Many public agencies are in very dire straights right now, given the ever-increasing payments that are demanded by the California Public Employees’ Retirement Fund (Calpers).
But a recent case from the small town of Loyalton, just a 45-minute drive from Reno, shows that there may be a viable backdoor for California public agencies to escape the tyranny and unreasonableness of Calpers.
In short, if the required contributions by Calpers are too expensive for your public agency to afford, simply quit making payments to Calpers. The worst that can happen is that Calpers will cut pension benefits in proportion to the shortfall which what is needed to help provide long-term financial relief to public agencies in California.
That’s what the City of Loyalton did about four years ago and Calpers finally sent them a “final demand letter” on Aug. 31st giving them 30 days to “bring its account to current,” according to Calpensions.com.
If Calpers acts to cut the pension of the four retirees of the small town, it would be the first time that Calpers used its power to cut pensions in proportion to the payment not made by the employer, according to the Calpensions report citing a Calpers spokesperson.
Loyalton owes Calpers a $1.66 million lump sum payment that cannot be made overtime with installments. But the town of only 733 residents only has $1.17 million in annual revenues, but $1.68 million in annual expenditures and $6.16 million in liabilities. So there is no feasible way for the city to make the full payment.
Any reasonable creditor would work with the agency to provide for a workable payment plan, but Calpers, despite being a state-run public agency, is the modern day equivalent of Shylock from Shakespeare’s classic Merchant of Venice.
All Calpers wants is its “pound of flesh” even if it bankrupts the public agency or causes great financial hardship to both taxpayers and retirees. This “corrupt” nature of Calpers is due to the long-history of union domination of its board and staff.
The best thing public agencies can do is say no, and force Calpers to negotiate. Experience has shown that Calpers will bring the full brunt of the taxpayer funded $300 billion agency down onto public employers in the form of lawyers, legions of public affairs personnel, a union organizing campaign and downright intimidation and vicious threats, according to discussions with public officials who have witnessed this Calpers intimidation first hand.
So be prepared since you are essentially going to war with the most well-funded, ruthless public agency that currently exists in the United States, apart from maybe the IRS.
But if more public agencies do what the City of Loyalton did, what will Calpers do? They will be forced to provide cities with greater flexibility to either make payments or reduce pension benefits, or both.
The state’s pension system is close to reaching a breaking point because Calpers continues to demand extremely high and ever increasing contributions from public agencies to pay for even higher retiree benefit costs that were sold to them under false pretenses in the wake of SB 400 (Ortiz—1999).
Calpers projects total contributions from public agencies in California to rise from $10 billion in 2010-11 to $20 billion in 2023-24—a doubling—although that assumes an artificially high discount rate of 7.5%, which means total unfunded pension liabilities debt will likely more than double or triple as well over the same period.
Yet Calpers offers no flexibility to reduce the costs of those benefits. Thus, public agencies are really left with two options either stopping making the payments, or file for bankruptcy.
Bankruptcy should also be considered, but the three cities in California that went into bankruptcy (Vallejo, Stockton, and San Bernardino) essentially failed bankruptcy because they failed to renegotiate their pension liabilities, despite the fact that these were their largest and fastest growing debt category.
According to a federal judge, these cities could have also torn up their existing public employee collectively bargained contracts which govern all pay and benefits, but only marginal changes were made due to the heavy-handed tactics of both Calpers and the public employee unions who loomed large in the bankruptcy proceedings.
California public agencies can and should seek to reduce public employee retiree benefit costs since it is the only way to get out from under all their debt and skyrocketing contribution costs. But public officials should be prepared for war because that’s what it will take to go up against Calpers and the public employee unions who will do everything in their power to prevent any changes, no matter how reasonable or necessary to ensure the long-term fiscal sustainability of our public agencies.
David Kersten is president of the Kersten Institute for Governance and Public Policy (www.kersteninstitute.org). He specializes in labor negotiations and political action, having been at the table for dozens of sets of collective bargaining negotiations over the past several years. Kersten is available to help public agencies who may be considering or in the midst of challenging Calpers or renegotiating unsustainable labor contracts in collective bargaining.