Pacific Grove California Explores Bankruptcy Over Pension Issues

In an effort to rein in pension costs, Pacific Grove California Explores Bankruptcy.

Pacific Grove's Budget and Finance Advisory Committee is cautiously probing the implications of the city declaring a Chapter 9 bankruptcy as a solution to its budget woes and entitlement obligations.

The committee Thursday heard a brief report from City Attorney David Laredo, who left with a list of questions to be answered at its May 21 meeting, according to committee member and former Councilwoman Susan Nilmeier.

Talk of municipal bankruptcy has been in the air since U.S. Bankruptcy Judge Michael McManus ruled last month that the city of Vallejo, which filed for Chapter 9 bankruptcy protection in May 2008, has the authority to void its existing union contracts.

The judge contended that Congress did not extend the same projection to public employees that it did to those working in the private sector under Chapter 11 bankruptcy rules.

The city has been struggling with how to bring its pension costs to CalPERS under control in light of the economic recession. The state pension program relies on investment income to fund benefits and, when these funds fall short, cities and other public agencies enrolled in CalPERS must take up the slack.

Last year then-Councilman Daniel Davis prepared a report on the city pension plan and recommended that the city get out of the state program. He noted that Pacific Grove is already paying off a $19 million pension debt to CalPERS due to the stock market crash starting in 2000.

In November the city's voters approved an advisory measure to the council that it jettison CalPERS.

CalPERS is acronym for the California Public Employees Retirement System. CalPERS provides retirement, health, and related financial programs and benefits to 2,500+ public employers, more than 1.6 million public employees, retirees, and their families.

Taxpayers foot the bill if CalPERS fails to meet its plan assumptions.

Unjustified Bonuses At CalPERS, CalSTRS

Inquiring minds are reading how CalPERS, CalSTRS award big bonuses despite losses.

California's two biggest public employee pension funds handed out millions of dollars in bonuses last year to their top executives and investment managers, despite losing billions of dollars.

The biggest bonus check, $322,953, went to Christopher Ailman, chief investment officer of the California State Teachers' Retirement System. It nearly doubled his base pay of $330,000 for fiscal 2007-08.

Ailman's counterpart at the California Public Employees' Retirement System, Russell Read, received a $208,677 bonus to his $555,360 base pay in August, more than a month after he had resigned from the fund's top investment job.

Retirement fund officials say bonuses like those paid to Ailman and Read help attract and retain top talent.

Since closing their books last year, both funds have lost dramatically more money with the stock markets' meltdown. CalPERS' holdings have fallen from $239 billion to $175 billion, a loss of more than 25 percent. CalSTRS' assets have dropped nearly 30 percent, from $162 billion to about $114 billion.

A Look At "Top Talent"

Q: How does one lose 25-30%?
A: It takes "Top Talent"

Perhaps CalPERS should give Sitka Pacific Capital Management a call. Sitka's two key strategies had positive returns in 2008 and both are positive through the first quarter of 2009.

Hedged Growth Since Inception


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Absolute Return Since Inception



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I am obligated to say that past performance is no guarantee of future results.

Vallejo California Fires Warning Shot?

Vallejo California fired the first shot by declaring bankruptcy in May of 2008. Please see Hardball In Vallejo, No Balls In D.C. for details.

In March of 2009 Judge Rules Vallejo Can Void Union Contracts.

The union wage and pension agreements were absurd; the union refused to give in; and now the union got what it deserved for bankrupting Vallejo, California. This is a victory for Vallejo taxpayers, and actually, taxpayers in general as this is likely to be a precedent setting case.

Expect to see more cities file bankruptcy or threaten to, in order to get major union concession on pension funding. I am tired of sky high taxes for the benefit of the few while most private plans have suffered.

This was a good ruling. A tip of the hat goes to U.S. Bankruptcy Judge Michael McManus.

Fat Pensions Spell Doom For Many Cities

Please consider the CNNMoney article Fat Pensions Spell Doom For Many Cities.

The jig is up. For years, politicians have been playing what amounts to a multi-trillion-dollar shell game with state and local pensions. They've doled out lush retiree benefits to their heavily unionized workforces, knowing that they could shove the cost for those benefits onto future generations of taxpayers.

Thanks to retroactive benefit enhancements approved by the city council in 2000, police officers and firefighters can now retire at age 50 and receive an annual pension equal to 90% of their final pay (assuming 30 years on the job), an amount that gets increased every year to help keep pace with inflation. The old plan had given the workers a pension equal to 60% of their final pay at age 50.

So a Vallejo police sergeant making $150,000 a year can now retire at age 50 and receive an annual pension of $135,000, increased each year for inflation. To put that amount in context, you would need to amass a retirement nest egg equal to about $3.5 million to produce a similar retirement income on your own.

It wasn't just police and firefighters who benefited from the city's largess. The annual pensions for rank-and-file city employees were jacked up from 60% of final pay at age 55 (after a 30-year career) to a whopping 80% of pay, increased each year for inflation.

Other towns in trouble

Here's the scary part: What's going on Vallejo isn't unique.

Back at the turn of this century, when the stock market was still booming, public pension plans across the country were suddenly overflowing with surplus money. Politicians responded by handing out heavily sweetened pensions.

Then, even though the stock market collapsed, politicians couldn't stop the trend. In 2001 alone, pension benefits were increased in at least 17 state plans, as well as some major cities.

Now that bubble has collapsed and the stock market is floundering. State pension plans alone are about $360 billion short of the assets they should ideally hold for future retirees, according to a recent report by the Pew Center on the States. And that's not including city plans.

There is, however, one potential option for cutting back on public pension benefits: bankruptcy. And that's what it has now come to in Vallejo. Elected officials in other struggling areas will surely be watching.

Clearly Pacific Grove is watching, and I commend them for it. Two cities will not make a trend, but it's a start.

Unless unions are willing to renegotiate benefits (which they won't be), bankruptcy is the only viable option for cities. Raising taxes will not fly. So here's to hoping Pacific Grove files bankruptcy. Bankruptcy is a taxpayer friendly option that everyone but the unions should welcome.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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