BY JERAMY GORDON
Daily Post Associate Editor

Many cities, faced with massive pension debts, are beginning to talk about leaving the California Public Employees' Retirement System, or CalPERS, and moving toward something resembling a 401(k) plan for their employees. But history shows that CalPERS and the unions representing government employees will fight any changes every step of the way.

CalPERS is a $300 billion fund that state and local governments use to provide pensions for retiring employees. The governments and their employees pay into the fund.

Over the last decade, dismal investment returns combined with government entities and their employees not contributing enough money have created unfunded liabilities approaching $100 billion statewide, according to CalPERS. However, independent pension analysts, who believe CalPERS' investment return calculation has no basis in reality, estimate that liability has topped half a trillion dollars -- three and a half times the state's $152.3 billion budget. That translates to roughly $36,000 for each California household.


An unfunded liability is a debt the government has no current ability to pay off. Basically, government entities have promised workers retirement benefits they can't afford. And now, faced with ballooning pension costs that have pushed several cities into bankruptcy, leaving CalPERS may be a city's best path to financial stability, some elected officials say.

But CalPERS doesn't make leaving easy. With the fund tacking on a premium up to three to four times the amount of the unfunded liability, cities find the cost of leaving simply unaffordable.

For example, a city such as Palo Alto with an unfunded pension liability of $295 million would have to pay CalPERS more than $864.9 million to leave. That's because when an agency wants to leave the system, CalPERS changes the rate at which it calculates investments returns.

CalPERS expects to receive average returns of 7.5% on all investments. If a city were to leave CalPERS, the fund would calculate its investment returns at a more modest rate of 2.9%. With the fund growing at a slower rate, the city would have to make up the difference in order to ensure that all pensioners get the amounts they were promised.

CalPERS has dubbed that reduced rate the "hypothetical termination rate." The pension fund does this because CalPERS maintains the obligations to pay the promised retirement benefits and it assumes the lowest risk possible managing the investments of cities that are no longer participating.

"It just makes it impossible for anyone to leave," said Stanford professor Joe Nation, who has been exploring public pensions with his graduate students since 2010. But the high termination fees haven't stopped cities and other government entities from examining the possibility of dropping CalPERS.

San Carlos City Councilman Matt Grocott said he has asked City Manager Jeff Maltbie to present the council with a roadmap for leaving CalPERS.

"Filing an intent to leave CalPERS is the only way to find out our true unfunded liability," Grocott said. "I am willing to take it through the course; the thing I struggle with mainly is finding third party experts to give me trustworthy information because I don't trust CalPERS."

Menlo Park took baby steps toward pension reform in 2010 with Measure L, which created a second retirement tier for newly hired city workers.

Menlo Park residents Henry Riggs and Roy Thiele-Sardina were the primary leaders of the Measure L campaign, which required new city employees to work until 60, not 55 (police and fire employees exempted).

The 2010 ballot measure also changed the pension calculation formula to 2% rather than 2.5% of an employee's highest salary (times the number of years worked) as their annual pension.

The measure was approved by 72% of voters. It was a small step, but a big victory for pension reformers.

But the local unions fought back, even after voters overwhelmingly passed the reform. The Service Employees International Union, which represents the city's non-police workers, and the city managers' American Federation of State, County and Municipal Employees, said the reform offered "no real savings and wrongly scapegoats public employees for a recession caused by big banks and corporations." The unions sued to stop the initiative.

"Naturally, they see themselves as a loser in any pension reform effort, because they already have the high hand," said Menlo Park resident and Realtor Ed Moritz, who acted as Measure L's treasurer. "That's understandable. They push back as hard as they can."

The unions sued Moritz personally but they lost. He said battling them was an uphill fight.

"You have to come with some big bucks," he said. "They have their treasury, and that's what they use it for, to protect themselves."

Steven Greenhut, of the independent journalism project Watchdog.org, said eventually, something has to give.

"Essentially, any California public-sector worker on the job in the last decade -- especially police officers, firefighters, prison guards and the rapidly expanding category of public safety worker -- have been made millionaires by fiat," he said. "One would need millions of dollars in the bank to match the guaranteed pensions provided to this group."

Greenhut says unions are so powerful that they're able to thwart even the smallest changes to public pensions.

"They halt statewide initiatives. They kill even modest reforms in the Legislature. State administrative agencies file lawsuits against municipalities where voters pass reform. The unions file and win lawsuits," Greenhut wrote on Watchdog.org. "The latest came in Ventura County, where a court ruled a pension reform measure that mainly affected new hires wasn't legal."

Other California cities, such as Redding and Pacific Grove, have also asked voters to weigh in on pension reform. Voters in Pacific Grove, located near Monterey, took things a step further and in a radical move approved a city plan to withdraw from CalPERS in exchange for a seemingly less expensive defined contribution plan resembling a 401(k).

Pension reform is like a game of ping-pong, according to Greenhut.

"The judge told reformers to go to the Legislature. Of course, the union-controlled Legislature tells reformers to go to the voters," he said.

San Jose Mayor Chuck Reed successfully pushed a 2010 pension reform measure that has been tied up in the courts ever since. More than 70% of voters there were in favor, he said.

He then attempted to take his pension fight statewide with a ballot measure that would give local agencies the power to renegotiate pensions going forward. But he pulled out after being dealt a legal blow over the wording of the ballot argument. Reed claimed that California Attorney General Kamala Harris' description of his measure was inaccurate and misleading. Specifically, he took issue with the first sentence, which said the measure would "eliminate constitutional protections" for public workers, "including teachers, nurses and peace officers."

But is it time to give up and raise the white flag on pension reform? Maybe, Greenhut said.

"Enough already. The governor has spoken. The Legislature has spoken. The courts have spoken. The state administrative agencies have spoken. No reform, they say. No way, no how. Not even for new workers. Not even to halt crazy abuses," he said. "At some point, California reformers need to spend their time doing something more constructive, such as figuring out which city in Texas to relocate."

So what's next, bankruptcy?

The city of Stockton filed for bankruptcy protection two years ago, and ever since federal bankruptcy Judge Christopher Klein has strongly hinted he's willing to explore cutting pension obligations the same way as other debts, according to Dan Walters, a columnist for the Sacramento Bee.

"We have a festering sore here," Judge Klein said earlier this year. "We got to get in there and excise it and figure out what the story is."

Of course, Klein's words don't sit too well with CalPERS brass. The pension fund continues to fight bankruptcy proceedings, citing several legal theories as to why pensions should be exempted. Many of which Klein has shot down.

When a judge in Detroit ruled that pension obligations in that city could be treated the same as any other debt, CalPERS jumped for the defense, saying California, as a state, has sovereign immunity.

San Bernardino also incurred CalPERS' wrath when it said it would try to reduce pension debts in its bankruptcy but has since developed a plan that leaves pensions untouched.

In Pacific Grove, a city of 15,000 just north of Monterey, residents voted in 2009 to give the city permission to pull out of CalPERS in exchange for a 401(k)-style plan. But officials in the Monterey Peninsula city later discovered that the costs of leaving CalPERS would top $20 million. That's an impossibly high expense for a city with a general fund of $15 million, Jim Becklenberg, management and budget office director for Pacific Grove, told a Redding newspaper.

Becklenberg said Pacific Grove's retirement costs soared from $100,000 a year in 2001 to $2.2 million in 2005.

So leaving CalPERS is financially unfeasible; bankruptcy, while a promising option, isn't the most ideal route; and the ballot box is a risky, uphill battle for even the smallest reform.

Pension experts, such as Nation and Atherton resident Peter Carpenter, who currently serves on the Menlo Park Fire Protection District board, say sweeping reform at the state level is the best solution to plugging the hole, even if it's politically divisive.

In 2012, Gov. Jerry Brown pushed the Public Employees Pension Reform Act, or PEPRA, which promised sweeping pension reform throughout the state. The only problem was that the major changes the law enacted only applied to employees hired after Jan. 1, 2013. Critics of the act said its effects wouldn't be felt for 30 or more years when those new employees are ready to retire.

The new law, which created a new retirement tier for government workers, applies to all public pension systems, including CalPERS. Still PEPRA, which Brown called "the biggest rollback" to the state's retirement systems in California history, didn't go far enough, critics said.

"The Legislature doesn't have any interest in taking on the issue," Nation said. "Because of that, there's been no action on this and the ship continues to sink."