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California watches as small city goes after Calpers

Calpers headquarters is seen in Sacramento, California, October 21, 2009. REUTERS/Max Whittaker
Calpers headquarters is seen in Sacramento, California, October 21, 2009. REUTERS/Max Whittaker

By Tim Reid

LOS ANGELES (Reuters) - Officials of a tiny California city say they believe overbilling by state pension system Calpers has pushed up municipal debt to unsustainable levels, and they have hired a bankruptcy attorney to explore ways to lower payments to the system.

Municipal bankruptcy experts said other cash-strapped California cities and towns will be watching Pacific Grove, a coastal city of 15,000 south of San Francisco, to see how it resolves its issues with the California Public Employees' Pension Fund (Calpers), the largest U.S. pension system.

Calpers, which manages $254 billion in assets, said it will provide the additional information Pacific Grove has asked for by April 15. But the pension fund also said it has calculated city pension payments carefully and provided Pacific Grove with detailed calculations and accounting methods in yearly reports.

"We can't afford to keep paying Calpers at the current rates - and we can't afford to get out," said Bill Kampe, Pacific Grove's mayor. "Fundamentally, we want to pay less to Calpers."

The Pacific Grove city council last week voted to "fully explore" ways in which it believes Calpers has "artificially inflated the City's liabilities." It hired an actuary as well as Karol Denniston, a San Francisco lawyer at Schiff Hardin who helped draft California's bankruptcy process law.

"I am aware of many other cities that are taking a hard look at how to manage their pension debt, which is usually the largest liability they have," Denniston said. "And the first port of call is going to be negotiating with Calpers."

Like many cities in the early 2000s, Pacific Grove awarded more-generous pension deals to police, firefighters and other workers. Funding such deals became much more difficult after the 2008 financial crisis and the recession that followed.

Pacific Grove budget chief Tony McFarlane said the city's annual payment to Calpers soared to about $1.5 million last year from just $97,000 in 2002, which at the time was less than 1 percent of its $12.5 million general fund.

On top of the $1.5 million payment last year, Pacific Grove also had to come up with $1.65 million to finance a $19 million pension obligation bond that the city issued in 2004. That bond money was paid to Calpers the same year. Last year's total pension-related payments of $3.15 million were about 20 percent of the annual city budget of $15.6 million.

HARD LOOK AT PENSION DEBT

City officials said, and Calpers has confirmed, that the cost to terminate its obligations to the pension fund would surpass $70 million, a figure the city says it cannot afford.

"We have kept cutting and cutting city services just to keep up our payments to Calpers, and to fund the pension bond," said Thomas Frutchey, the city manager.

Calpers has said it has little leeway to renegotiate debt with member cities, citing its responsibility to keep the pension fund financially sound. A Calpers spokesman said the city could reduce its pension liability through steps such as lowering benefits to new hires and requiring existing workers to pay a bigger share of pension costs.

In August, San Bernardino stopped payments to Calpers when it filed for bankruptcy protection. Kampe said Pacific Grove's finance committee looked at the bankruptcy option four years ago, but dismissed the idea because of the costs involved.

Budget chief McFarlane said rising pension costs have prompted Pacific Grove to cut its workforce to 65 employees from 100 in 2004. Firefighting has been contracted out to nearby Monterey, and the police force has been cut from 22 to 14.

James Spiotto, a municipal bankruptcy specialist and a partner at Chapman & Cutler in Chicago, said it is only a matter of time before other California cities take on Calpers.

"If you keep on forcing people to do something they can't afford, they will strike back," Spiotto said.

(Reporting by Tim Reid; Editing by Tiziana Barghini)

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