Once bankrupt, Vallejo still can't afford its pricey pensions

March 10, 2014: 10:44 AM ET
vallejo police
The Vallejo police force, shown at a crime scene last year, remains "woefully understaffed" several years after bankruptcy, according to City Manager Dan Keen.
NEW YORK (CNNMoney)

The California city of Vallejo emerged from bankruptcy just over two years ago, but it is still struggling to pay its bills.

The main culprit: Ballooning pension costs, which will hit more than $14 million this year, a nearly 40% increase from two years ago.

Amid threats of legal action from the state's pension giant, CalPERS, Vallejo did little during its nearly three-year stint in bankruptcy to stem the growth in its pension bills.

As a result, Vallejo continues to dole out large sums of money for retirees. Except for new hires, Vallejo's police and firefighters can retire at age 50 with as much as 90% of their salary -- for life. Public safety workers who retired in the last five years have average annual pensions of more than $101,000.

And the pension costs are expected to continue to rise, with a projected increase of up to 42% over the next five years.

Related: Detroit retirees sound off on possible pension cut

Moody's recently warned that Vallejo's pension obligations could force it to file for bankruptcy protection a second time. The credit rating agency said the city offers a cautionary tale for two other California cities teetering on the brink: San Bernardino and Stockton.

Vallejo City Manager Dan Keen counters that the city's financial position isn't as bleak as Moody's says. He said the city is in a much "better place" than when it filed for bankruptcy, in part due to a 1% sales tax hike that is funding new city services, like the installation of new surveillance cameras aimed at improving public safety.

In addition, employee concessions, such as a 5% pay cut for police, will allow the city to fill this year's projected $5.2 million budget shortfall, he said.

Still, Keen said pension costs are a major concern.

"If we don't resolve those costs, then we're going to see services continue to suffer," said Keen, who has led the city since 2012. "We're going to have to cut somewhere."

A lot of cuts have already been made.

Vallejo's roads are littered with potholes. Three of its nine fire stations remain closed. And its police force is down by almost 40% -- though Keen says there are plans to hire more officers this year.

Crime has surged, with more than two dozen homicides last year, compared to only seven in 2006. Burglaries are also on the rise. Residents maintain neighborhood watch groups, but the crime is taking a toll.

"Some people in my neighborhood are voting with their feet and leaving Vallejo," resident Russell Zellers wrote in a 2013 letter to City Hall. "If things continue along the present course, I may not be far behind them."

Related: Retired union workers facing 'unprecedented' pension cuts

In the fatter years, Vallejo enjoyed a housing boom like many California cities. Flush with property tax revenues, city leaders approved increases in salaries and benefits for city workers. Police officers and firefighters were earning six-figure salaries, even before overtime.

As costs grew, city officials began dipping into the city's cash reserves to pay the bills. Then, in May 2008, after a wave of foreclosures caused property tax revenue to plummet, the city could no longer afford the generous salaries and other benefits it was paying and was forced to file for bankruptcy.

To help cut its debt, the city slashed retiree health benefits and the interest payments it paid to banks. It also cut pension benefits for new hires and raised the amount current workers must contribute to their pensions. But it did not attempt to cut pension benefits for current workers and retirees, a move that can only be attempted during bankruptcy.

Why Detroit filed for bankruptcy

In its report, Moody's blamed the state's pension giant CalPERS for Vallejo's lack of action.

CalPERS, which manages $277 billion in retirement assets for more than 1.6 million workers and retirees, has repeatedly argued that pension benefits are protected by California law. It says it is an "arm of the state" and should therefore be exempt from bankruptcy proceedings -- meaning it should get paid in full while other creditors could get pennies on the dollar.

Workers and retirees say their pensions were promised through employment contracts and they shouldn't be penalized for the city's bad planning.

Related: Pensions ask retirees to pay back tens of thousands

So far, no bankrupt California city has ever challenged CalPERS over pension cuts. CalPERS did not respond to a request for comment.

Vallejo's bankruptcy was likely only a short-term fix to its financial problems, said Michael Sweet, a California-based bankruptcy attorney at Fox Rothschild LLP.

"The problem will continue to fester until people face up to the fact that the money available is less than promises made," he said.

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