Explaining Southern California's economy

San Bernardino is not having a very good week

 bankrupt pensions

Steven Cuevas / KPCC

As if bankruptcy weren't enough to deal with, San Bernardino is home to some of the highest unemployment and home foreclosure rates in the country, recent surveys say.

The Inland Empire city of San Bernardino declared bankruptcy last year. Now it's slogging through the Chapter 9 process, taking on CalPERS, the giant California pension fund, at the same time. 

Sound like enough to keep one struggling municipality busy? Not quite. Two new reports indicate that the city's problems run deeper than just being broke.

On Wednesday, the U.S. Labor Department reported that what it calls the Riverside-San Bernardino-Ontario "metropolitan area" had the highest unemployment rate of all large U.S. cities in December: 10.9 percent. That’s down from more than 12 percent in December 2011.

Meanwhile, real estate analytics firm RealtyTrac says the San Bernardino area had the second highest foreclosure rate in the U.S. last year: nearly 4 percent of homes there had a filing in 20-12.

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CalPERS strikes fear in the hearts of private equity firms

Max Whittaker/Getty Images

A sign stands in front of California Public Employees' Retirement System building in Sacramento.

Yesterday, CalPERS, the huge California public employees pension fund, announced some good news: the $248 billion colossus made a 13.26 percent return on its investments in calendar year 2012. They're dancing with their spread sheets in Sacramento, because that's a vast improvement over the 2012 fiscal year performance, which ended on June 30.

How bad was the fiscal year performance? One percent.

Yep, one percent. It was bad.

CalPERS has targeted a rate of return for its investments of 7.5 percent — a target that it reduced from 7.75 percent last year. So that 13.26 percent return, if it holds up through the fiscal year, will go a long way toward helping CalPERS make up what it lost last year.

However, as CalPERS Chief Investment Officer John Dear pointed out and Pensions & Investments reported, that 13.26 percent wasn't as thrilling as it sounds. It was "117 basis points below the retirement system's custom benchmark for the calendar year."

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San Bernardino v. CalPERS — and now maybe the bankruptcy court

 bankrupt pensions

Steven Cuevas / KPCC

The Inland Empire city filed for bankruptcy protection last summer.

The Economist provides a crisp assessment of the simmering battle between bankrupt San Bernardino and and CalPERS, the biggest public pension fund in the U.S. I've written a lot about San Bernardino's troubles and the Very Big Question of how hard the broke city will fight CalPERS. But The Economist article is well-worth reading as a summary of the risks of tangling with the money managers in Sacramento. 

Here's a taste:

As part of their bankruptcy arrangements, Vallejo, an old port town near San Francisco, and Stockton, in the Central Valley, slashed workers’ pay and stiffed bondholders but made good on their CalPERS payments. In September Compton, a struggling city south of Los Angeles, did fall behind on its obligations; it was quickly brought into line by a lawsuit.

San Bernardino has proved less of a pushover. An unlovely, crime-ridden city at the heart of the Inland Empire, the suburban sprawl east of Los Angeles, it followed Stockton into bankruptcy this summer. The city’s particular troubles go back decades, but much of its story followed familiar contours: overbearing unions, political dysfunction and financial commitments made during good times that could not be met in bad. In one respect, though, its behaviour has been strikingly original. Since its declaration in August, San Bernardino has not paid CalPERS its full dues.

[...]

The problem is simply that CalPERS is, by some distance, San Bernardino’s biggest creditor, and the city cannot cut services any further without jeopardising basic safety. The fund, like all creditors, will eventually receive what it is owed, the mayor adds, but the city needs breathing space. (It wants to resume payments in 2013-14.) On November 30th it filed a proposed emergency budget with a bankruptcy court. Among the cuts and deferrals were $13m-worth of payments to CalPERS.

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Why was CalSTRS investing in gun company linked to Newtown massacre?

California State Teachers Retirement System

CalSTRS

The headquarters of the California State Teachers Retirement System in Sacramento. Like many big pension funds, it's increasingly invested in a riskier manner to meet return targets. This led to its investment with Cerberus Capital Management and the gunmaker that built the weapon used in the Newtown massacre.

Just to lay it out for you:

• Adam Lanza, a disturbed young man, killed 20 children, his mother, and six other adults in Newtown, Connecticut on Friday before killing himself

• He used a "Bushmaster" automatic rifle, a civilian variation of the AR-15, a military rifle that traces its heritage to the M-16

• The company that owns Bushmaster, Freedom Group, is owned by Cerberus Capital Management, a prominent private equity fund that...

• Raised at least $500 million from the California State Teachers' Retirement System (CalSTRS) for a fund that invested in Freedom Group.

It's one of those gruesome loops – the serpent eating its own tail – that can only result from the intersection of private-equity, the huge pension funds that provide private-equity with money, and the imperative for funds like CalSTRS to hit their annual return targets.

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San Bernardino bankruptcy: How hard will CalPERS fight for its money?

Max Whittaker/Getty Images

A sign stands in front of California Public Employees' Retirement System building. CalPERS is trying to prevent bankrupt cities from evading pension obligations.

Last week, Moody's, the rating agency, released a note about the ongoing San Bernardino bankruptcy and the city's pension obligations to CalPERS. According to Moody's, San Bernardino's total unfunded pension liability far outstrips it other municipal debt. 

San Bernardino declared bankruptcy in July, after the city council revealed that it barely had enough money to keep the lights on. A big question in the bankruptcy has been whether the city will attempt to reduce or discharge its CalPERS liabilities. As Moody's pointed out, neither Vallejo, which went into Chapter 9 in 2008 and emerged in 2011, nor Stockton, which declared bankruptcy earlier this year, sought concessions from CalPERS. In Vallejo's case, other creditors took a substantial haircut. 

CalPERS maintains that pension obligations can't legally be reduced in bankruptcy. That hasn't stopped San Bernardino from ceasing payments, to the tune of $6 million. CalPERS is now disputing San Bernardino's Chapter 9 eligibility, according to Moody's, and is threatening to do away with the city's pension plan. This would expose San Bernardino to a bigger pension payment, due immediately. 

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