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Hearing the Footsteps

Rick Roeder       June 2014

Detroit seems to be an awfully long way from Sacramento but sometimes objects can truly be closer than they appear when one looks in the rear view mirror. Yes, Motown is three time zones and 2,000 miles distant from Gold Rush country but CalPERS staff is keeping its eyes eastward and its ears very close to the ground. Ever since Detroit was permitted to proceed with its Chapter 9 bankruptcy proceedings last summer, the degree of worry has escalated for both CalPERS and retirants in entities that had declared bankruptcy or will contemplate doing so.

Seven entities in California have declared bankruptcy, most notably the cities of Vallejo, Stockton and San Bernardino. The initial rulings from the bankruptcy judge in the Detroit case, Steven Rhodes, affirmed that the City of Detroit is eligible for bankruptcy protection. As a result, pension reductions will apply not just to actives but also to current retirants if the results of the ruling are not overturned in Circuit Court.

Last month, CalPERS filed an amicus curiae brief (“friend of the court”) to the Detroit appeal handled by the 6th Circuit Court. CalPERS has the large worry of entities paying off all their unfunded liabilities. The CalPERS brief took issue with the concept expressed in the Detroit case that once the state permits an entity to file bankruptcy, the state laws and constitutional protections no longer apply to the municipal debtor. CalPERS also expressed the view that bankruptcy was unnecessary and was being used as a capricious bargaining tool.

If those arguments fail to gain traction, CalPERS attorneys also argued that the Detroit’s pension system has a meaningful distinction from CalPERS in that the Detroit system is municipal–based. If the Circuit Court does not override the initial decision by Judge Rhodes, CalPERS hopes the decision will be written in narrow enough scope that any resulting legal tsunami gets contained well East of the Colorado River.

In the latest developments in the Detroit bankruptcy, members will be voting on a proposal which reduces the degree of pension cuts significantly, thanks to some potential additional cash infusions from outside sources. The General pension board Trustees voted, 5–2, to accept the latest proposal. The Safety pension board will soon cast their vote. If accepted by the membership, the new proposal will go before Judge Rhodes on August 14. For General members, current pensions would be cut by 4.5% in addition to elimination of annual COLA adjustments if members approve the proposal. For Safety members, there would be no pension cuts but a lower COLA adjustment.

CalPERS has been unsuccessful in its attempts to disallow the bankruptcy process in California. We note that the deciding judge in CalPERS’ unsuccessful attempt last summer to overturn the City of San Bernardino’s bankruptcy filing was Meredith Jury – which goes to show that sometimes it is legal to be both judge and jury.

When the California legislature implemented pension reduction legislation in 2012 (“PEPRA”), such reductions only applied to post–2012 hires. Thus, for the entities subject to PEPRA, the bill was no near–term panacea for unprecedented pension contribution levels. Please refer to our February 2014 article, “Was PEPRA Enough?”

For over five years, The Ramble has been following the bankruptcy–related issues for governmental pension plans. As this issue will not be resolved soon, we expect to be weighing in on this topic for several more years to come.

Guest authors are welcome to submit articles and their thoughts to the ROEDER RAMBLE for potential viewing on this site.