CalPERS seeks to be new California ‘Octopus’

Octopus - curse of CaliforniaDec. 17, 2012

By Wayne Lusvardi

In 1901, Frank Norris wrote a novel, “The Octopus: A Story of California.” The book became famous for its description of the monopolistic Southern and Pacific Railroad that dominated California a century ago.

Fast-forward to 2012 and the bankrupt city of San Bernardino, where the California Public Employees Retirement Fund is trying to become a new Octopus.

CalPERS asserts in bankruptcy court that it is a sovereign government agency that has police powers, the power of eminent domain and the power of taxation.  Police powers are the right of governments to enforce laws and regulations to protect public safety, health and welfare.  Eminent domain is the power to seize property for public use, while paying just compensation to the owners. The power of taxation means the constitutionally granted power of government to use coercive powers to impose and collect taxes.

CalPERS contends it is “an arm of the state” that is immune from the jurisdiction of the bankruptcy court. Thus, it asserts that the bankruptcy court cannot halt CalPERS from exerting its supreme right to the general funds of the city to meet its public-pension fund payments.  When the City of San Bernardino filed for bankruptcy, it stopped making pension payments to CalPERS. But CalPERS believes that it has police powers to protect government pensions as a new entitlement above even the duty of local government to protect its citizens from crime, fires and emergencies.

The Wall Street Journal reported: “If CalPERS has police power and sovereign rights, it could also seize private property or assess a special pension fee on taxpayers” — no matter that Proposition 13 requires a vote for any increase in taxes.  The Wall Street Journal cites the Fifth Circuit Court of Appeals, which ruled in 1940 that there is no preferential treatment for the state as a creditor. CalPERS asserts it can seize assets and leave the cash-strapped city of San Bernardino without money for essential public services such as police and fire protection.

CalPERS and underwater mortgage eminent domain

CalPERS often throws its weight around by using what is called “the CalPERS effect” to influence investment markets. It may not have monopoly power, but it has market power. This was described in a 2009 paper by Wilshire Associates Inc.:

“The California Public Employees’ Retirement System … has been a leading activist in the modern corporate governance movement since its beginnings in the mid-1980s. Over time, CalPERS gradually shifted its focus from more technical issues related to corporate control to fundamental issues of long-term corporate performance.”

The County of San Bernardino has recently retained Mortgage Resolution Partners to explore using eminent domain to condemn “underwater mortgages” as a way to bail out to several cash-strapped cities in the county. If over-mortgaged properties can be purged from lenders’ books, then CalPERS hopes the housing market will recover and tax coffers will refill and bail out the city and county pension funds.

Legal experts are doubtful that eminent domain can be used to take mortgages from lenders at less than full value, then pass the expected savings on to property owners with over-mortgaged properties.  Nonetheless, CalPERS believes it can trump even the courts, despite the checks and balances of the three branches of government: executive, legislative and judicial.

Executive agency

In reality, CalPERS is an agency under the executive branch of California government, with an unelected board that is not directly accountable to the public. Its board of directors is partly elected by CalPERS retirees. Other board members are appointed by the governor and the Legislature.  Also on the board are the state treasurer, controller, director of the Department of Personnel Administration and a delegate from the state Personnel Board.

There is no representation on its board to assure taxation with proportional representation or representation by taxpayer watchdog organizations.

What success CalPERS’ claims to sovereignty may have with a cash-strapped state court system that has a vested interest in any bailout of the state pension fund remains to be seen.

The Wall Street Journal calls CalPERS’ assertion of unlimited powers a “ploy.” Real octopus animals squirt an “ink” that serves to keep themselves hidden or as a decoy from predators. Expect some of the same from CalPERS.


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  1. Soquel Creek
    Soquel Creek 17 December, 2012, 08:56

    Strangely, apparently even a career California Democrat seems to agree with the assessment. Willie Brown, California’s longest-serving Assembly Speaker and former Mayor of San Francisco recently wrote …

    “The world is changing. Years ago it was the likes of Southern Pacific and other big businesses calling the shots in Sacramento, and we were all highly critical of them.

    “These days it’s labor. That’s not the portrayal union leaders like to see in the media, but it’s the truth.

    “Real reform would be barring labor leaders from sitting on state pension boards. The boards ought to be made up of money managers who are concerned with how much cash is going in and out of the fund. There is no justification for any trustee on a pension board being more interested in spreading benefits than paying for them.”

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  2. The Ted Steele System
    The Ted Steele System 17 December, 2012, 09:22

    Oh– Wayner—- You are a deeeeelight!—- you have a fantastic imagination after reading and misinterpreting the pleadings!

    Reply this comment
  3. Wayne Lusvardi
    Wayne Lusvardi 17 December, 2012, 10:21



    As Delivered by Peter Mixon to the CalPERS Board of Administration on September 12, 2012

    Several public agencies that provide retirement benefits through CalPERS have recently filed for bankruptcy under Chapter 9 of the Bankruptcy Code. CalPERS is a creditor of these agencies and of course has an interest in the outcome of these bankruptcy proceedings. I am here this morning to give a high-level summary of the legal position that CalPERS will be taking in these actions.

    1.CalPERS is, of course, an arm of the State of California. California, like every other State in the Union, has sovereign powers. And, under our system of government, the United States Constitution created a system of dual sovereignty which divides powers between the federal government and the States. The Supreme Court recently explained: “[t]he Framers concluded that allocation of powers between the National Government and the States enhances freedom, first by protecting the integrity of the governments themselves, and second by protecting the people, from whom all governmental powers are derived.” Bond v. United States, 131 S.Ct. 2355, 2364 (2011).

    2. Thus, when State sovereignty is subject to displacement by federal law, Congress’s intent must be “clear and manifest.” It is for this reason that the United States Supreme Court has held on several occasions that certain State laws, which may inhibit the power of a bankruptcy court, are not preempted by the Supremacy Clause.
    a. Why Is This Important?
b. Preemption – means that federal law takes precedence over state laws
c. Important – If preemption applies, bankruptcy court could take action that would otherwise be illegal under State laws

    3. The drafters of the Bankruptcy Code acknowledged that certain powers have been reserved to the States under the United States Constitution and therefore limit the power of the Bankruptcy Court to interfere with the State’s control over municipalities and State agencies in a bankruptcy case.

    4. For example, section 903 of the Bankruptcy Code expressly sets limits on the power of the Bankruptcy Court. It is not a “gatekeeping” provision, which allows a bankruptcy court to abrogate all aspects of State Sovereignty once a municipality files a bankruptcy petition. Instead, this statute means what it says: before, during, and after bankruptcy, the law of the State controls a municipality in the exercise of its governmental and political powers.

    5. In enacting section 903 of the Bankruptcy Code, Congress further determined that Chapter 9 of the Bankruptcy Code would not preempt state laws that control the political and governmental powers of municipalities and arms of the State. In this respect, Chapter 9 is different from all other chapters of the Bankruptcy Code. Congress acted wisely to avoid a constitutional clash by preserving the authority of States over their core aspects of sovereignty in any municipal bankruptcy case.

    6. The limitations on the power of the bankruptcy courts extend to the relationship between CalPERS and a participating public agency employer. The relationship between CalPERS and a municipal employer is not a mere commercial contract between a creditor and a debtor. Instead, it is an aspect of the State’s control over a municipality that is protected from interference under constitutional principles and federal bankruptcy law. Accordingly, Chapter 9 of the Bankruptcy Code does not preempt the State of California’s control over the system of benefits provided to its employees and the employees of participating municipalities such as the City of Stockton.

    7. The Legislature created CalPERS eighty years ago to “effect economy and efficiency in the public service” by providing a pension plan to pay retirement compensation and death benefits to public employees and their families. Under State law, a municipality may choose to provide retirement benefits through the CalPERS system. An agreement between a municipality and CalPERS reflects the choice of the municipality to participate in the system. Once a municipality commences its relationship with CalPERS, the municipality is bound by the constitutional and statutory provisions governing the system and the decisions of the CalPERS Board of Administration.

    8. As created by the Legislature and confirmed by the People, the CalPERS pension plan is a trust fund, which consists of the assets that are needed to pay retirement and other benefits that participating public employers have promised to their employees. The California Constitution and state statutes define this trust relationship and the rights and duties of the Board of Administration, the public employers and the members of the system.

    9. As trustee of the retirement system, CalPERS is a fiduciary and must ensure the integrity of the State of California’s benefits system. CalPERS does not have the right to “forgive” or reduce employer contributions which are necessary to sustain the soundness of the system and ensure the payment of promised benefits.

    10. Pursuant to California law, a public agency must follow the governing statutes when it chooses to participate in the retirement system. These statutes preclude an agency from lowering the benefit formula for existing employees who are members of the system. CalPERS does not have the right to approve a lower benefit formula for these members.

    11. Under the law of the State of California, a participating public employer in bankruptcy may not terminate its relationship with CalPERS through “rejection” of its “contract” with CalPERS in the bankruptcy proceeding.

    12. Participating public agency employers do have the right, under California law, to terminate their relationship with CalPERS. However, termination of this relationship does not terminate the obligations of the public agency to make contributions to CalPERS to fund benefits accrued prior to termination. Instead, California law provides for a valuation of the assets and liabilities of the employer at the time of termination. Because termination of the relationship essentially closes the pension plan, any unfunded liabilities as of termination must be fully paid by the employer. These amounts are typically much larger than the ongoing obligations owed by the employer prior to termination. Termination by a municipal debtor would create a much larger obligation to CalPERS, which would impair the ability of the debtor to make payments to its unsecured creditors and severely dilute the return to such creditors.

    13. When a participating public agency terminates its relationship with CalPERS, CalPERS is entitled to priority over unsecured creditors under the laws of the State of California. An example of a statute that affords CalPERS a priority is California Government Code Section 20574. This statute provides that CalPERS has a lien on all assets of a municipality to secure all liabilities of the municipality to CalPERS owing upon a termination of the relationship, including any deficit in funding for earned benefits, interest, and attorneys’ fees and other collection costs. As secured creditors are paid before unsecured creditors, this lien creates a priority in favor of CalPERS.

    14. Bond insurers and other sophisticated Wall Street financial players have suggested that it is unfair to protect the pension benefits promised to municipal employees and their families. Of course, the bond insurers are presumably experts in evaluating the financial condition of municipalities and were presumably paid large fees to assume the risk of nonpayment of certain municipal debts. Indeed, one of these insurers touts its financial acumen as follows: “National only guarantees transactions that meet our strict risk management guidelines and portfolio limits. In each and every one of our transactions, multiple considerations and possible outcomes are analyzed before recommendations are made. Ours is a careful, vigilant approach backed by solid financials and an unparalleled performance record.” To protect their profits, these insurers are now demanding that municipalities renege on commitments made to thousands of present and former employees to honor earned pension benefits. CalPERS members – policemen, firefighters, and other public employees who have labored to serve the public benefit for years – have rights which make it fair that their pension benefits are fully honored in the bankruptcy process.

    Thank you Mr. President and members of the Board. This concludes my presentation. -Peter Mixon, CalPERS General Counsel

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  4. stevefromsacto
    stevefromsacto 17 December, 2012, 10:41

    You ought to put this paragraph in all caps. It really spells out what the anti-worker plutocrats are trying to do to screw workers out of their earned pension benefits:

    ” To protect their profits, these insurers are now demanding that municipalities renege on commitments made to thousands of present and former employees to honor earned pension benefits. CalPERS members – policemen, firefighters, and other public employees who have labored to serve the public benefit for years – have rights which make it fair that their pension benefits are fully honored in the bankruptcy process.”

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  5. SeeSaw
    SeeSaw 17 December, 2012, 11:41

    CalPERS contends it is “an arm of the state”

    It contends it is an arm of the State, because it is.

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  6. The Ted Steele System
    The Ted Steele System 17 December, 2012, 12:43

    Wayner— Just posting the pleadings has done nothing except to illustrate how your conclusions are faulty. The info from Calpers appears correct to me. Your conclusion about an octopus remains goofy. Calpers use of the term sovereign is used in the exact context of case law and in advocacy of their position here.

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  7. Rex the Wonder Dog!
    Rex the Wonder Dog! 17 December, 2012, 14:42

    CalPERS contends it is “an arm of the state” that is immune from the jurisdiction of the bankruptcy court.
    Once the muni SUBMITS to the federal court, like it has in SB and Stockton, then the federal court has jurisdiction, and CalTURDS knows it. That is why CalTURDS is in federal court trying not to take a hit- instead of state court suing SB like they said they had the right to. If they had that right they could have bypassed the federal court all together-they didn’t and they know why-they would lose.

    CalTURDS will take a haircut just like everyone else in the SB BK, that will in turn open the flood gates for all other muni’s-NATIONWIDE not just CA- to cut pensions in BK court, but they probably will not have to do that, just the THREAT of cutting them in BK court will ring the unions and state pension systems to the bargaining table to bargain a cut.

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  8. Rex the Wonder Dog!
    Rex the Wonder Dog! 17 December, 2012, 18:31

    So what’s the end game for CALPERS here. Do they want judges to force cities like San Bernardino to raise taxes to fund pension obligations for public employees?

    33% of SB residents live below the poverty line, they cannot raise taxes, there is not money to take.

    I have been there recently and there are so many vacant retail and industrial buildings it is amazing……all vacant.

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  9. SeeSaw
    SeeSaw 18 December, 2012, 09:58

    You just pointed out the elephant in the room, Rex. Those vacant retail and industrial buildings exist due to the bursting of the scam housing bubble and the abolishment of Redevelopment. The cost of the pensions is a little bug, next to that elephant, in the whole picture of what has happened in SB.

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  10. Tough Love
    Tough Love 18 December, 2012, 09:58

    Quoting SeeSaw …”CalPERS contends it is “an arm of the state”. It contends it is an arm of the State, because it is.

    CalPERS is more appropriately the ARMPIT of the State … to the determent of all of it’s (non Public Sector employee) Taxpayers.

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  11. SeeSaw
    SeeSaw 18 December, 2012, 10:14

    I deal in facts, TL–not opinions.

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  12. eatingdogfood
    eatingdogfood 18 December, 2012, 11:29

    Democrats + unions = BANKRUPTCY !!!

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  13. The Rt Rev Ted Steele
    The Rt Rev Ted Steele 18 December, 2012, 14:07

    Well said SEESAW— the right ALWAYS forgets how we all got here and how they helped!


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  14. double l
    double l 20 December, 2012, 11:31

    Is CALPERS squirting octopus ink as a ploy so they can escape scrutiny for their dismal return on investment?

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  15. DyingTruth
    DyingTruth 28 December, 2012, 14:11

    OF COURSE these public parasites are going to do and/or say anything to protect their bloated pensions and overpaid salaries. They knowingly and continue to let/aid&abett countless numbers of Californians have their homes illegally taken, the entire Bill of Rights be overruled by judicial fiat and allowed(some would argue facilitated) the Peoples’ sovereiegnty to be seized and hijacked in a Financial Coup D’état. ALL FOR THE VERY SAME REASON They would sacrifice all Californians (they practically already have) for personal gain. When we look around and see our state drowning in personal and public debt, in shambles and on the brink of God-knows-what, no termination notice is necessary, OUR GOVERNMENT FAILED, Top-to-Bottom removal is MANDATORY.

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