By: David A. Smith
[Continued from yesterday’s Part 8 and the preceding Part 1, Part 2, Part 3, Part 4, Part 5, Part 6, and Part 7.]
Finally, with all the proximate bankruptcy facts (explained in detail in Stockton Judge Christopher Klein’s bankruptcy decision and opinion In re City of Stockton) cleared away – Franklin Templeton’s objections, CalPERS’ many and varied powers that could potentially have been used For Good and were not – we came to the root of the matter.
Principal source for and previous posts relevant to this post
In re City of Stockton (pdf, also available in text here), issued February 5, 2015
California’s self-tying knots (February 27, 2012; 5 parts)
[San Bernardino] Innumeracy precedes insolvency; December 4, 2012; 4 parts)
[Detroit] The fall of the Roamin’ Empire (September 25, 2013; 5 parts)
Stock-taking (October 15, 2014; 2 parts)
[Detroit] A fleeting miracle? (December 31, 2014; 2 parts)
[Detroit] Doublethink pension funding (January 5, 2015; 10 parts)
[Stockton revitalization] Folly or catalyst? (May 13, 2015; 3 parts)
Now that we can see the deadly combination of Proposition 13, the need to expand public-employee pay through pensions, not salaries, the Public Employee Retirement Law (PERL), and the connivance of Governor Gray Davis, on whose watch CalPERS was given its autocratic powers, we are enlightened as to why CalPERS “chose to intrude itself into this case and repeatedly (at virtually every hearing) insist” on reiterating its position.
We’ve got standing!
10. Though not invited, CalPERS belligerently crashed the bankruptcy party
Though it has acted like a bully for decades, once its termination-lien cannon is spiked, it can be seen for what it is: a lobbying group that fronts for another.
The assertion that CalPERS is the largest creditor of the City is not correct. CalPERS in its own right is only a small-potatoes creditor for the expenses that it is entitled to charge for administering the City-sponsored pension.
In that ‘small potatoes’ phrase, one can hear the disgusted judge enjoying his wielding of the scalpel to expose CalPERS’ hypocrisy.
I have come with glorious purpose
The judge also enjoyed writing this:
CalPERS has bullied its way about in this case with an iron fist insisting that it and the municipal pensions it services are inviolable. The bully may have an iron fist, but it also turns out to have a glass jaw.
That CalPERS glass jaw, the judge was delighted to hit:
CalPERS does not bear financial risk from reductions by the City in its funding payments because state law requires CalPERS to pass along the reductions to pensioners in the form of reduced pensions. Rather, it is the pensioners, present and future, themselves who are at risk of loss.
I laid all this out in Section 2 above.
CalPERS is a creditor in its own right only for the fees that it is permitted to charge for administering the City’s pensions. The real creditors are the employees, retirees, and their beneficiaries who will bear the burden of any reduction in the City’s pensions.
Translation: CalPERS, you’re just record-keeper, not a player.
The key legal point to draw is that the authority of CalPERS to interject itself into the potential modification of a municipal pension in California under the Federal Bankruptcy Code is doubtful.
In a bankruptcy court, the only parties who have standing to challenge the debtor (in this case, the city) are creditors of the debtor – and they are the public employees of Stockton. CalPERS administers their pension fund investments, and may claims it speaks for them, but it does not.
As CalPERS does not guaranty payment of municipal pensions and has a connection with a municipality only if that municipality elects to contract with CalPERS to service its pensions, its standing to object to a municipal pension modification through chapter 9 appears to be lacking.
Translation: Allow me to quote Jules Winnfield,
11. CalPERS is, in fact, the unions’ proxy to club municipalities
Silencing CalPERS in bankruptcy is critical because its purpose, now revealed, has been solely to be the obnoxious mouthpiece of its masters:
Nobody tells me what to say!
The CalPERS board is not typical of a private board.
The thirteen-member CalPERS board is selected on a political basis:
Seven public officials or appointees thereof.
Six persons elected by the employees participating in CalPERS.
Six of the board are directly elected by the public-employee unions; the other seven are public officials, many of whom owe their political offices to those same unions that have been making major campaign contributions for decades.
The PERL also operates to involve CalPERS in negotiations between a municipality and its employees.
In short, while privity of contract may be between the municipality and CalPERS –
‘Privity’ simply means that the two parties are contractually connected. The city has signed a contract with CalPERS, and that gives CalPERS privity under the contract, but as the contract is ministerial, the real privity (see Judge Klein’s triangle) is between the city and its employees.
Also courtesy of AHI super-volunteer Tanvi Maheshwari
As the diagram illustrates, after a few years the city finds itself negotiating all the time with CalPERS, in which most of the things the city wants are non-negotiable (because they’re baked into the PERL statute’s 800 pages) while most of the things that CalPERS (as agent for the employees) wants, it has power to negotiate because CalPERS, and only CalPERS, calculates and determines how much the city’s pension is underfunded, and therefore how much more the city must contribute each year just to stay in ‘acceptable’ shortfall.
– the reality of the operation of the CalPERS process has employees participating in those discussions armed with the muscle of employee representatives constituting 46% of the board.
Good luck getting an independent board out of that. In fact, CalPERS seems to have been set up with the deliberate intention of being one member of a tag team to work over municipalities:
You hold him, I’ll jump on him
In effect, municipal employees are permitted indirectly to participate in negotiations between a municipality and CalPERS.
The process of voluntarily adjusting a CalPERS pension requires that the municipality:
First negotiate with its employees regarding the pension.
Second run the gauntlet of also satisfying the CalPERS board.
You want to cut the pensions?
That’s double jeopardy: first negotiate a settlement (which inherently involves compromises and tradeoffs), and then after the city has secured concessions from the union, CalPERS enters and un-trades some of those union concessions, or compels more city concessions – all with the threat of the ‘termination lien’ nuclear weapon.
Oh, you didn’t want to pay $1.6 billion?
Although the PERL contemplates that a municipality is free to shift to a different pension administrator, the ferocity of CalPERS’ behavior in this case indicates that it has a policy of, by overt and passive aggression, resisting attempts to make such shifts.
Don’t write naughty words on walls if you can’t spell
Maybe Michael McLaughlin of Chelsea should have learned from these folks; the scale of his theft was much less. (Also, CalPERS’ former CEO, Fred Buenrostro, recently pled guilty to taking bribes, and as we saw with Michael McLaughlin, false in one thing, false in all things. Between that and the FIFA indictments, it’s been a good week for anti-corruption, and I hope that Mr. Buenrostro’s rollover heralds more exposes because I suspect he could take down many a board member or CalPERS executive.)
Often in my blog posts I’ve paraphrased Cato the Elder, and I close this multi-part journey into fear by paraphrasing him again:
CalPERS delenda est.
Keep it simple, stupid, and say it again and again until you crush the opposition