Desperate Hot Springs – Another California city teeters on the edge of bankruptcy

In what may be the most embarrassing California-related headline to appear in a while, Reuters announced last month: Tony resort city mulls bankruptcy, blaming wages, pensions. That supposedly “tony” city is Desert Hot Springs, on the northern edge of the Coachella Valley near Palm Springs. Though it’s certainly true that Palm Springs and many of its suburbs are booming resort and retirement meccas, Desert Hot Springs long ago picked up the nickname “Desperate Hot Springs.” It’s a magnet for parolees and poor retirees living in low-cost tract houses and trailers.

On November 19, the Desert Hot Springs city council declared a fiscal emergency, usually a precursor to bankruptcy. The city has $20 million in annual budgeted expenses and only $14 million in revenues. As is common these days, city officials blamed outside forces: the economic downturn, the housing bust, lagging development. The downturn has eased, though, and most California cities are recovering from the housing bust. And it’s no real surprise that developers shun the city, given that a Desert Hot Springs address is practically the kiss of death in the Coachella Valley.

Desert Hot Springs, in fact, went bankrupt once before—in 2001, after the city lost a lawsuit against a developer who claimed discrimination when officials stopped him from building a neighborhood of manufactured homes. The city’s crime problem grew so severe that Riverside County officials launched a military-style invasion. “Hundreds of law enforcement officers backed by armored cars and Black Hawk helicopters swept into the city . . . in a massive show of force that stunned the gangs, parolees and street thugs who had terrorized the community for years,” the Los Angeles Times reported in 2009. Crime has since fallen, thanks to a greater police presence and expansion of community anti-gang programs. But the city still struggles with persistently high unemployment and a generally impoverished population. In short, there’s nothing “upscale” about the place.

Now things could get even worse. Officials fear that cuts in the budget—70 percent of which goes to the police department—will undermine the progress made on public safety. But one need only look at the city’s salary schedule to understand what’s really going on. The average annual wage in the police department is $119,000 a year, with the average total compensation topping $164,000. And that doesn’t include the unfunded liabilities—the unaccounted-for costs to pay for generous retirement benefits. Wages for all categories throughout the city are astoundingly high, with many officials earning total-compensation packages well above $200,000 a year. The city manager’s salary and benefits top $300,000 annually.

The plight of Desert Hot Springs has prompted concern among California’s hardy pension reformers, who see it as a sign of things to come. But the state’s legislative leaders have mostly shrugged, perhaps because Desert Hot Springs, like other cities sliding into Chapter 9—Stockton, San Bernardino, Vallejo—happens to be on the economic margins. These economically troubled cities, the thinking goes, aren’t reflective of the state as a whole. But is that correct?

Leading the charge to get a statewide pension initiative on the November 2014 ballot is Democrat Chuck Reed, mayor of one of California’s wealthier cities, San Jose. Recently, Reed noted that San Jose’s police costs had soared in recent years, even as the city has significantly cut the police workforce. He blames this reduction in services on San Jose’s uncontrolled pension debt (the city’s pension-reform measure, which passed overwhelmingly last year, remains in legal limbo).

As they ignore cascading budget crises in California cities, the state’s unions have been ramping up their attacks on Reed and his measure. Assembly Speaker John Perez’s former spokesman, Steve Maviglio, lambasted Reed on behalf of a union-funded think tank—though he didn’t address any of the specifics of Reed’s measure. Instead, Maviglio dismissed the idea that pension reform is a bipartisan cause, pointing out that the measure enjoyed “right wing” financial support as well as the support of this “conservative” writer. “Right out of the gate,” Maviglio wrote, “the state’s leading Democrats blasted the proposal. And aside from Reed himself, not a single big city mayor—Democrat or Republican—joined Reed’s effort. In fact, one of the Democratic mayors that Reed initially had on board is expected to renounce his support.”

While the Democratic leadership opposes a measure that takes aim at one of its vital constituencies, a few serious Democrats are backing Reed—not because of some supposed right-wing conspiracy, but because they have enough foresight to see what’s happening to municipal services. California’s roughest cities are harbingers. “All of the cities that have gone into bankruptcy have different variables that have contributed to their problems,” said Jack Dean, vice president of California Pension Reform. “The one consistent theme that all of them have is high payroll and pension costs.” Unless those costs are reined in, Desert Hot Springs won’t be the last city to find itself in desperate straits.

Steven Greenhut is the California columnist for U-T San Diego. This article originally appeared on December 5, 2013 in City Journal and is republished here with permission from the editor.

Desert Hot Springs, California, Fights Bankruptcy – Average City Employee Makes $144,329 Per Year

While today’s municipal bankruptcy news focuses on Detroit, where a judge has just ruled the city can proceed with its bankruptcy filing, tonight a small California city holds a council meeting to try to avoid the same fate.

Desert Hot Springs isn’t on the national radar, but its situation is hardly unique. With only 27,000 residents and only 55 full-time city employees, Desert Hot Springs lacks the financial heft that allows larger cities – think Los Angeles – to put off their day of reckoning.

If you review the city council’s meeting agenda for December 3rd, 2013, you will see item 5, “Budget and Financial Update – Fiscal Year 2013/14.” Clicking on that link will open a window containing links to five exhibits that constitute the most recent financial projections for the city for their current fiscal year ending 6-30-2014. And as can be seen from the one-page summary document, Exhibit 2, “FY 2013-14 Budget with Revenue & Expenditure Adjustments,” at this point Desert Hot Springs is expecting to collect $13.9 million and expecting to spend $18.1 million.

Put another way, as reported in the local newspaper Desert Sun on December 2 in an article entitled “Desert Hot Springs City Council to consider spending cuts,” after closing down a public swimming pool, laying off school crossing guards, and discontinuing any watering of the city’s parks, Desert Hot Springs still expects to spend 30% more than it makes, a deficit of $4.2 million.

The subtitle of the Desert Sun article reads “Parks, pool listed, but councilmen also eye pay, benefits” (italics added).

That’s a good idea. We took a look at pay and benefits for Desert Hot Springs city employees, using 2011 Desert Hot Springs payroll data from the California State Controller’s “transparency” website, corroborating them with totals as disclosed on the city’s 2013/14 financials Exhibit 5, “Consolidated Genl Fund Expend Budget, by Line Item.”

Journalists and watchdogs, take note:  State and local government payroll numbers as summarized by the State Controller, using payroll data submitted by cities, counties and agencies throughout California, are misleadingly low. Their webpage summary data for Desert Hot Springs lists the average direct pay plus employer paid benefits of a Desert Hot Springs employee as $99,633. Does that sound like a lot? Well wait, because it’s not even close to accurate.

If you go to the State Controller’s “Raw Export” page and click on the “2011 City Data,” you can download a 6 MB compressed file, which, if you use Excel, will convert into a 29 MB spreadsheet. This will have all payroll records by employee for all cities in California. Scroll down to “Desert Hot Springs” and copy those records into a separate spreadsheet for analysis. Or better yet, just download the analysis here, 2011_Payroll_Desert-Hot-Springs.xlsx (434 KB), since that’s what we did.

The raw payroll data provided by the California State Controller includes a column showing the maximum salary permitted by job title, making it very easy to eliminate employees who worked a partial-year or were part-time workers. Other clues are whether or not an employee was eligible for pension benefits, which is also clear on this spreadsheet.

Once you eliminate the part-time workers, you get representative averages.

The average full-time employee working for the city of Desert Hot Springs earned direct pay plus employer paid benefits during 2011 of $144,329. The average public safety employee working for Desert Hot Springs earned direct pay plus employer paid benefits during 2011 of $164,621.

This is in a city where the median household income is $31,356 and the median home selling price is $133,500.

Public sector union spokespersons often complain that “politicians are trying to balance the budget on the backs of working people.” Set aside for a moment the fact that “working people” means “unionized government employees” who, in the case of Desert Hot Springs, are making more per year than the average home costs in that city. Can Desert Hot Springs balance their budget if their “councilmen also eye pay, benefits,” and could actually do anything about it?

The State Controller’s 2011 data shows full-time and part-time payroll totaling $8.7 million; just full-time payroll totals $7.9 million. The City of Desert Hot Springs 2013/14 Budget Review – Consolidated Genl Fund Expend Budget, by Line Item shows full-time and part-time payroll also totaling $8.7 million, virtually the same amount two years later. But that’s not all. A careful review of the budget also shows “Contract Services,” not associated with payroll, totaling another $6.6 million.

Desert Hot Springs uses outside contractors for their entire Fire Dept. services, as well as Animal Control and Code Enforcement. Outside contractors, apparently, also fulfill significant portions of the workload for nearly every other department in the city. These contracted services primarily represent costs for personnel, often coming from other local government agencies. Desert Hot Springs is spending $15.3 million, or 84% of their $18.1 million budget, on either city employees or contractors.

If it weren’t for public sector unions, the solution would be obvious, swift and lasting. Implement an across the board 27% reduction in pay and benefits to all employees and contractors working for Desert Hot Springs. This would reduce the average pay plus employer paid benefits for a full time employee of Desert Hot Springs from $144,329 per year to $105,360 per year.

There are a lot of good and qualified workers who would be thrilled to water the lawns, maintain the swimming pools, and even patrol the streets of Desert Hot Springs for an annual pay and benefits package north of six figures. And if pay and benefits were lowered, more city employees could be hired, improving services and making the city safer for everyone.

Public servants may wish to consider comparisons to the people they serve, instead of to their unionized counterparts in other cities and counties, or those convenient boogymen, the “CEOs and billionaires” who, apparently, are the reason we ought to ignore the crippling cost of their own inflated pay.

Public servants may also wish to consider that the consequences of inflated public sector pay are precisely the same as the consequences of inflated bonus packages for Wall Street billionaires and inflated prices charged by corporate monopolies – they raise the cost of living for everyone else. Using their formidable political clout to attack all anti-competitive monopolies who make life in California unaffordable except to the privileged classes – the super rich and the unionized elites – would be a noble undertaking.

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Ed Ring is the executive director of the California Public Policy Center.

Desert Hot Springs, California, Facing Bankruptcy

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.

Please consider Another U.S. city mulls bankruptcy due to soaring wages and pensions

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.

50% Clawbacks 

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.