The Tensions of Pensions in Municipal Bankruptcy

Pensionary Challenges.  One of the unique challenges of chapter 9 municipal bankruptcy is the tension between state constitutions and public pensions—a struggle we experienced in Detroit and Stockton—and which now will begin to unfold in San Bernardino, where, unlike every other retiree in this California city, 23 retired San Bernardino police officers would, under the city’s proposed plan of debt adjustment, lose part of their pension; the officers would still receive payments from the California Public Employees’ Retirement System (CalPERS), but a retirement supplement from a private firm called the Public Agency Retirement System would be eliminated. In its proposed plan, San Bernardino said it thought it had an agreement (PARS) with the retirees to end the PARS supplement and instead distribute the $1.8 million in assets in that fund to the 23 officers.

Before U.S. Bankruptcy Judge Meredith Jury, as well as in letters and statements to the City Council, several of the officers, however, are begging to differ. The PARS supplement — which San Bernardino has used to boost the officers’ retirements to the level now common for other police and firefighters — makes up 10 to 20 percent of many of those officers’ pensions, retired officer John Montecino this week stated before Mayor Carey Davis, the City Council, and the public: Officer Montecino highlighted the case of two officers he said depend on PARS: Brian Cartony, a decorated officer he said was ambushed when he responded to a homicide scene, and Mark Johnson, nearly killed on duty by an AK-47: “Brian and Mark are some of San Bernardino Police Department’s wounded warriors,” Montecino said. “Officers who were willing to put their lives on the line for San Bernardino and now depend on you, Mayor Davis, and this council not to betray them in retirement. Don’t let yesterday’s heroes become today’s outcast.”

The issue stems from a more than decade old agreement between the city and two unions representing police to use the PARS retirement system to give police officers age 50 or older with 20 or more years of service with San Bernardino retirement compensation that was equivalent to the retirement then becoming common statewide: 3 percent at 50, rather than the 3-at-55 the city offered through CalPERS. That agreement was replaced in 2007, when San Bernardino and the union began offering the same benefit — retirement benefits of 3 percent of each year’s salary available at age 50 — through CalPERS. But that left a gap for 23 officers who retired between 2004 and 2007; officers for whom the city continued to make payments to that retirement fund until shortly after it filed for chapter 9 municipal bankruptcy three and a half years ago.

The issue arose as the city is in complicated bankruptcy mediation with another creditor, Luxembourg-based corporation EEPK, which is upset with its treatment under the city’s proposed plan: EEPK, which is unsurprisingly unhappy that the city is offering it only one cent on the dollar. One can thus grasp the kinds of Solomon’s choices that abound—and, even harder here, City Attorney Saenz notes San Bernardino, at least in his opinion, must favor its workforce to continue functioning as a city, noting, this week: “We are sensitive to our retirees specifically…Obviously they worked for the city and dedicated a lot of time and effort to it. … You’ve heard this described in court as ‘Main Street versus Wall Street,’ that as Wall Street gets more, Main Street gets less, and from the perspective of these retirees, that’s very true.”

Similarly, the San Bernardino committee representing nearly 2,000 retired city employees wrote in a filing with the U.S. bankruptcy court last month that it was sympathetic to “former City police officers who risked decades of their lives and faced dangerous situations in order to protect the City and its populace.” Notwithstanding, the group’s attorney, Steven Katzman, noted it was possible the PARS retirees’ interests could conflict with other retirees’, so they should be represented by a different attorney. To which San Bernardino, in response, said it would revise the plan to include PARS retirees with other unsecured creditors, who would get 1 cent for every dollar they are owed under the city’s proposed plan. The difficult choices could fester: Councilman Jim Mulvihill, who was part of the Council 6-1 majority voting in favor of the city’s proposed plan of debt adjustment, now seems to be reconsidering, noting: the retirees deserved what they’d been promised: “The point is our retirees were told this would be part of their retirement.”

Undoubtedly, in a city where February elections are looming, balancing the city’s bankruptcy filings with re-election is like straddling a precipice. Or, as Councilman Mulvihill put it: “We pulled the rug out from those 23 officers. These are employees that risked their lives and their health providing security for our population and they planned on this retirement….a compromise might be best, but to pay the same 1 percent that bondholders get “isn’t just an injustice, it’s an insult.”

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