• Legislate, don’t litigate says bankruptcy attorney

    Citizen’s initiative will be more expensive than its proponents calculated

    By Marge Ann Jameson POSTED 01/03/13

    Noted municipal bankruptcy and conflict resolution attorney Karol K. Denniston, a partner in the Schiff Hardin LLP law firm, suggested to the City Council at the Jan. 2 meeting that they not dive into bankruptcy nor preempt the proponents of an initiative to void the 2002 Council action of agreeing to a 3 percent at age 50 retirement plan under CalPERS. The initiative seeks to void the 2002 Council action as illegal, but she said it does nothing to address the myriad problems related to the voiding of the agreement.

    It was pointed out that the City should “avoid citizens’ initiatives based on an incomplete understanding of these complex and interdependent issues.”

    The result of the initiative, she said, would spin a tangled financial web of related lawsuits about which the proponents of the initiative have made no consideration: Not only would the City face lawsuits from the affected employees, retirees, bargaining units and likely CalPERS itself, but there are a decade of related dealings and agreements such as intervening MOUs and the issuance of pension bonds and other bonds.

    Defending such lawsuits, which she points out the City would likely lose, would tie up any efforts the City might make to bring retirement costs under control, she said. And “Federal courts can’t impair contracts in bankruptcy,” so that’s not a solution either. CalPERS, by law, must enforce its agreements, she said. They cannot negotiate like other creditors and bondholders.

    She cautioned that litigation is never going to fix the problem. Instead, Ms. Denniston recommended a legislative solution at the state level. She told the Council that, even though Pacific Grove is small in comparison to other cities in the same boat, there is a chance for Pacific Grove to lead the way for these cities. “Build a constituency of other municipalities,” she suggested.

    She advised three steps: 1) to look at the cost of litigation over the 2002 decision and consider the cost of appeals as well; 2) monitor what other cities are doing; and 3) build a group to make a presentation to Sacramento to get the Democratic-controlled Assembly, Senate, and Governor to do something. “There will have to be a balancing, and the legislature is going to have to take it on,” she said, or the State’s bond rating will dive and the pension problem will explode.

    Above all, she said, there needs to be discourse with the people backing the initiative to encourage them to put it on hold. If the initiative gains enough signatures, the City Council will be forced to do as it did with the previous initiative put forth by the same people as the current one and either enact the legislation or put the item on the ballot for the voters to decide.

    The City, tied up in a lawsuit with the police union as a result of the previous initiative, has found itself unable to take certain other actions or to disclose certain information as a result. Forced to limit contribution to employee retirement funds to 10 percent of the employees’ salary by the initiative, the City is also forced to contribute more than 20 percent under state law and, as City Manager Tom Frutchey said, “there is no common ground.” The City questions the possibility of seeking legal solutions to these conflicting requirements, opting for a “friend of the court” decision by filing suit itself.

    The City has extended invitations to three separate law firms to project budgets to litigate the “3@50”  benefit plan, budgets which Frutchey says will be made available to the public as soon as they are received.

    While initiative proponents allege that the obligation has risen to $45 million, Frutchey announced that the long-sought figures from CalPERS had arrived that afternoon and showed that the obligation is closer to $7 to $18 million – as of June, 2012 which is the most recent available.

    Denniston met with both City representatives and proponents of the initiative. In her field of expertise, Denniston has studied the more than 400 communities in California facing similar issues, including the notorious bankruptcies of Vallejo, Stockton and San Bernardino.

    posted to Cedar Street Times on January 3, 2013

    Topics: Front PG News


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