What happens when a bankrupt city does not cut its largest debt, pensions, is getting its first test in Vallejo, which has higher average pensions and higher CalPERS rates than the two larger cities still in bankruptcy, Stockton and San Bernardino.

Vallejo was the forerunner, choosing not to try to cut pensions before exiting a 3 ½-year bankruptcy three years ago. City council members said later CalPERS had threatened a long and costly legal battle.

Stockton’s plan to exit bankruptcy without cutting pensions was approved in October. The judge ruled that CalPERS pensions can be cut in bankruptcy. But Stockton does not want to cut pensions, saying they are needed to be competitive in the job market.

San Bernardino, cash short, skipped payments to CalPERS for most of a fiscal year. Last month the city formally announced that under an agreement with CalPERS last June, the missed payments are being repaid and pensions will not be cut in bankruptcy.

So, will the bankrupt cities regret passing up a chance to cut growing pension costs that take funds needed for other services?

A leader among the critics of public pension cost reporting, credit-rater Moody’s, warned in February that the failure of the three bankrupt California cities to cut pensions risks a return to insolvency.

Vallejo may be a good post-bankruptcy test not only because it was first in and first out, but also because of its high pension costs. Here are some comparisons of the three cities from several sources.

Retirees of Vallejo, population 117,000, have higher average pensions than the retirees of the two larger cities, San Bernardino 214,000 and Stockton 300,000. One reason: Union bargaining was based on pay in the high-cost San Francisco Bay Area.

The latest CalPERS valuation reports show police and firefighters retired less than five years have an average pension of $95,127 in Vallejo, compared to $85,501 in Stockton and $78,673 in San Bernardino.

The average pension and benefit amount for retirees with 30 plus years of service in Vallejo is $83,938 in Vallejo, $66,286 in Stockton and $63,418 in San Bernardino, according to a database of government pay and pensions, TansparentCalifornia.com.

Of the individual pensions listed by name in the database, 13 percent (87) of Vallejo retirees have an annual pension of $100,000 or more, compared to 7.4 percent (130) of Stockton retirees and 5.9 percent (83) of San Bernardino retirees.

The rate that Vallejo pays CalPERS is significantly higher than the rates paid by the other two bankrupt cities. The Vallejo safety rate (police and firefighter), 57.6 percent of pay next fiscal year, is projected by CalPERS to reach 72 percent of pay in 2021.

Last week a Moody’s report said the San Bernardino no-cut pact with the California Public Employees Retirement System makes it more likely that the city will cut bond debt and retiree health care, following the Vallejo and Stockton pattern.

“San Bernardino’s choice to leave its accrued pension liabilities unimpaired means that its contribution requirements to CalPERS (see Exhibit 2) will likely increase to the point where they weaken the city’s financial profile, even after the relief provided by the bankruptcy adjustment,” said Moody’s. “This weakening is similar to what we expect to occur in both Stockton and Vallejo.”

moodys1_bankrupt ca citiesIf growing pension and retiree health care costs continue to eat up more of government budgets, diverting money as public safety services and other key programs erode, is there a point at which leaders and the public demand change?

When San Diego and San Jose voters approved cost-cutting pension reforms in June 2012, retirement costs were 20 percent or more of the general fund in the two big cities that have their own pension systems.

The Vallejo budget is complicated by separate accounting for a one-cent sales tax approved by voters in November 2011 for 10 years. Measure B was expected to yield about $10 million each year.

In a five-year forecast in the current Vallejo budget (p. 20) excluding Measure B, the annual CalPERS payment, 17.6 percent of the general fund ($13.8 million of $78.5 million), is expected to grow to 21.8 percent by 2019-20 ($17.4 million of $80 million).

The Stockton plan to exit bankruptcy expects the city’s CalPERS contribution to climb to 18.5 percent of the general fund by the end of this decade, then to stay at that level for most of the next decade.

Since leaving bankruptcy, Vallejo has made a supplemental $6.6 million payment to CalPERS to cut pension debt, started pension-like annual investments to help pay future retiree health care, and has begun building a large general fund reserve.

Vallejo has received national media attention for “participatory budgeting” that allows residents to vote on how some of the Measure B sales tax money will be spent, about $3 million the first year.

In a general fund update for the city council last month, the Vallejo city manager, Daniel Keen, listed a number of “nice milestones,” beginning with the first structurally balanced city budget in 10 years.

The city received its first unqualified audit in over seven years, re-entered the debt market with an $18 million water bond, and debt issued in 1999 was recently upgraded from “CCC+” to “BB-” with a stable outlook.

Through the first quarter of the fiscal year that began July 1, tax revenue is $2 million above projections. But $2.5 million in expected savings from unfilled positions dropped to $1 million due to a “very good job” hiring police and firefighters.

“In our five-year projections we had expected that number to come down,” Keen said. “It’s just coming down a lot sooner than we thought it would.”

Vallejo made deep cuts in police and firefighters and closed several fire stations. The current budget called for hiring 18 police officers, two dispatchers, 10 police cadets, 10 firefighters and one deputy fire chief.

A budget chart (p. 165) shows the average Vallejo police salary, $111,016, is more than matched by pension, health care, workers compensation and other expenses that push the total cost for the average officer to $227,221. (See chart below)

The city’s first structurally balanced budget in a decade may be temporary. The five-year forecast expects a general fund deficit to reopen again next fiscal year and grow to $3 million by 2019-20.

“There is still a lot of work to do,” Mayor Osby Davis told the council. “There is still a lot of watching dollars and planning that we have to undertake. Until we see that balanced throughout, we are not out of the woods.”

vallejo_avg cost per employeeReporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune.

Cross-posted at Calpensions.