CalPERS Forced to Declare Southern California Agency in Default of Pension Obligations

he California Public Employees’ Retirement System (CalPERS) Board of Administration today declared the East San Gabriel Valley Human Services consortium in default and terminated its contract after it failed to pay more than $400,000 to fund its pension plan.

Under the law, pension benefits will be reduced by approximately 63 percent for 191 members and 24 percent for six members hired after pension reform went into effect in 2013, effective July 1, 2017 if the consortium fails to pay.

"The Board was forced to make this painful decision after East San Gabriel Valley failed to stand by its contractual obligations despite repeated and numerous attempts by CalPERS to avoid this terrible situation," said Rob Feckner, president of the CalPERS Board. "Cutting benefits to retirees is truly the last step we want to take, but our employers must uphold their obligations and keep the promises that they made to their employees. We have a fiduciary responsibility to protect the long-term future of all beneficiaries and the fund."

East San Gabriel Valley is a Joint Powers Authority consortium formed in 1979 by the cities of West Covina, Covina, Azusa, and Glendora to primarily provide employment and training services to local residents and inmates incarcerated by the Los Angeles County Sheriff’s Department.

The consortium lost a major contract and closed its headquarters in 2014. Since August 2015 it has failed to pay its Unfunded Accrued Liability (UAL), now totaling $406,345. CalPERS made multiple attempts to collect the outstanding amount due, including:

Holding discussions with consortium officials in over 34 telephone calls Sending multiple collection and demand notices to the consortium Contacting all four of the cities that formed the consortium 38 years ago to request immediate payment
California Public Employees’ Retirement Law allows the Board to terminate an agency contract after it fails for 30 days to pay the full amount owed in contributions. The law also requires retirement benefits be reduced by the proportion of the amount due in accumulated employer and member contributions.

The terminated contract will take effect in 60 days. Once the contract is terminated, the consortium is liable to pay the full amount of its termination liability of approximately $19.3 million, which would fully fund current and future payments of retirement benefits to its members. If the consortium fails to pay the termination liability, then CalPERS will send a notice to current and former employees of the consortium outlining the decision to reduce retirement benefits, beginning July 1, 2017.

CalPERS first notified employees and retirees in January 2017 that the consortium had failed to pay the amount due and that retirement benefit reductions could follow. The reduction applies only to the portion of benefits a member earned while working at the consortium.

"Our financial oversight of public agencies will continue to further reduce the risks to members, employers, and the CalPERS Fund," said Richard Costigan, chair of the CalPERS Finance & Administration Committee. "We’re committed to being a reliable partner to our participating employers and helping them fully understand the costs of the pension benefits they offer."

One of the consortium’s four founding cities contends that it cannot pay the pension contributions because doing so would constitute a "gift of public funds." CalPERS General Counsel Matthew Jacobs disagreed, and said that public entities have a legal right to appropriate funds as they see fit, as long as it’s for a public purpose, such as paying public pension contributions.

Last November, CalPERS declared the city of Loyalton in default of its obligations to CalPERS after failing to pay what it owes to fund its pension plan, and reduced benefits for four Loyalton retirees.