Little Hoover: More CA city bankruptcies loom

Nov. 14, 2012

By Dave Roberts

“Are your cities going to make it for five years?” asked Little Hoover Commission Chairman Daniel Hancock at the recent commission hearing on pension and infrastructure financing.

“That’s a good question,” responded Dwight Stenbakken, deputy executive director of the League of California Cities.

California’s cities are being eaten alive by employee compensation costs. The pension reform measure signed into law in September by Gov. Jerry Brown, AB 340 by Assemblyman Warren Furutani, pretty much left current employees alone, focusing instead on new hires. Government officials will have to wait until 2018 to negotiate with public employee unions to reform pensions for current employees.

Hancock pressed Stenbakken. “We all know when you run these numbers, they’re all hugely back loaded,” said Hancock. “The front end numbers don’t change very much at all. So over a five-year period, this is not going to move the needle very much. Can you guys make it five years?”

Stenbakken hesitated. “Well, uh, I don’t know,” he said. “And that is a looming question over everything. I think it’s one thing that first of all has changed the dynamic at the local government collective bargaining table. Back in 2008, when we first started going into the tank economically and we were trying to make some changes, of course we were accused of cooking the books and hiding things and making this up.”

But in the wake of the Great Recession, union negotiators have not had as strong a hand as when the tax dollars were rolling in.

“At the local government collective bargaining table I think everybody is being a little more realistic about it,” said Stenbakken. “Because there are very few alternatives. And the most ugly one is that we’re going to cut employees. And I don’t think that’s good for employers. I don’t think that’s good for employees. And I don’t think it’s good for the taxpayers, because the services go down too.”

Layoffs

Throughout the state, government employees have been laid off, services have been slashed and just this year Stockton, San Bernardino and Mammoth Lakes have declared bankruptcy. The worst may be over. The real estate market is starting to rebound, so property taxes may start to pick up next year. But it will take a while for most cities to restore employees and services.

“We are at least four to five years behind any kind of recovery in terms of governmental revenues,” said Stenbakken. “So this is a problem that we are going to be dealing with for a long time, not just a short-run problem. And I don’t know if we are going to see more Stocktons or not. I hope not. But that may be the ultimate result.”

AB 340 provides a variety of pension reforms: a cap on maximum pensions, postponement of the retirement age, reduction in the pension formula, cost-sharing, three-year averaging to determine the pension amount, only regular pay and regular overtime can count toward the pension, a ban on buying “air time” service credits to boost the pension payout, and no retroactive benefit increases. But only the cost sharing and air time provisions apply to current employees.

As a result, the reform has been criticized as window dressing. Some studies suggest that California’s unfunded pension liability could total more than $500 billion. But the reform package is estimated to save California taxpayers only $42 to $55 billion over 30 years for CalPERS plans. While pension costs are currently a fairly small part of the state general fund budget, they are metastasizing on the local level, where personnel costs comprise most of the budget.

“With city governments, and to some extent with county governments too, a much higher percentage of that money goes for police and fire,” said Stenbakken. “So we do have a significant problem. We do have an issue of these costs crowding out other services that we provide.”

Current employees

He said that cities need to have the power now to rein in retirement expenses for current employees.

“We would love to … be able to unilaterally implement this at the end of the collective bargaining process, without the five-year time frame [delay] and without the requirement for an MOU [memorandum of understanding],” said Stenbakken. “But that wasn’t going to pass the Legislature and get signed by the governor. We think that there’s sufficient leverage now at the collective bargaining table to make these changes, even with the requirement that we have a signed MOU. Because it is real, it’s happening, and the alternatives are not good for anybody.”

For decades, the legal cards have been stacked against government officials seeking to get a handle on runaway retirement expenses. A League of California Cities analysis concludes that California case law dictates that:

* A public employee’s pension constitutes an element of compensation.

* A vested contractual right to a pension benefit accrues upon acceptance of employment.

* Eliminating this pension right will impair an employer’s contractual obligation to the employee.

One of the precedents was a 1991 case, Legislature v. Eu. State legislators sued to retain their retirement benefits after Proposition 140, the term-limits initiative, was passed by voters in 1990. The legislators argued that they had a vested right to their pensions, and the court agreed. Federal law also dictates that states must honor vested employee contracts.

Controlling costs

Hancock questioned why the law should be so tough on governments trying to control employee costs.

“We’ve spent a lot of time on this over the last few years, and some questions have been hard to get answers to,” he said. “How is it that a private employee working for IBM can work there for 20 years and you vest his pension for the 20 he works and then put him in a 401(k) — and that’s considered OK. And when the state of California, the city of San Jose want to do that, it’s not OK. Under what theory does that happen? If I were litigating this, I would look on that issue, suggesting that it isn’t so clean cut that they’re vested rights.”

Commissioner David Schwarz picked up on the litigation suggestion.

“My bottom line is ultimately all this discussion about how you rearrange or tweak pension reform; it’s interesting and it’s important,” he said. “And the legislation that was recently passed has moved things before it. At the end of the day it strikes me that this has got to be litigated. We have got to get an answer on whether the federal constitution will permit this impairment [of vested pension rights].”

Stenbakken agreed, saying, “What I don’t think has come in front of [the court] yet is a collectively bargained agreement between an employer and an employee in an economic time we are in right now. And whether or not that combination of facts is going to change a court’s decision, I don’t know. But it seems like until you get that in front of the court, we’re not going to know.”

While Stenbakken is fearful for the fate of California cities as they struggle with employee costs over the next five years, others are more sanguine.

“We believe that, while the fiscal challenges facing cities and counties are difficult for all those involved, pensions are not the cause of, nor a significant contributor toward, bankruptcies we are seeing,” said Ann Boynton, a CalPERS deputy executive officer. “Ambitious borrowing during boom times, and low revenues that came with the bust, are actually the biggest factors behind the recent bankruptcy filings.”

And Ron Cottingham, president of the Peace Officers Research Association of California, said that the employee unions have already agreed to significant benefit reductions. These include contributing more to their pensions and agreeing to anti-spiking measures.

“We think a lot of these things have been accomplished at the bargaining table,” he said. “We realize that continuing changes, because of the [reform] legislation, will occur at the bargaining table. Maybe not as fast as you’d like in some areas. But that will depend on each area’s ability to get to the table and negotiate changes. We have some that have not been to the bargaining table yet. We have one unit that just inked a contract that does not expire until the year 2020.”

It remains to be seen what fiscal shape that unit’s municipality will be in by 2020, assuming it still exists.