Saturday, March 08, 2014

A Lot to Be Moody About in Vallejo

A report from Moody’s Investors Service was released recently about Vallejo, Stockton and San Bernardino entitled, “Without Pension Relief, Bankrupt California Cities Risk Return to Insolvency”.

Moody’s warns that because of Vallejo’s continuing structural imbalance, the city, “risks a second bankruptcy filing if it continues on its current path.” And while the City did cut cut retiree health benefits, created a second benefit tier for new hires and made City employees contribute more of their pay toward their pensions, Moody’s argues that Vallejo missed the opportunity in bankruptcy to cut its pensions.
“Vallejo’s current budget challenges are largely driven by its failure to alter its pension obligations to CalPERS, the California Public Employees Retirement System,” the report says. Moody’s analyst Tom Aaron, who co-authored the report, says, “By failing to address its pension liabilities (Vallejo) remains vulnerable to increasing annual payments,” which will exceed 70 percent of payroll in just six years.

Having been through the bankruptcy up close and personally, I have mixed feelings about Moody’s pronouncements. They are spot on about Vallejo’s continuing structural deficits. Giving our police officers, some of the highest paid in the state, raises in bankruptcy was unfathomable, and refusing to cut salaries across the board for all employees, with the highest paid employees taking the biggest hits, was irresponsible. Moody’s is correctly sounding the warning bell about the dangerously steep rise in pension costs coming our way.

Vallejo’s own budget hawk J.D. Miller notes that:
“CalPERS rate increases will raise Vallejo’s pension costs roughly 50 percent by 2020…The combination of increased pension costs and the expiration of Measure B in 2023, in excess of $20 million a year, will reduce the amount of money Vallejo has to spend for police officers and firefighters…Vallejo could have 80 fewer police officers, 80 fewer firefighters, or some combination of these two.”

Many of us in Vallejo hear the tsunami sirens very loudly. We get it and we’ve been asking for pension and pay cuts from our city employees. But Moody’s blithely says that Vallejo should have “cut pensions while in bankruptcy.” Much easier said than done. CalPERS contends that pensions are not touchable under the Chapter 9 bankruptcy code because, under California law, public employees' pensions are contracts that cannot be involuntarily “impaired.” That’s definitely arguable. And with the judge’s ruling in Detroit's bankruptcy that pension obligations are debts that may be subject to modification like other debts — that definitely opens the door to a CalPERS challenge.

But under threats of long and costly legal action from CalPERS, as a Council Member, I made a choice not to cut pensions of current employees. Vallejo simply didn’t have the time or money for a long and protracted legal fight with CalPERS that would have stretched our bankruptcy out even longer. And CalPERS had unlimited time and money to fight us. It was an awful choice to make. But I figured that there would be other cities coming behind us that would file for Chapter 9, and they’d be bigger and wealthier than Vallejo, and therefore would have the resources to fight CalPERS on behalf of the rest of us. That’s what San Bernardino is doing right now. I applaud their chutzpa and wish that Vallejo had been able to lead that charge.

But it shouldn’t have to come down to a legal battle between cities and CalPERS. It really doesn’t have to. If we enacted the pension reform that San Jose Mayor Chuck Reed is proposing, and I am supporting, there would be no need for lawyers and judges to steer us through budget crisis. This statewide pension reform will give California cities the tools to negotiate new pension formulas with current employees for their future earnings (not what they’ve already earned). No bankruptcy or court battles necessary.

Ultimately, many California cities are in this position because they promised their employees much more than they could afford in terms of pensions and health care. And the solution is not as easy as just paying more to cover the deficit. No amount of economic development can cover a structural deficit based on exponentially rising costs like our pensions. Cities like Vallejo can’t pay much more or they won’t be able to provide even basic services to its citizens. The taxpayers have taken the hit again and again and again in terms of paying more to cover the pension deficits. It’s time we addressed these unrealistic pensions head on, together, as a united California.

Mayor Reed’s statewide pension reform — and elected officials with strong political will and public employee unions with integrity — is the only thing that will keep cities like Vallejo from being stuck in a revolving door of bankruptcy.

Read more about the Pension Reform Act of 2014: