Add Desert Hot Springs, CA to the list of California cities in dire straits due to poor management, union wages, and ridiculously unaffordable pension promises.
A resort town in California warned on Tuesday that it will run out of money by March due to burdensome salary and pension costs and could join other U.S. cities that have recently filed for bankruptcy protection.
A bankruptcy filing by Desert Hot Springs, a city of 26,000 about 110 miles east of Los Angeles, would make it the third California city along with San Bernardino and Stockton to seek court protection from creditors.
San Bernardino and Detroit – the biggest U.S. city to seek Chapter 9 protection – are likely to set precedent on whether retirees or Wall Street bondholders suffer the most when a city goes broke.
The problems in Desert Hot Springs came to light last week when a new finance director reviewed the city’s records and discovered a $3 million shortfall in its budget of $13.5 million. Amy Aguer, the interim director of finance, did not have details on how the shortfall occurred but said it was the result of higher-than-expected pension and salary costs, especially in the police department, and overly optimistic estimates of revenue.
“It’s obvious we can’t continue with salaries and pensions that are in the stratosphere, no matter how much love there is for our police department,” said Russell Betts, a council member.
Desert Hot Springs, which is near Palm Springs, filed for bankruptcy in 2001 after losing a multimillion dollar lawsuit and still servicing $9.7 million of bond debt issued to fund its exit from Chapter 9 bankruptcy.
In a report issued last week, Aguer said bankruptcy was a real option under consideration, although on Tuesday she expressed hope that the city could avoid that fate this fiscal year.
Aguer said nearly 70 percent of the city’s budget was consumed by police costs, most of which were spent on salaries and pension payments to the California Public Employees’ Retirement System, or Calpers.
Calpers is America’s biggest public pension fund, with assets of $277 billion. It has argued strenuously in court that pension payments cannot be touched, even in a bankruptcy.
The “Only” Option
It is ridiculous to hope Desert Hot Springs can avoid bankruptcy. Its fate is sealed for the second time. Bankruptcy is the only option.
The choice is now or later. Now makes more sense.
Just Desserts for CalPERS
I long for the day that a judge rules pension costs are not sacrosanct. And that day is coming soon!
I expect such a ruling in Detroit. And when it happens, it will open up a floodgate of cities willing to do the right thing, and the right thing is to force clawbacks in absurd pension promises.
I had an original title to this post of “Screw CalPERS”. That title was wrong. It is taxpayers who are being screwed, not overpaid, underworked, undeserving public union workers.
Clawbacks of 50% or more in union pension promises are not only sane, but “fair“.
Taxpayers should not have to foot the bill for union threats, coercion, bribery, and vote buying. It’s that simple.
About the Author: Mike Shedlock is the editor of the top-rated global economics blog Mish’s Global Economic Trend Analysis, offering insightful commentary every day of the week. He is also a contributing “professor” on Minyanville, a community site focused on economic and financial education.