A tiny town’s mas­sive pen­sion trou­ble

Re­tirees saw pay­ments drop af­ter city ex­ited CalPERS — and soon oth­ers may too.

Los Angeles Times - - CALIFORNIA - By Phil Wil­lon

LOYALTON, Calif. — The tremor in John Cussins’ right hand wors­ened as he de­scribed rest­less nights haunted by wor­ries about pay­ing the bills.

Af­ter suf­fer­ing a stroke in 2012, he re­tired as a 21-year em­ployee of the city of Loyalton, Calif., where he over­saw the town’s wa­ter and sewer sys­tems. Cussins, 56, be­lieved his city pen­sion and the So­cial Se­cu­rity pay­ments he and his wife re­ceived would bring in enough to pro­vide a de­cent re­tire­ment in the tiny, old tim­ber mill town in the Sierra Val­ley.

Then a let­ter ar­rived in Oc­to­ber. The Cal­i­for­nia Pub­lic Em­ploy­ees’ Re­tire­ment Sys­tem was cut­ting his $2,500-a-month pen­sion by 60%, bring­ing it to about $1,000 a month.

“I was re­ally shocked when I found out about it,” Cussins said. “We thought the pen­sions were there for the rest of our lives.”

Loyalton’s four re­tired city em­ploy­ees be­came the first in Cal­i­for­nia to see their pen­sions sliced by CalPERS be­cause of a city de­fault­ing on its pay­ments to the fund, but hun­dreds of other gov­ern­ment re­tirees across the state may soon face a sim­i­lar fate.

At the same time, fi­nan­cially strapped lo­cal gov­ern­ments that con­sid­ered pulling out of the state pen­sion sys­tem, some hop­ing to find more af­ford­able al­ter­na­tives, have found it next to im­pos­si­ble to do be­cause of the large ter­mi­na­tion fees they must pay CalPERS if they do.

As the na­tion’s largest pub­lic pen­sion fund, CalPERS man­ages a $300-bil­lion re­tire­ment sys­tem that serves more than 1.8 mil­lion mem­bers and a re­tiree health­care pro­gram that serves close to 1.4 mil­lion more. CalPERS func­tions as a money man­ager, in­vest­ing the funds paid into the sys­tem by state and lo­cal gov­ern­ments. But those gov­ern­ments de­cide what pen­sion benefits they will pro­vide their em­ploy­ees and are ul­ti­mately re­spon­si­ble for en­sur­ing there is enough money in their pen­sion funds to pro­vide the benefits promised.

Cussins was a mem­ber of the Loyalton City Coun­cil when the pen­sions were cut, but he said he had no idea it was com­ing. More than

three years be­fore he was elected, the coun­cil voted to pull out of CalPERS when its last pen­sion-el­i­gi­ble em­ployee re­tired, de­cid­ing the monthly pay­ments were too steep for a town that for years flirted with in­sol­vency.

CalPERS levied a $1.66-mil­lion ter­mi­na­tion fee on the city. Loyalton, home to about 760 peo­ple, has a sin­gle full-time city worker and an an­nual bud­get just shy of $1 mil­lion. The city didn’t pay the fee, so the four re­tired city em­ploy­ees saw their pen­sions slashed in Novem­ber.

“I’m scared to do any­thing. I’m scared to spend much money,” Cussins said. “I guess worst comes to worst, we’d even have to sell our prop­erty and try to go to some low-in­come hous­ing deal.”

He now has com­pany. The CalPERS Board of Ad­min­is­tra­tion in March voted to cut the pen­sions of close to 200 re­tirees from the East San Gabriel Val­ley Hu­man Ser­vices Con­sor­tium, a South­ern Cal­i­for­nia job train­ing pro­gram cre­ated by the cities of Azusa, Cov­ina, West Cov­ina and Glendora. The agency stopped con­tribut­ing to the state pen­sion sys­tem when it folded in 2014. On July 1, CalPERS sliced the pen­sion checks for the con­sor­tium’s re­tirees by 63%.

Re­tirees of the Ni­land San­i­tary District, just east of the Sal­ton Sea, could also face ac­tion, al­though the agency is ne­go­ti­at­ing with CalPERS of­fi­cials to de­ter­mine how much it may cost to leave the pen­sion sys­tem.

At the cen­ter of all of these cases is the ter­mi­na­tion fee lo­cal gov­ern­ments must pay to CalPERS if they opt to leave the sys­tem — money that of­fi­cials at the state pen­sion sys­tem say is needed to en­sure re­tirees re­ceive the full pen­sions they were promised.

Af­ter the city of Stock­ton de­clared bank­ruptcy in 2012 fol­low­ing the na­tion­wide re­ces­sion, the fed­eral court judge han­dling the case called the fee a “golden hand­cuff ” and “poi­son pill” that pre­vents cities and other lo­cal gov­ern­ments from leav­ing CalPERS to find other op­tions for em­ployee pen­sion benefits. The price tag for Stock­ton to pull out of CalPERS was $1.6 bil­lion. The city chose to stay put.

If a city de­cides to pull out of the state pen­sion fund, CalPERS places the mu­nic­i­pal­ity’s pen­sion fund into a pool of lower-risk in­vest­ments, which low­ers the re­turn rate on what that city earns. As a con­se­quence of the re­duced in­vest­ment earn­ings, the city will have less money to pay the full pen­sion benefits of its re­tirees, in­creas­ing the ter­mi­na­tion fee im­posed by CalPERS to make up the short­fall.

Loyalton’s CalPERS ac­count was worth $1.1 mil­lion when it voted to pull out. And when placed in the pool of ter­mi­nated pen­sion ac­counts, the city was ex­pected to earn a 2.4% rate of re­turn on those in­vest­ments. That rate of re­turn for Loyalton’s ter­mi­nated ac­count was far lower than what CalPERS ex­pects to earn for ac­tive pen­sion ac­counts — roughly 7%.

CalPERS spokes­woman Amy Mor­gan said the agency placed the pool of ter­mi­nated ac­counts in con­ser­va­tive in­vest­ments as a pre­cau­tion be­cause CalPERS would be ob­li­gated to cover any short­fall if there was a drop in earn­ings. That risk is com­pounded by the fact that cities ex­it­ing CalPERS stop con­tribut­ing to the pen­sion sys­tem — monthly pay­ments that serve as a buf­fer to in­vest­ment losses and other po­ten­tial im­pacts, in­clud­ing in­fla­tion.

Close to 100 cities and other gov­ern­ment en­ti­ties have ter­mi­nated their CalPERS ac­counts and, com­bined, those pen­sion funds cre­ate a pool of money that ex­ceeds $222 mil­lion. As of June 2015, the amount CalPERS ex­pected to have to pay in pen­sions from that fund was es­ti­mated to be $88.5 mil­lion — mean­ing the pen­sion ac­count had a $111-mil­lion sur­plus, ac­cord­ing to a March re­port.

Villa Park in Orange County toyed with the idea of leav­ing CalPERS in 2014, in part be­cause of­fi­cials wanted to de­ter­mine the small city’s long-term pen­sion li­a­bil­ity. For­mer Villa Park Mayor Rick Bar­nett said other, more af­ford­able op­tions are avail­able, in­clud­ing de­ferred com­pen­sa­tion plans sim­i­lar to a 401(k). But Villa Park opted not to move for­ward af­ter CalPERS tal­lied the ter­mi­na­tion fee: $3.6 mil­lion.

“It’s a joke,” said Bar­nett, an Irvine bank­ruptcy at­tor­ney. “You’re trapped.”

CalPERS warned Loyalton of­fi­cials about the exit fee in June 2014 and met with city lead­ers sev­eral times to dis­cuss the con­se­quences. CalPERS of­fi­cials said that Loyalton re­ceived 10 col­lec­tion no­tices be­fore the pen­sions were cut. But the re­tirees said nei­ther the city nor CalPERS warned them that their pen­sions were at risk un­til last fall.

“As a board, we have a fidu­ciary re­spon­si­bil­ity to keep the CalPERS fund on se­cure foot­ing, and as part of this duty we must en­sure that em­ploy­ers ad­here to the con­tracts they agreed to. When they don’t, the law re­quires us to act,” said Rob Feck­ner, pres­i­dent of the CalPERS board, in a state­ment af­ter the Novem­ber de­ci­sion. “The peo­ple who suf­fer for this are Loyalton’s pub­lic ser­vants who had ev­ery right to ex­pect that the city would pay its bill and ful­fill the ben­e­fit prom­ises it made to them.”

Loyalton City Coun­cil mem­bers told CalPERS of­fi­cials in Novem­ber that the city would di­rectly re­im­burse re­tirees for the pen­sion money they lost — $5,000 a month for all four re­tirees com­bined.

But that prom­ise may be short-lived. The City Coun­cil has been pro­vid­ing those sup­ple­men­tal pay­ments since CalPERS sliced the city re­tirees’ pen­sions, and it has voted to con­tinue those pay­ments un­til Novem­ber. Af­ter that, the pay­ments may be re­duced — or cut off en­tirely.

Most of Loyalton’s an­nual bud­get is ded­i­cated to run­ning the city’s wa­ter and sewer sys­tem. The city has only about $160,000 for other ex­penses, in­clud­ing pay­ing the Sierra County Sher­iff ’s Of­fice for po­lice pro­tec­tion, the salary of the city’s sin­gle full-time em­ployee who works in­side City Hall and out­side con­trac­tors that help run the city. Loyalton only ex­pected to have $30,000 in re­serves, city of­fi­cials said. Re­im­burs­ing the city’s re­tirees will cost $60,000 a year.

Loyalton Mayor Mark Marin knows the math won’t work. The son of the for­mer town fire chief, Marin spent most of his life log­ging in the Sierra Ne­vada un­til, he said, he was talked into run­ning for mayor just over a year ago, adding that he ran for City Coun­cil only to help un­tan­gle the city’s fi­nan­cial mess.

“I don’t know where we’re going to get the money un­less we start sell­ing crap off,” Marin said. “What’ll end up hap­pen­ing is that we won’t be able to pay our obli­ga­tion and the re­tirees will come back with a law­suit. The only way they’re going to get any money is if they take prop­erty.”

Marin noted that it would have been a lot cheaper if the city had just stayed in CalPERS. Loyalton was pay­ing just $3,500 a month, and that cov­ered the cost of its re­tirees’ full pen­sions.

Once a proud and vi­brant com­pany town known for solid-pay­ing jobs and a fron­tier life­style, Loyalton was flat­tened in 2001 when Sierra Pa­cific In­dus­tries — the largest em­ployer in Sierra County at the time — shut down the sawmill that sus­tained the town for more than a cen­tury.

And more re­cently, Loyalton has been bit­ten by a series of self-in­flicted fi­nan­cial blun­ders and mis­for­tune.

In 2014, a Sierra County grand jury is­sued a scathing re­port that de­tailed a litany of mis­man­age­ment is­sues in the city. It found some mem­bers of the City Coun­cil were “less than hon­est” and ques­tioned whether the city would sur­vive fi­nan­cially.

“The city, through its City Coun­cil, has de­cided that am­a­teurs know the best way to run the city, and this is caus­ing prob­lems that are start­ing to show up. This is ex­pos­ing the cit­i­zens of the city to li­a­bil­ity is­sues in many forms and from many sources,” the re­port stated.

In 2010, the city’s book­keeper was ar­rested and charged with em­bez­zling pub­lic funds. The FBI was called in to help sift through the city’s tan­gled fi­nances.

Around the same time, Loyalton’s city em­ploy­ees re­ceived a big raise — close to 50%. Ex­pla­na­tions for how that hap­pened dif­fer. Marin says it was know­ingly ap­proved by a for­mer City Coun­cil. But Coun­cil­man Brooks Mitchell, who was on the coun­cil when the raises went through, in­sists that he and his col­leagues ap­proved only a 5% raise and that the fig­ure was mys­te­ri­ously switched to 50% af­ter the vote. It took years for city of­fi­cials to no­tice, Mitchell said.

Mitchell fig­ures that mis­take cost the city more than $650,000, though Loyalton’s in­sur­ance pol­icy al­lowed the city to re­coup about $330,000.

But that pot of money dis­ap­peared fast. The coun­cil spent a chunk to con­vert an old el­e­men­tary school into a new home for Loyalton’s City Hall and the town mu­seum in 2015. It also spent more than $20,000 on a pair of en­graved stone signs to wel­come vis­i­tors to Loyalton.

“The City Coun­cil went over­board. They got all this money back from the in­sur­ance and started spend­ing ev­ery­thing. Then, later on, they cut our re­tire­ment,” said Patsy Jardin, 71, who worked for the city for three decades as the City Hall of­fice man­ager and book­keeper.

Jardin said her $4,100 monthly check from CalPERS was slashed by close to $2,000 af­ter the City Coun­cil voted to pull out of the pen­sion fund in 2012.

The coun­cil “promised me it wouldn’t cut my re­tire­ment,” Jardin said. “They promised me.”

Loyalton’s mayor said there’s no doubt the city messed up by grant­ing pen­sion benefits without think­ing hard about whether the small town could pay for them down the line. But, he said, Loyalton’s predica­ment is just a symp­tom of an overly gen­er­ous state pen­sion sys­tem that has be­come un­sus­tain­able.

“There are peo­ple who made $200,000 a year and they’re draw­ing $200,000 in re­tire­ment,” Marin said. “How’s that going to work?”

Pho­to­graphs by Myung J. Chun Los An­ge­les Times

THE TOWN of Loyalton faced a $1.66-mil­lion fee — more than its yearly bud­get — to pull out of CalPERS. When it didn’t pay, the fund slashed its re­tirees’ pay­ments.

JOHN CUSSINS, a 21-year Loyalton em­ployee, was shocked when his pen­sion was cut 60%: “We thought the pen­sions were there for the rest of our lives.”

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