San Bernardino at Brink Awaits Calpers Pension Tab
The Southern California city of San Bernardino has seen its workers’ pension costs more than double since 2006, adding to the fiscal stress that led it to the brink of bankruptcy.
Next week, the city of 209,000 will learn annual returns of the California Public Employees’ Retirement System, which may say it failed to meet its investment target. When the nation’s biggest public pension underperforms, the most-populous state and its municipalities may have to help make up the difference, straining budgets that are still rebounding from the recession that ended in 2009.
“Pension funds lose money every time they don’t earn as much as they assume they will earn,” said David Crane, a Democrat who was an economic adviser to former Governor Arnold Schwarzenegger, a Republican. “When they don’t earn that, they need the governments who are on the hook for all these liabilities to put up more money.”
San Bernardino on July 10 became the state’s third municipality to decide to seek bankruptcy protection in as many weeks. Calpers, as the $234 billion pension is known, is already the biggest unsecured creditor of Stockton because the city owes the fund money for worker pensions. The community of 292,000 east of San Francisco on June 28 became the biggest U.S. city to enter bankruptcy after talks with bondholders and labor unions failed.
Growing obligations to workers are pressuring cities nationwide. Central Falls, Rhode Island, filed for protection in August under the weight of labor costs. In the wake of the 18- month recession, cities have faced diminished revenue and state support, forcing officials to reduce services and payrolls.
Municipalities faced a fifth straight year of lower revenue in 2011, according to the National League of Cities.
Declining tax collections, growing worker costs and a jobless rate in the metropolitan area of almost 12 percent contributed to help push San Bernardino toward bankruptcy court.
The city’s obligation to Calpers grew from $11.8 million in 2006 to $25.5 million in the fiscal year that began July 1, according to annual reports prepared for the city by the fund. Boosts to benefits and salaries, combined with an aging workforce that increased retirements, contributed to the higher pension costs.
“Calpers has said we can add benefits on and it won’t cost us more,” said Jim Morris, chief of staff to San Bernardino Mayor Pat Morris. “When you open up new benefit levels that puts upward pressure on everybody.”
The city faces a $45 million deficit, according to a budget analysis.
Investors this week demanded the most extra yield in six months to own bonds of California localities amid the bankruptcy votes. General-obligation debt from issuers in the state yielded as much as 1.04 percentage points above top-grade securities on average, matching the most since January, according to Bloomberg Fair Value index (SPX) data.
Taxable Build America Bonds issued by the San Bernardino Joint Powers Financing Authority in December 2010 and maturing in 2030 traded yesterday at an average yield of about 9.3 percent, up from 7.6 percent July 9, data compiled by Bloomberg show.
The amount the city must pay as a percent of payroll for firefighter and police pensions grew to 30.1 percent this year from almost 19 percent in 2008. The increase was fueled in part because Calpers had to increase requested contributions after the fund lost almost a quarter of its value in the year through June 2009. The Standard & Poor’s 500 Index dropped 38.5 percent in 2008.
“The financial struggles for California’s cities and counties are difficult issues for everyone involved,” Brad Pacheco, a Calpers spokesman, said in a statement. “Calpers is committed to working with the affected parties to address pension obligations. The unprecedented losses resulting from the recession have impacted the rates we must charge to honor the commitment employers have made to their employees.”
The fund expects to earn 7.5 percent annually to cover the costs of providing pension benefits to almost 540,000 people. It spreads out any gain or loss over 15 years to shelter municipalities from volatility in yearly results.
Its daily market value was down about 2 percent for last fiscal year through June 28, a period in which the S&P 500 gained about 0.6 percent. Still, the fund has beaten its benchmark 15 times since 1990 and earned 7.9 percent annually on average in the last 15 years. It is set to report its results as soon as July 16.
San Bernardino’s City Council, over the objection of the mayor, in 2007 granted more lucrative pension benefits to workers, including allowing them to retire at the age of 55.
“It was a contentious thing,” Morris said. “It should have never been done. Given longevity, we will soon end up paying these people more in their retirement than they ever earned on active duty.”
The city has 102 former employees who collect annual pensions exceeding $100,000, according to data provided by Calpers.
The $3.7 trillion municipal-debt market rallied yesterday along with Treasuries. Yields on 10-year tax-exempt bonds rated AAA fell 0.05 percentage point to 1.77 percent, the lowest since mid-May, Bloomberg Valuation data show.
Following are pending sales:
DORMITORY AUTHORITY OF THE STATE OF NEW YORK plans to sell $1 billion of debt backed by personal-income-tax revenue as soon as July 17 through competitive bid, according to bond documents. Proceeds will help finance capital projects for the State University of New York system and the City University of New York and support environmental infrastructure projects. (Updated July 13)
MIAMI-DADE COUNTY, Florida, is set to issue $540 million of sales-tax revenue bonds as soon as next week. The sale will refund debt and help finance transportation projects, according to bond documents. (Updated July 13)
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