Lessons from Vallejo: Don’t avoid pension reforms

Illinois legislators and local officials could learn a thing or two from California cities that have buckled under the weight of too much debt. The first is if they don’t implement reforms early enough, bankruptcy for the city of Chicago and other municipalities may be unavoidable. In California, both Stockton and San Bernardino were forced...

Illinois legislators and local officials could learn a thing or two from California cities that have buckled under the weight of too much debt.

The first is if they don’t implement reforms early enough, bankruptcy for the city of Chicago and other municipalities may be unavoidable. In California, both Stockton and San Bernardino were forced into bankruptcy in 2012 because of debt and massive pension obligations they could no longer service. Crumbling pensions and rising debt for the city of Chicago and its sister governments already place the city at real risk.

But the second lesson is one that both Stockton and San Bernardino should heed as well. Once in bankruptcy, don’t avoid pension reform.

That lesson is being offered by Vallejo, Calif., a city that only two years ago emerged from bankruptcy protection but is reeling once again because of out-of-control pension costs. The reason? It failed to reform its pension costs during its bankruptcy reorganization.

Vallejo, a town of 115,000, filed for bankruptcy in 2008 under the pressure of a tanking housing market. Its deficit at the time was $18 million. According to Reuters:

“During its three-and-half year bankruptcy, the city slashed costs, including police and firefighter numbers, retiree health benefits, payments to bondholders and other city services.

The only major expense the city did not touch was its payments to the $260 billion California Public Employees Retirement System.”

Now the city’s rising pension costs are consuming more and more of its revenues. Vallejo is running in the red again and its deficits are expected to grow to nearly $9 million next year, the bulk driven by higher pension costs.

The California Public Employees’ Retirement System, or CalPERS, is California’s pension and health benefits system, which covers state workers, as well as municipal workers in cities across the state, including Vallejo. CalPERS recently lowered its projected investment returns to 7.5 percent from 7.75 percent. That means that cities must contribute more into the pension fund to make up for the lower expected investment income, and more of Vallejo’s general fund revenues are being funneled toward pensions.

Vallejo’s decision not to take on CalPERS has become a costly one – and one that may send them into bankruptcy yet again.