Choice: Pensions or police

Orange County Register

When the money runs out, government subdivisions start turning on one another. That's happening with the city of San Bernardino's bankruptcy. In August, the city stopped making pension payments for its current employees into the California State Employees' Retirement System; it owes $6.9 million. CalPERS appealed to the bankruptcy judge, insisting that the city must pay, even if that meant cutting police and fire protection for the city's 213,000 residents.

Bankruptcy Judge Meredith Jury in Riverside ruled that CalPERS would be ill-advised to sue for the money in state court, although she could not prevent that. “She said she was inclined to think at least $13 million in payments the city plans to defer until July 2013 are legally required, but the harm to the city would be overwhelming,” reported the Inland Valley Daily Bulletin.

The judge said, “One of the immediate effects of that would be that the employees would not be paid, and that, to me, is a death knell for the city of San Bernardino, and an immediate one.” If a city can't protect its own people, it's hard to see why it should exist.

CalPERS has branded the bankruptcy a “sham.” But the judge said, “I don't think there's really anyone in the room who thinks the city isn't broke.”

“I was surprised the court ruling was so definite,” Marcia Fritz told us; she is president of California Foundation for Fiscal Responsibility, a pension-reform group. She said a major problem is that city employees still are accruing pension benefits, even though the city isn't paying toward those benefits. “Somewhere in the mix, there will have to be adjustments. But nobody wants to take that move.”

She said that CalPERS would be advised to take the first move and halt the accrual of employee benefits until the city starts paying back into the system. Employees then would continue getting their paychecks and medical insurance, but would not accrue pension benefits. Previous pension payments would remain secure, as would any future payments after the city presumably works through the bankruptcy and returns to making regular pension payments.

Ms. Fritz also warned that CalPERS must look out for the overall soundness of its investment portfolio. The fund can't be drained of contributions for too long. And with two other cities going through bankruptcy, Stockton and Mammoth Lakes – and other cities at risk of joining them – acting quickly is crucial.

Of course, this problem stems from San Bernardino, like most public bodies in California, having a “defined benefits” pension system, managed by CalPERS, with taxpayers ultimately on the hook for any shortfall. By contrast, if city employees were on 401(k)-style “defined contribution” plans, as are most private-sector employees, this problem wouldn't crop up. The employees themselves would contribute to and direct their own retirement investments.

Ultimately, that's the direction California public-employee pension reform is headed, with a push from the San Bernardino bankruptcy.

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