San Bernardino Dumps CalPERS as Pension ‘Death Spiral’ Looms

The City of San Bernardino has voted to become the first participant to dump CalPERS after the state’s pension plan shocked participants by announcing contribution rates would rise by 61 percent over the next five years.

The city’s savings will grow from $4.7 million next year to $17.2 million a year by 2021. Each CalPERS participant that leaves will force pension contributions rates to rise even faster in what could result in a “death spiral.”

Breitbart News reported four months ago that the California Public Employees’ Retirement System’s actuaries had demanded the under-funded pension plan’s plans participants increase annual cash contributions by a stunning 10 percent in each of the next 5 years due to an inappropriate “assumption” about the solvency of the plan. That meant CalPERS’ annual payments would leap from $4.5 billion this year to $7.25 billion in year five.

After a five-hour screaming session last Monday, the San Bernardino City Council’s conservative majority voted 4-to-3 in favor of dissolving its 137-year-old City Fire Department and turning fire protection responsibilities over to the county.

The bankrupt city was paying $28.6 million to employ a total of 100 city firefighters with 38 on duty at all times. But unlike other city unions, the firefighters’ union refused to take a 10 percent pay cut and to forego merit raises. Instead, the union filed several lawsuits against the city.

By turning fire protection over to the county, the San Bernardino will only pay $26.7 million in compensation for fire protection. The county deal immediately saves $4.7 million a year when reduced pension, health care and workers’ compensation costs are included.

Despite the lower costs, the county has contracted to provide 41 firefighters on duty at all times and operate one extra fire station. The big cost difference is due to the city fire department being loaded up with highly-paid captains and lieutenants; meanwhile, the fire-fighting staff was racking up tons of overtime, according to the bankruptcy consultants.

The city’s bankruptcy attorney, Paul Glassman, warned the council that failure to approve an outsourcing plan might jeopardize the city’s relationship with U.S. Bankruptcy Judge Meredith Jury and creditors that are demanding real cost savings.

The San Bernardino County Fire Department, with 930 employees and 56 fire stations, serves the unincorporated area and seven cities. San Bernardino city firefighters currently covered by CalPERS will be transferred into the San Bernardino County Employees Retirement System.

The City of San Bernardino filed for Chapter 9 bankruptcy on August 1, 2012 after accumulating $296 million of unfunded liabilities and a $45 million budget shortfall, and was about to miss payroll. San Bernardino skipped its CalPERS pension payments until the following July, saying it was in danger of not making payroll.

After the unprecedented failure of San Bernardino to pay CalPERS’s contribution, the pension plan opted for an all-out legal battle occupying much of the first two years of the San Bernardino bankruptcy. What emerged from mediation in June of last year was an agreement for San Bernardino that would require residents and businesses to pay an additional property parcel tax increase to fund $16 million in skipped payments, and interest payments of $602,580 a month for another two-year period.

But the restructure was based on CalPERS telling the city that its pension contribution costs would only rise each year by an inflation rate of less than 2 percent per year. The CalPERS 10 percent annual increases would have resulted in the city paying $17.2 million more to operate its own fire department.

With San Bernardino demonstrating how much can be saved by dumping CalPERS, it is expected that a number of cities and local districts may also bailout of the expensive and increasingly insolvent pension plan. Each participant that leaves will cause CalPERS pension contribution rates to rise even faster in what could result in a death spiral.