Bloomberg News

Stockton, California, Retirees Feel Shock of Benefit Rollback

June 28, 2012

Stockton, California, Retirees Feel Shock of Benefit Rollback

Stockton, an agricultural center about 80 miles (130 kilometers) east of San Francisco, is poised to become the largest city to enter bankruptcy protection in U.S. history. Photographer: David Paul Morris/Bloomberg

For Gary Jones, a retired Stockton, California, police officer, getting his brain scanned every four to six months is essential to monitor an inoperable tumor with a 12 percent survival rate.

On June 26, Jones, who takes nine pills a day to control facial seizures, urged the City Council to reject a proposal to end health-care payments for retirees under a budget the city will use to operate in bankruptcy. He failed.

“I see it as a death sentence,” Jones, a 52-year-old resident of nearby Manteca, said yesterday by telephone. “If I can’t get taken care of and the cancer has come back and the tumor is growing, I’ll never know until it’s too late.”

Stockton, an agricultural center about 80 miles (130 kilometers) east of San Francisco, is poised to become the largest city to enter bankruptcy protection in U.S. history. The community isn’t alone in trying to cope with escalating retiree costs. Most U.S. municipalities offer health-care coverage to retired workers without setting aside enough money to pay for it, leaving millions of dollars in unfunded obligations.

“Many municipalities currently find themselves in a situation of having a shrinking tax base combined with an exploding expense load, which includes debt payments, pension payments and basic services,” Lawrence Larose, a partner in New York who leads the municipal restructuring legal practice at Winston & Strawn LLP, said by telephone. “We will see an increasing number of cities and counties that will have a difficult time managing their long-term liabilities while maintaining current services.”

Pay-Go Basis

Most cities have funded health care on a pay-as-you-go basis, David Hitchcock, senior director at Standard & Poor’s in New York, said yesterday in a telephone interview.

“Almost no cities or counties are advance-funding the accrued liability,” he said. “What they’re paying is current retirees’ medical benefits, but they are not setting aside the money for future retirees that are accruing benefits now.”

Some California cities, including San Jose and San Diego, have tackled their retiree costs through ballot measures.

Voters in San Jose, the Silicon Valley home of Cisco Systems Inc. (CSCO:US) and EBay Inc., this month approved a measure to let city employees choose whether to pay more and keep existing pension plans or accept reduced benefits and a higher retirement age. The city faces $2.9 billion in unfunded retiree costs, including health care. A similar measure passed in San Diego.

Unions Warned

Stockton’s decision to stop paying for retiree health-care coverage is an important message to union members, San Jose Mayor Chuck Reed said yesterday by telephone.

“It’s an example of how things will go poorly for the employees and the retirees because they are the ones who get hammered when cities run out of money or retirement plans run out,” Reed said. “There is a great deal of risk for them if we don’t get control over costs.”

Stockton’s council this week agreed to a spending plan that takes effect July 1 and reduces retiree medical benefits by $7.1 million, and eliminates the cover entirely in fiscal 2014.

Having to make the cut was “devastating,” Councilman Paul Canepa said yesterday in a telephone interview.

“A lot of people think that we’re heartless,” Canepa said. “It’s really hard to promise something that wasn’t funded correctly.”

$417 Million

Stockton has a $417 million unfunded liability for retiree health care, City Manager Bob Deis said June 5 in a memo to the council. There are almost 1,100 benefit recipients, he said.

Deis told the council this week that the care costs the city as much as $1 million for each employee.

“So $600,000 to $1 million we’ve committed to for each employee, and we’ve set aside nothing, zero,” Deis said. “This liability has grown and grown and grown.”

Stockton’s approach punishes people with little power to fight back, said Frank Mauro, executive director of the nonpartisan Fiscal Policy Institute, a nonprofit research organization based in Latham, New York.

“They’re hurting very vulnerable citizens,” Mauro said yesterday by telephone. “What can a retiree who’s been retired for 10 to 15 years already and is living on a fixed income do?”

The Governmental Accounting Standards Board, the Norwalk, Connecticut-based organization that sets rules for state and local governments, this week approved changes to curb the use of overly optimistic assumptions by public officials who oversee underfunded pensions to diminish the scale of the liabilities in future decades.

Wide Impact

“The implications of bankruptcy impact the lives of every citizen, including public employees who are counting on retirement security for the service they have provided,” Brad Pacheco, a spokesman for the $226.1 billion California Public Employees’ Retirement System, the largest U.S. pension, said yesterday by e-mail.

“Calpers is committed to work with affected parties to address pension obligations within our fiduciary responsibility and the laws we must follow,” Pacheco said.

Mark Baldassare, president of the Public Policy Institute of California, said city leaders had believed that real-estate values would continue to climb, tax receipts would rise and retirement funds would show year-to-year gains.

“It’s been proven over the last few years that those things are not a given,” Baldassare, whose nonpartisan research institute is based in San Francisco, said by telephone. “It raises questions about what kind of retirement packages city governments can provide their employees. Stockton is a dramatic case of this, but many cities are struggling with it.”

Canepa, the Stockton councilman, said people didn’t pay attention to these details when times were good.

“Where do we go and how do we make it better for the long- term survival of the city is important to me,” Canepa said. “But it’s not without pain.”

To contact the reporter on this story: Alison Vekshin in San Francisco at avekshin@bloomberg.net.

To contact the editor responsible for this story: Stephen Merelman in New York at smerelman@bloomberg.net.


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