The city of Vallejo, which preceded Stockton into bankruptcy, made the same decision as Stockton not to cut public employee pensions — and that choice has come back to haunt the city.
The city budget is $5.2 million for this fiscal year, and the hole will grow to $8.9 million next year. The city will be forced to slash services.
“When Vallejo entered bankruptcy in 2008, its annual employer payments to CalPERS were $8.82 million, or 11 percent of the city’s general fund,” this story says.
“When it exited bankruptcy at the beginning of 2011, the payments to CalPERS were just over $11 million, or 14 percent of the fund. The latest budget pegs those payments at $15 million, or 18 percent of the general fund.”
What happened is that CalPERS, the state pension fund, lowered its the expected yield rate on its investments. It has projected a rosy 7.75 percent. But it got real (or more real), and lowered its projected yield to 7.5 percent. Since it now projects its investments will make less money, cities have to pay more to fund pensions. A lot more.
The possibility that CalPERS will lower its yield rate again in the future, socking Stockton with higher costs, and possibly impinging on Measure A tax revenue — which is to say, eating cops — is to my mind the strongest argument made by opponents of Measures A and B.
“Any municipal bankruptcy that doesn’t restructure pension obligations is going to be a failure because pension obligations are the largest debt a city has,” said Karol Denniston, a municipal bankruptcy attorney in San Francisco.
Stockton city officials say they have factored CalPERS’ changed valuations into Measure A and B and their Plan of Adjustment. Scrutinizing their projections is therefore at the heart of reckoning whether Measure A and B are the way to go. Stockton has to get this analysis right or, like Vallejo, we’ll start lurching toward the cliff again. Been there, done that. Really don’t want to go back.