CalPERS Declares Consortium in Default of Pension Obligations

On March 15th, the CalPERS Board of Administration declared the East San Gabriel Valley Human Services consortium in default for failing to pay over $400,000 to fund its pension plan.  According to CalPERS, the consortium’s contract will terminate in 60 days. At that time, the consortium will be liable for approximately $19.3 million, the amount needed to fully fund current and future payments of retirement benefits to its members.

If the consortium fails to pay this “termination liability,” CalPERS will notify the consortium’s current and former employees of its decision to reduce retirement benefits beginning on July 1, 2017. Members will suffer reductions of approximately 63 percent; six members hired after pension reform went into effect in 2013 will experience reductions of 24 percent. These numbers are based on how much money the consortium already paid into the pension system.

Background

The East San Gabriel Valley Human Services consortium was formed in 1979 as a Joint Powers Authority by the cities of West Covina, Covina, Azusa, and Glendora. Its primary purpose was to provide employment and training services to local residents and incarcerated inmates. The consortium closed its headquarters in 2014 after losing a major contract with Los Angeles County. It has not paid its Unfunded Accrued Liability since August 2015.

Only once before has CalPERS reduced retirees’ benefits because of a municipality’s failure to pay its pension bills. In November 2016, CalPERS declared the tiny Northern California city of Loyalton in default of its pension fund obligations and reduced benefits for four Loyalton retirees. In that case, the City Council made up the difference in the retirees’ benefits.

Analysis

This case is much bigger and more complex, as it involves several hundred employees, a Joint Powers Authority, and four cities. CalPERS has asked the cities to pay the consortium’s pension obligations. California Government Code Section 6508.1 provides that parties to a joint powers agency are liable for the debts, liabilities, and obligations of the agency unless the agreement specifies otherwise. This situation could engender lawsuits involving CalPERS, the consortium, the four cities, and the impacted retirees.

This case also highlights the problem of asking entities to pay the full amount of their termination liability all at once. In this case, the consortium, which shut down its headquarters over two years ago and owes approximately $400,000 to CalPERS, has been given several months to produce the relatively enormous sum of $19.3 million.

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