Part 6 of 7:
Unions Will Seek Court Imposed Tax Increases Instead of Reform
In a corporate bankruptcy, the judge can close down the business, sell the assets, and determine which creditors get paid. But in a municipal bankruptcy (MBK), a judge cannot force a city out of business. The city should come out of bankruptcy in a condition to provide municipal services, but that will not happen in Pacific Grove unless the city requests a modification of both pensions and salaries. There is no doubt that the U.S. Constitution specifically granted Congress the power to modify pensions in a MBK. The question is whether Congress has authorized bankruptcy judges to do so. CalPERS claims that state law makes pensions untouchable. Judge Klein, in striking
down Stockton retirees’ medical benefits, noted that federal law trumps state law in a bankruptcy proceeding. There is no law on whether pension benefits may be modified in bankruptcy, because thus far no city, until Detroit, has requested a court to modify them. The California unions and CalPERS have foiled all attempts by a California city to request modification of pensions. So all eyes are on Detroit.
If it is determined that pensions may be modified in a MBK (municipal bankruptcy), then there is a way out for Pacific Grove and for several other local cities. But if this Pacific Grove council was forced to file for bankruptcy on behalf of Pacific Grove, it would likely not request modification of pensions. Stockton, San Bernardino and Vallejo did not, and now Vallejo is considering another bankruptcy, this time to modify pensions. Incredibly, Stockton is proposing higher taxes rather than a modification of pensions.
In both Detroit and Pacific Grove, because of sharp reductions in the work force, pension contributions are down and the number of retirees is up. Both cities have also promised investors the repayment of pension bond money. Detroit is offering retirees a pension modification of 19 cents on the dollar. Pagrovian pension reformers have been fighting since 2008 to avoid a like tragedy for Pacific Grove retirees, but so far with no success. Pacific Grove could now pay about 50 cents on the dollar, but without reform, that will get worse.
Pacific Grove recently paid a bankruptcy attorney about $100,000 for advice. She informed Pacific Grove of the critical need to be prepared to file for a MBK, and that it would take about a year to prepare properly. But her advice has been ignored. Why? Because the unions, policy staff, and the council majority exist in a state of delusion. When Pacific Grove is no longer able to pay CalPERS, CalPERS will terminate the Pacific Grove pension plan. By law that gives CalPERS a lien on all Pacific Grove city-owned property, including revenues. That would trigger an emergency bankruptcy. Pacific Grove is not prepared for such a crisis. If Pacific Grove does file a MBK and does not request a material modification of salaries and pensions, it could eventually cost Pacific Grove taxpayers about $22,000 to $25,000 per parcel to eliminate its pension obligations. That sum grows every day.
CalPERS and the unions are looking at court-imposed parcel taxes to pay for their perfidy. There is no other source of funds. Meanwhile, the Pacific Grove city council listens to the same bad advice that led to Pacific Grove ‘s financial demise. Retirees and taxpayers beware.
The Size of the Municipal Deficit Because of Overcompensation
The Pacific Grove mayor asserts that Pacific Grove is no worse off financially than other cities and that the 2002 pension increase was not a big deal. He is wrong. Carmel collects $5 in revenue per resident compared to Pacific Grove ‘s $1. Monterey $3, etc. Del Rey Oaks and 200 other cities never adopted the 90% of salary benefit (3%@50). Pacific Grove was and is uniquely unable to afford even a 60% of salary pension benefit (2%@50). Carmel can continue to pay bubble salaries and pensions so long as it can continue to raise its TOT and sales taxes at will. Monterey, Salinas, Marina and Seaside are not as well off as Carmel in that regard.
The mayor overlooks that before the illegal adoption of the pension benefit for the safety unions in 2002, the pension contribution rate for safety and non-safety were about the same from year to year. Presently, Pacific Grove contributes about 12% of salary for non-safety and about 29% of salary (including the 9% employee contribution) for safety. Otherwise, the safety pension fund would be totally depleted and the safety pension deficit triple its present size (increasing the size of a court-ordered parcel tax).
In 2002, without the new pension benefit, the council had already adopted a budget that authorized expenditures that were $2,300,000 more than revenues. It was told that the per-year cost of the new benefit was only $51,500, but in fact the true additional cost per year was about $880,000 (failure to provide the true cost information to the council and the public made the adoption illegal). CalPERS, the unions, and the city manager knew the true cost of the pension increase, but nobody else did until the true cost was discovered in 2009. Since that discovery, the Pacific Grove city attorney has purchased three legal opinions opining that staff and the unions can defraud the council to get pension increases. We’ll see.
The adoption of the new pension benefit by Pacific Grove in 2002 illegally violated the state constitution’s “debt limitation.” A city cannot take on a new obligation, except by a 2/3 vote of the electors, if it is probable that in any future year it would not have revenues to pay for the obligation. As set forth above, Pacific Grove did not have sufficient revenues to pay for the current benefits, let alone a new benefit. There was no vote by Electors. If the 2002 pension increase is repealed: (1) It would stop all payment of the illegal benefit going forward, and annual contribution rates would drop by at least 1/3; (2) Safety retires would continue to receive a generous 60% of salary benefit; (3) If there were to be a clawback of prior payments, it would be limited to three years; (4) the $22,000 to $25,000 per-parcel tax needed to make the pension plan whole would be materially reduced; and (5) Otherwise-certain-to-occur pension deficit increases (increasing the size of the parcel tax) would be thwarted.
The council should repeal and rescind the 2002 illegal adoption of the pension benefit for safety, but instead it wants new taxes. The initiative repealing the 2002 increase must be approved by the voters in 2014. Election of a city council that will honor that vote is critical. Otherwise, be prepared to pay up again and again.
Read the entire series:
The Fall of Pacific Grove – How it Began, and How City Officials Fought Reform
– Part 1, January 7, 2014
The Fall of Pacific Grove – How City Thwarted Reform, and CalPERS Squandered Surpluses
– Part 2, January 14, 2014
The Fall of Pacific Grove – CalPERS Begins Calling Deficits “Side Funds,” Raises Annual Contributions
– Part 3, January 21, 2014
The Fall of Pacific Grove – Outsourcing of Safety Services Causes Increased Pension Deficits
– Part 4, January 28, 2014
The Fall of Pacific Grove – Anti-Pension Reform Mayor Claims to Favor Reed Pension Reform
– Part 5, February 3, 2014
The Fall of Pacific Grove – Privately Owned Real Property are the Only Assets to Pay for Pensions
– Part 6, February 11, 2014
The Fall of Pacific Grove – The Cover-Up by the City After the Hidden Actuarial Report Surfaced in 2009
– Part 7, February 18, 2014
The Fall of Pacific Grove – Conclusion: The “California Rule” Cannot Stand
– Conclusion, February 24, 2014
About the Author: John M. Moore is a resident of Pacific Grove, Ca. He is a licensed member of the California State Bar (#34734) and a member of the “Public Law” section of the State Bar. He is retired and no longer practices law, but has Lexis/Nexis for research. John graduated from San Jose State College with majors in Political Science and Economics (summa cum laude). He then received a JD from The Stanford School of Law and practiced business and trial law for 40 years before retiring. In 1987, he was the founding partner of a Sacramento law firm that he formed in 1987 to take advantage of the increased bankruptcies brought about by the Tax Act of 1986. Although he did not file and manage bankruptcy cases, he represented clients in numerous litigation matters before the bankruptcy court, including several cases before judge Klein, the current judge of the Stockton bankruptcy case. He is an admirer of Judge Klein, for his ability and accuracy on the law. As managing partner, he understood the goals of bankruptcy filings and its benefits and limitations.