It’s the latest development in a bitter fight between the city and taxpayers. Last August, the city approved a controversial plan by Fresno Mayor Ashley Swearengin to double water rates in order to fund a $410 million upgrade to the city’s water system. But when a group of taxpayers led by former Fresno County Supervisor Doug Vagim objected to the plan, the city took the taxpayers to court in order to stop a referendum campaign.

Earlier this month, a state appeals court upheld a lower court ruling that ordered the city to fulfill its ministerial duties and issue a petition title and summary. Now the taxpayers say that the title and summary, as prepared by City Attorney Doug Sloan, are biased in favor of the water tax hike.

“Frankly, I don’t believe this Title and Summary filed by the Fresno City Attorney can be considered to represent an impartial statement of the purpose of the proposed measure,”  Vagim said  “This text belongs in the con-argument side of the ballot’s voter guide for Measure W.”

This is the full text:

“Title: Initiative Measure To Repeal City of Fresno’s Four-Year Water Rate Plan And Related Water Fees”

“Summary: A ‘yes’ vote on this measure would repeal water rates to be charged over four years that the Fresno City Council adopted on August 15, 2013, and cause the rates to return to what the Council adopted in 2008. The City Council adopted the 2013 water rates to pay for increased costs to provide adequate water that is safe to drink. The increased costs are caused by changes in state and federal drinking water standards, depletion of ground water, costs of maintenance and repairs to old water pipes and other parts of the water system, and the necessity to build a surface water treatment plant. If the current rates are repealed, the City Council could impose higher rates again. However, it would delay the City’s work to repair and improve the water system.”

Factual errors: Last water rate hike in 2010, not 2008

Vagim points to state law, which requires the city attorney to issue an impartial analysis. The Election Code states:

“In providing the ballot title, the city attorney shall give a true and impartial statement of the purpose of the proposed measure in such language that the ballot title shall neither be an argument, nor be likely to create prejudice, for or against the proposed measure.”

In the complaint letter submitted to the city attorney on Thursday, Vagim’s group cited factual errors in the title and summary, including the last time the city raised water rates. The petition summary references a water rate hike in 2008, when the last such increase passed the council in 2010.

“The prejudicial nature of this misstatement falsely informs voters that water rates have not been raised since 2008, when in fact rates were last increased in 2010,” the letter objecting to the petition summary states.

After five months of delays, the taxpayers say they’ll circulate the biased petition rather than wait for another title and summary. 

“Moreover, the City’s intentional, unreasonable and unlawful delay over the course of the last five (5) months has deprived my client of time to challenge the petition title and summary for petition circulating,” the complaint states.

If they can gather enough signatures, they’ll be looking for a revised title and summary before the election and could recoup legal fees and court costs in the process.

Fresno City Attorney: ‘Title is fair, complete and complies with the law’

The city attorney maintains that the title complies with the law. “We believe the title is fair, complete, and complies with the law,” said Sloan, Fresno’s City Attorney.

But the state’s leading taxpayer advocacy group contended otherwise. “The language is most certainly slanted,” said Jon Coupal, president of the Howard Jarvis Taxpayers Association. “But we have not yet determined whether it crosses the line from the perspective of potential litigation.”

Earlier this month, CalWatchdog.com reported the story of the bully tactics by the City of Fresno in defense of Mayor Swearengin’s water rate increases. Under Swearengin’s plan, the average water bill would be doubled to fund a $410 million upgrade to the city’s water system.

In September, a group of taxpayers, led by former Fresno County Supervisor Doug Vagim, organized a campaign to overturn the rate hikes. But the taxpayers were denied a title and summary for their petition. Without a title and summary, the group couldn’t collect the necessary signatures to get a referendum on the ballot.

City of Fresno sues taxpayers

Then the city sued the taxpayers in an effort to stall the petition from reaching the 2014 ballot. In late November, a Superior Court sided with taxpayers and ordered the city attorney to issue the title and summary. Instead of compiling with the court order, the city filed a notice of appeal, which stayed the court’s order, as part of a strategy to run out the clock on the initiative.

The city of Fresno is facing major financial problems after years of fiscal mismanagement and irresponsible spending. It owes $3.4 million per year in annual construction bond payments for a city-owned minor league baseball stadium. The bond payments were supposed to be covered by a $1-per-ticket fee collected by the team. However, City Manager Renena Smith told the Fresno Bee in November that the team is two years in arrears. To solve its cash flow problems, the city had to borrow $14 million from the water department to balance its books.

Fresno Bee: Thumbs down to Fresno Mayor Ashley Swearengin

Even supporters of the water rate hike have become disgusted with the city’s hardball tactics. Shortly after the first ruling, the Fresno Bee editorial board, which backs the water rate increases, chastised Swearengin.

“We support the water-rate increases; they are vital to the city’s future,” the paper wrote. “But with these stalling and blocking tactics, Swearengin sends a message that she doesn’t trust Fresno voters to do what’s best for the city.”

The “stalling and blocking tactics” stopped the referendum from reaching the June 2014 ballot. To qualify their proposed initiative for the regularly scheduled November 2014 election, taxpayers would need to submit 4,846 valid signatures to the City Clerk by May 8.

The battle began last August, when the city of Fresno approved a controversial plan pushed by Mayor Ashley Swearengin to raise the city's water rates. The additional revenue would go towards a $410 million upgrade to the city's aging water system.

Under Swearengin's plan, most water users, which include city residents and some unincorporated parts of Fresno County, would see their average monthly bills rise to $48, double what they were last year. That didn't sit well with a group of taxpayers, led by former Fresno County Supervisor Doug Vagim, who mobilized a grassroots effort to overturn the rate hikes.

But when the taxpayers tried to circulate a petition to overturn the mayor's plan, the city took the extraordinary step of refusing to grant the petition a title and summary. Without a title and summary, the group couldn't collect the necessary signatures to get a referendum on the ballot.

The move appears to be a direct violation of the California Constitution. Section 3 of Article 13C states that “the initiative power shall not be prohibited or otherwise limited in matters of reducing or repealing any local tax, assessment, fee or charge.”

Pre-emptive strike: City sues taxpayers

Not content to block the initiative, the city went a step further: It sued the taxpayers.

“The City anticipates Initiative Proponents will continue to advocate for the Initiative and its submission to the voters,” its lawsuit states. “By seeking pre-election relief, the City hopes to avoid the cost and expense of submitting an illegal and invalid Initiative to voters.”

Attorneys for Fresno made the remarkable argument that the city's lawsuit would restore the public's trust in government that had been eroded by the courts.

“The voters already fear that everything they vote on ultimately gets invalidated by the courts anyway, and we don't want to feed that fear by letting plainly invalid measures get presented to the voters,” the city's attorney, Michael Colantuono, argued in Fresno County Superior Court.

Taxpayers said that the city was using the legal system to undermine their constitutional rights.

“Our constitutional rights are being infringed on on a daily basis as we're denied the ability to go to the voters to seek their approval,” Chuck Bell, one of the state's preeminent election attorneys, argued on behalf of the taxpayers. “Frankly, we still have the hurdle once a title and summary is issued to retain the requisite signatures of a sufficient number of voters to qualify the measure for the ballot.”

In late November, a Superior Court agreed, and ordered the city attorney to issue the title and summary. Instead of compiling with the court order, the city filed a notice of appeal, which stayed the court’s order, as part of a strategy to run out the clock on the initiative.
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'Core public service not subject to referendum'

Swearengin's office did not respond to an email request for comment on the issue. However, at a press conference last month, the Republican mayor said that the city's interests in managing the water business trumped citizens' rights to petition their government.

“The city of Fresno believes there is ample case law that indicates that a core public service is not subject to a referendum,” she said. “I recognize the short-term pain of raising water rates in the city of Fresno. However, I believe this short-term pain will result in long-term gain for the people of Fresno.”

Much of the city's financial problems stem from years of fiscal mismanagement and irresponsible spending. In a November speech to the Rotary Club of Fresno, City Manager Bruce Rudd acknowledged that “the reality is this organization has always ran close to the edge.”

Among the city's money-pits: a costly city-owned baseball stadium for the town's minor league team, the Fresno Grizzlies. The city owes $3.4 million per year in payments toward the stadium's construction bonds. The bond payments were supposed to be covered by a $1-per-ticket fee collected by the team. However, City Manager Renena Smith told the Fresno Bee in November that the team was two years in arrears.

Which all comes back to the city's water problems. To make up for the cash it wasn't getting from the baseball team, the city had to borrow $14 million from the water department to balance its books.

Fresno Bee turns on mayor over her hardball

Even supporters of the water rate hikes have become disgusted with the city's hardball tactics. Shortly after the first Superior Court ruling, the Fresno Bee editorial board, which backs the water rate increases, chastised Swearengin.

“We support the water-rate increases; they are vital to the city's future,” the paper wrote. “But with these stalling and blocking tactics, Swearengin sends a message that she doesn't trust Fresno voters to do what's best for the city.”

The “stalling and blocking tactics” have already proven effective at stopping the referendum from reaching the June 2014 ballot. If the 5th District Court of Appeals doesn't set aside the stay, taxpayers won’t get a title and summary until May, and the referendum would miss the November ballot. To qualify their proposed initiative for the regularly scheduled November 2014 election, taxpayers would need to submit 4,846 valid signatures to the City Clerk by May 8.

The next scheduled election would occur in 2016, by which time the city is expected to have bond funding contracts in place.

By Katy Grimes

By Chris Reed

As John Seiler pointed out here Tuesday, Monday’s court ruling by U.S. Bankruptcy Judge Christopher Klein isn’t seen as definitive. Yes, the city of Stockton can proceed with its bankruptcy filing. No, Klein doesn’t yet agree with the city’s plan to only short bondholders and not CalPERS, its biggest creditor, as it reorganizes under Chapter 9 of federal bankruptcy law. He explicitly said later that he will decide on its fairness later.

But did Klein make one crucial point in his ruling and comments from the bench? Maybe, and I’m not the only one who thinks so.

Consider this: Every newspaper advance story that I saw before last week’s hearings in Klein’s court spoke of the centrality of the CalPERS argument that promised pensions were protected by the state Constitution, which should take precedence over federal bankruptcy laws which allow federal courts to modify contracts that bankrupt entities have with their creditors.

Pension preservation: State law vs. federal law

So did the most sophisticated legal analysis of Stockton’s pension-protection proposal that I read before Klein’s April 1 ruling. It appeared in January on the Bankruptcy Law Insights blog and was written by bankruptcy expert Ben Feder:

“The issues at stake — whether California state laws protecting public employee pension obligations are pre-empted and superseded by Congress’s Article I, Section 8 authority to establish uniform laws regarding bankruptcy, or are protected under the Tenth Amendment — implicate fundamental issues of federalism, and in all likelihood the Supreme Court will eventually need to resolve the questions being raised regarding the proper balance between state and federal power … .

“The [most] complicated question is whether priorities for unsecured claims created under state law — particularly regarding obligors that are themselves governmental units — can trump the distribution mechanisms of the U.S. Bankruptcy Code, and the Code’s underlying purpose of providing similar treatment for similarly situated creditors. Numerous states in addition to California have varying degrees of protection for public employee pension obligations. (Rhode Island, on the other hand, recently took the opposite tack and enacted a law that gave priority to bondholders in the Central Falls Chapter 9 cases.)

“Calpers will argue that the preference under California law for public employee< pension obligations is protected under the Tenth Amendment. San Bernardino’s bond investors will argue that the Bankruptcy Code expressly sets forth the priority of certain types of unsecured claims, that no other unsecured claims are entitled to more favorable treatment, and that California law regarding public employee pension obligations is pre-empted by the Supremacy Clause of the Constitution.”

‘Powers not delegated to the U.S. are reserved to the states’

What is the relevance of the Tenth Amendment? This is from CalPERS’ counsel:

“The Tenth Amendment provides that the ‘powers not delegated to the United States by the Constitution, nor prohibited by it to the states, are reserved to the states … or to the people.’ This is no minor addendum to the Bill of Rights; this amendment reflects the federal structure of our government.

“This structure allocates and ultimately provides limits on the powers of dual sovereigns — the federal government and the governments of the States. The Tenth Amendment and the principles of federalism preserve the integrity and residual sovereignty of the States, and ensure that the States function as political entities in their own right.”

But at least based on published accounts, the knotty question of deferring to the California Constitution’s pension protections or interpreting the Tenth Amendment to the U.S. Constitution as preserving the state’s decision-making authority on such matters didn’t seem knotty at all to bankruptcy Judge Klein.

Klein depicted CalPERS as a “garden-variety creditor” -– not one in a protected class.

He also said that going forward, he “is going to have a difficult time confirming a [bankruptcy reorganization plan] over the objection of unfair discrimination.” That’s a reference to Wall Street bondholders’ objecting to CalPERS being insulated from any of the pain facing other creditors. That’s another way of saying he rejects the idea that CalPERS is in a protected class.

Complex question — or not even a close call?

So instead of being a complex, challenging legal issue, Klein doesn’t appear to see this as a close call at all: Federal bankruptcy law supersedes the California Constitution, and the Tenth Amendment doesn’t shield CalPERS either.

I welcome any counter interpretation in the comments. And I acknowledge that an appeals court could completely disagree with Klein and go in another direction.

But I also think there is a chance that April 1, 2013, is remembered as a turning point in how Chapter 9 allows local governments to deal with their immense pension debts. We’ll see.

First on a series on public pensions.

Sept. 20, 2012

By Mark Cabaniss

The politicians in charge of “doing something” about the ongoing California pension debacle like to play a little game. It goes like this:  They decry the high costs of pensions that have already been granted, pretend to want to do something to rein in future pension obligations, and then turn their hands up and shrug that there is really nothing they can do about current pensions (including, cough cough, their own) — since, after all, pensions are contracts, and therefore they are protected by the Constitution.

But there is a problem with this self-serving assertion:  Even if politicians’ pensions are contracts protected by the Constitution, they are still breakable.  In pretending otherwise, the politicians are lying.  In other words, merely noting that pensions are contracts protected by the Constitution is not the end of analysis, but only the beginning, for all contracts are breakable, and all constitutional rights are subject to limits.

When, not if, state and local governments begin dishonoring the highest public pensions, there will be, obviously, a huge blizzard of litigation.  And when those cases are heard, some of the following basic concepts of contract law may be applicable.  (Note: My purpose here is not to write a treatise on contract law, nor to predict the course and outcome of future litigation.  My purpose is simply to show the lay person that there are several possible theories under contract law under which governments might be able to reduce the highest existing pensions rather than go bankrupt.).

All contracts are breakable, if you have a legally valid reason for breaking them.  For example, if a used-car salesman sells a car to a 10-year-old, the contract can be broken on the basis that the 10-year-old didn’t have the legal capacity (age) to sign a binding contract in the first place.  And all constitutionally protected rights, including contract rights, are nonetheless limited by finite resources. For example, your right to a fair trial does not mean that the government has to hire the entire Harvard Law School faculty to defend you in your shoplifting case. Society can’t afford it.

Regarding public pensions, the best and most obvious legal ground under contract law to get out of onerous pension obligation may be mistake of fact.  The legal rule goes like this: If you make a contract while holding a belief that isn’t true, you can get out of the contract.  For example, you make a deal to buy a Picasso for a million dollars, but it turns out that the painting is not a Picasso.  You can get out of the deal.  (Under the mistake doctrine, both sides have to be making the same mistake.  If only one side is mistaken and the other side knows the truth, you may still be able to get out of the contract under a different theory, such as fraud; more below.)

Pension spiking

Regarding high public pensions, the mistake that was made was simple, fundamental, and huge:  the supersize pensions that began to appear in the 1990s were justified on the grounds that pension funds “would” generate average annual returns of 7.5 to 8 percent or more into the future, forever.  This has turned out to be, ahem, not true.

The infamous SB 400, that then-Gov. Gray Davis signed into law in 1999, and which gave retroactive pension raises to state employees, including already-retired state employees, was sold by the California Public Employee Retirement System to the Legislature with lie after lie after lie — or “mistake” after “mistake” after “mistake,” if you prefer.  The CalPERS “analysis” that was “presented to” (perpetrated on?) the Legislature implicitly assumed that the Dow Jones Industrial Average would be at 25,000 by 2009, and 28,000,000 by 2099.  On the morning of Sept. 20, it is at 13,556.

Proving the existence of and reliance on the mistake(s) ought to be a lark. After all, a great deal of time, money, and work went into creating the rosy projections that were used to bamboozle government into granting the unsustainable pensions.  Were the mistakes made regarding future stock market returns mutual?  Well, the government certainly made a mistake on behalf of the taxpayers.  How about the public employees?  Who knows?  However, as a practical matter it is very hard to see how they would go in to court and say, “We were not mistaken as to future stock market returns.  We knew full well that the projections were a joke and that CalPERS was lying.”

Performance

The second big legal ground to get out of pensions is impossibility of performance.  If events make it impossible for you to perform the contract, then you can get out of it.  For example, you contract to sell your car, but before you deliver, it is destroyed by lightning.  Regarding pensions, the argument would be simply that the state and local governments have gone bankrupt since the pensions were granted.  In that event, the pensions could be modified to match the ability of government to pay them.

The third possibly applicable doctrine is known in contract law as consideration:  for a contract to be legally binding, there has to be something of value promised, on both sides.  For example, if I promise to give you a million dollars, and you promise to take three breaths between the hours of 1:00 p.m. and 2:00 p.m. next Tuesday, there is no mutuality of consideration, since I am giving something up and you are not.  The contract is voidable.

In the public pension realm, one obvious place where the consideration doctrine would come into play would be SB 400, the 1999 retroactive pension increase.  Since some of the workers who received retroactive pension increases were already retired, they obviously could not promise or give anything at all in exchange for the money, and indeed they did not.  Therefore, at least in regard to these already retired workers, there was a complete absence of consideration.  (A similar argument can be made not on contract law, but on Article 16 Section 6 of the California Constitution, prohibiting the giving away of public funds.)

A fourth possible ground for breaking managements’ pensions is fraud: If CalPERS or any of the other groups pushing big pensions knew that the pensions would not be self-funding and would require massive infusions of taxpayer cash, and they did not divulge that information, then any such pensions obtained on the basis of such fraudulent disinformation would be voidable.  Moreover, widespread and undisclosed self-dealing might qualify as fraud. For example, CalPERS officials, as public employees, themselves benefitted from the huge pension increases granted in 1999, and they did not disclose to the legislature that they would benefit.

Unconscionability

Another contract doctrine which might be used to break onerous pensions is “unconscionability,” which means simply that a contract is so one-sided that it is just unfair to enforce it against the disadvantaged party.  While normally this doctrine is applied to consumer contracts, some of the factors courts look to in weighing claims of unconscionability — such as whether the parties had equal bargaining power, whether the contract makes a one-sided allocation of risk (for example, where the taxpayers have to pick up the tab, all the tab, in the event that the Dow does not hit 25,000 by 2009, ha-ha) — are applicable to public employee pensions, as well.

Finally, one more area of contract law might be used to break the pensions: lack of capacity to contract.  If you are drunk or insane, for example, you cannot sign a contract to buy a house.  In the public pension context, the lack of capacity would be a little more subtle (maybe; hopefully).  For example, if you are under duress, being threatened to get you to sign a contract, that could qualify as a lack of capacity, since you lack free will.

Steven Greenhut and others have written recently about bullying tactics, including the attempt to frame a city councilman for DUI, being used in Costa Mesa to get local officials to see things the public employees’ way.  Testimony about such incidents could nullify the contracts obtained thereby.

Similarly, if you were being bribed to sign a contract, that too would qualify as a lack of capacity, since you would not be acting in your capacity as a fiduciary to the public, but rather in your private capacity as a criminal.  Another way to look at it is that if you are a manager sitting at a table “negotiating” a pension increase that will benefit not just the parties across the table but yourself as well, you may not be acting within the scope of your employment as a public official, but instead acting on your own behalf.  Therefore, you do not have the legal capacity to act to bind the public to pay for your self-dealing little scheme, since you are not at that moment acting as a public official.   Needless to say, were the courts to start taking bribery and self-dealing seriously, they could nullify a lot of contracts.

To sum up: There are a great many helpful doctrines under contract law that could be used to break onerous public pensions.  These legal arguments are strongest against the very top pensions, because they are the most unconscionable, they are the least possible to continue to pay, and they are the most likely to have been the result of self-dealing or bribery.

Therefore, the legal grounds for attacking the biggest pensions, managements’ pensions, coincide nicely with the public policy grounds of wanting to go after only the largest, most abusive pensions, and not the pensions of the retired school teacher or janitor.

Next article in this series: Breaking public employee pensions: The political path.

Mark Cabaniss is an attorney from Kelseyville. He has worked as a prosecutor and public defender.

As we’ve been warning here on CalWatchDog.com for more than two years now, CalPERS’ funding is way too low. I’ve written before how CalPERS might only be funded at the 55 percent level.

It turns out that even that is too optimistic. The new level might be just 40 percent, according to CalPensions.com:

“As CalPERS puts a new focus on risk, a funding level that drops to 40 percent is emerging as the red line.

“The worry is that if the funding level of the big pension fund drops too far, it may not be practical to raise annual employer payments enough to regain proper funding.

“The rough estimate (final figures are not in yet) is that CalPERS funding as of last June averaged 74 percent, up from 65 percent the previous year. A spokesman said the average level has never fallen below 55 percent.

“But CalPERS wants some cushion in case the economy slides back into a major recession, punching another big hole in investment earnings expected to provide about two-thirds of pension revenue.”

New Recession?

That’s another thing I’ve been warning about: a new recession. Recessions or depressions strike about every five to seven years. The last one struck in December 2007, almost five years ago.

Moreover, recessions seldom occur in election years (the 1980 and 1992 recessions were exceptions) because the politicians goose the economy to get re-elected. That’s happening this year.

As Wayne Lusvardi has reported on this site, you can’t have long-term growth when interest rates are close to zero, as now. That means people can’t save and invest in new business and jobs creation. Something has to break. And it will — probably next year.

The problem for CalPERS is that its portfolio needs to use recovery periods to make up for what was lost in the previous recession. But that hasn’t happened during the current economic recovery.

On June 30, 2007, CalPERS’ all-time peak valuation was $247.7 billion. According to its Web site, as of March 21, 2012 its valuation was $237.3 billion. So, it’s down 4 percent in nearly five years.

However much you massage the numbers, down is never up, not even 0.000001 percent up.

Here we are, probably at the end of an economic recovery period, and CalPERS still hasn’t recovered from its losses during the Great Recession.

CalPERS recently reduced its expected annual discount rate to 7.5 percent from 7.75 percent. Starting July 1, that’s a new $167 million yearly hit on California taxpayers. And we don’t get anything for it: No new roads, no schools built, no new teachers hired, no parks kept from being shuttered.

The money just goes to the generous pensions of former workers who don’t even work for us anymore, and might not even live in the state. Such as the 9,000 members of the “$100K Club,” who make $100,000 or more in their pensions per year.

Such as retiree Bruce Malkenhorst, who pulls in an incredible $509,664.60 a year for his pension.

And it’s all guaranteed by the California Constitution.

Unless we reinterpret the constitution.

Or change it.

Or ignore it.

March 22, 2012