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CalPERS and Unions Win Again – Taxpayers and Bondholders Lose

In bankruptcy, the federal courts have ruled that cities can reduce pension obligations. They can, but they don’t have to. In Detroit, bondholders were sacrificed to maintain police and fire pensions with minimal haircuts.

On Monday, U.S. Bankruptcy Judge Meredith Jury ruled against bondholders in favor of Calpers in the San Bernardino bankruptcy. She acknowledged that her decision is likely to be seen as unfair to the municipal bond market and might even discourage investors from buying pension obligation bonds in the future.

Please consider Calpers’ Pension Hammer Forces ‘Unfair’ Bond Ruling by Judge.

California’s public retirement fund holds so much power over local officials that pension-bond investors can’t expect equal treatment when a city goes bankrupt, a judge said in a ruling that she acknowledged seems “unfair.”

“What I see as unfair, and might seem unfair to the outside world, does not matter under law,” Jury said, referring in part to the powerful remedies Calpers can seek if the city doesn’t honor its contract.

Monday’s ruling sticks with a pattern seen in the bankruptcies of Stockton, California, and Detroit, said Marilyn Cohen, president of Envision Capital Management in El Segundo, California.

Up to Cities

Federal bankruptcy courts have many times ruled that cities can cut pension obligation, but nothing forces them to.

For example, in the Stockton California bankruptcy, a federal judge ruled that Stockton could have tried to reduce its obligation to Calpers. However, Stockton chose not to do so, arguing that fighting Calpers would take too long and could endanger employee pensions.

Conflict of Interest

I believe Stockton’s rationale is nonsense. Instead, I propose Stockton city officials had a conflict of interest.

City officials wanted to preserve their own pensions.

Chicago Connection

So what does this have to do with Chicago and the state of Illinois in general?

Lots, so let’s tie it all together.

As a result Tuesday’s Illinois Supreme Court Ruling that the 2013 Pension Reform Law Is Unconstitutional Moody’s cut Chicago’s bond rating two notches to junk. Moody’s specifically cited Chicago’s pension crisis.

I discussed this yesterday in Chicago Bond Rating Cut to Junk; City Faces $2.2 Billion in Various Termination Fees; Irresponsible to Tell the Truth.

In light of the San Bernardino ruling today, cities that have huge pension issues will see bond yields soar.

The Chicago Board of education is already paying 285 basis points more than other cities because of pensions. If bondholders keep getting hammered, those yields will rise further.

Pass a Bankruptcy Law, Give Taxpayers a Chance

A Chicago Tribune editorial by Henry J. Feinberg, says Pass a Bankruptcy Law, Give Taxpayers a Chance.

Under federal law, state governments can’t file for bankruptcy. Local governments can do so if their states give them permission. A bill now before the Illinois legislature would extend that permission to Illinois municipalities, most of which now can’t seek protection under bankruptcy law.

The right way is to amend House Bill 298 so people who hold Illinois bonds have a “secured first lien,” the fancy words needed in the law to make sure bondholders are first in line to get their money back. Passing this amended bill would do three things that the state’s local governments have not been able to accomplish for decades.

Three Reasons to Amend Bill 298

Feinberg cites three reasons to amend the pending bankruptcy bill.

  • First, it would bring opposing sides to the table to have meaningful discussions about how to save the borrower, in this case the local government, from financial ruin.
  • Second, the government could ask the bankruptcy court to modify labor contracts and order the parties to renegotiate the terms of collective bargaining agreements.
  • Finally, a law that puts bondholders first in line to get repaid would be a stroke of fairness that would help Illinois cities, school districts and other local governments avert a short-term solution like Detroit’s. There, some people who had lent money to the city by buying its bonds lost two-thirds of their investment. Meanwhile, members of the politically powerful police and firefighter unions took no cuts to their pensions (their cost-of-living adjustment was reduced). Other workers took a 4.5 percent base cut in pensions and the elimination of an annual cost-of-living increase, The Detroit News reported.

I agree with Feinberg on all three points. Bankruptcy is the only real solution for many of these plans and many cities as well.

Beware the Tax Man

Tax hikes cannot possibly address the shortfall. As discussed on May 4, in Beware, the Tax Man Has Eyes on You, the potential hike for Illinoisans is staggering.

Nuveen estimated 50% property tax hikes would be necessary. Those hikes were just for Chicago. They did not include money to bail out other Illinois pension plans. Nor did it address the $9 billion budget deficit for the state.

Finally, Nuveen’s estimate assumed pension plans would make their plan assumption of 7% returns or higher.

Stock Market Bubble Will Hit Pensions

I believe another serious decline in the stock market is likely. So do some of the biggest fund managers in the world.

Please check out Seven Year Negative Returns in Stocks and Bonds; Fraudulent Promises.

Pension promises were not made in good faith.

Rather, pension promises were the direct result of coercion by public unions on legislators, mayors, and other officials willing to accept bribes because they shared in the ill-gotten gains of backroom deals at taxpayer expense.

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, and a senior fellow with the Illinois Policy Institute.

The Glass Jaw of Pension Funds is Asset Bubbles

“Calpers argued that the California constitution’s guarantee of contracts shielded pensions from cuts in bankruptcy. The fund also asserted sovereign immunity and police powers as an ‘arm of the state,’ including a lien on municipal assets.”
–  Wall Street Journal Editorial, “Calpers Gets Schooled,” February 8, 2015

If you want powerful evidence of crony capitalism at its worst, look no further. In the Stockton bankruptcy trial, the pension fund serving that city’s employees threatened to seize municipal assets to pay pension fund contributions. They’ve made similar threats to other cities that protest against the escalating contribution rates. And they’ve made the cost to exit pension plans confiscatory. It is hard to imagine a bigger or more blatant example of collusion between business interests and government employees at the expense of ordinary private citizens.

In the Stockton bankruptcy case, judge Christopher Klein’s ruling left pensions untouched, but at least the judge was openly disgusted with CalPERS, stating “CalPERS has bullied its way about in this case with an iron fist insisting that it and the municipal pensions it services are inviolable. The bully may have an iron fist, but it also turns out to have a glass jaw.” (ref. San Jose Mercury Editorial, February 18, 2015)

Much has been made of the CalPERS’ “glass jaw,” referring to Klein’s contention that cities do have the legal right in bankruptcy to reduce pensions – even though he did not allow pension benefit reductions in this case. But there is another “glass jaw” facing CalPERS and all pension funds, the biggest “glass jaw” of all. They rely on annual returns of 7.5% per year to stay solvent, and as a result, sooner or later, the investment markets are going to deliver these funds a knockout punch.

Professional investors claim they can always beat returns of 7.5% per year, and many of them can. But public sector pension funds control over $4.0 trillion in assets, which makes them too big to beat the market. And the idea, courtesy of pension fund managers, that the investment market can deliver a long-term average return of 7.5% per year implies that 7.5% per year is a “risk free” rate.

For a quick reality check, here are the “risk free” rates of return currently available to investors in the United States:

Even in the cases where cities failed to make some of their annual pension payments, the financial impact was trivial compared to the primary cause of insolvency, which is that pension funds are not required to make “risk free” investments that are actually risk free. Because if they did, they would project low single digit annual rates of return instead of high single digit annual rates of return. It’s that simple.

A little over one year ago, the California Policy Center released a study “Are Annual Contributions Into CalSTRS Adequate?,” which utilized formulas provided by Moody’s investor services for that purpose. Using those formulas, the following table shows how lower rates of return impact CalSTRS:

Impact of Lower Rates of Return on CalSTRS
Based on 6-30-2012 Financial Statements, $ = Billions

20150224-UW_Ring-CalSTRS

Just in case this is all merely abstruse gobbledegook that savvy political consultants recommend politicians avoid since nobody understands it anyway, pay particular attention to the columns on the far left and far right. The left column’s top row shows the official rate of return used by CalSTRS, 7.5%, and the right column’s top row shows how much they should contribute each year based on that official rate of return. Never mind that CalSTRS, like nearly all pension systems, uses creative accounting to avoid making an adequate payment to reduce their unfunded liability. In FYE 6-30-2012, for example, CalSTRS only made an unfunded contribution of $1.1 billion, not $7.0 billion (column five, top row) which would have represented a responsible payment against their unfunded liability.

It’s worth noting that for CalPERS, we can’t even get data on how they break out their normal contributions and their unfunded contributions because doing so would require sifting through the financials of every one of their participating entities. But there is nothing uniquely troubling about CalSTRS. As calculated in a more recent California Policy Center study, released last week “California City Pension Burdens,” in 2014 all state and local government pension funds in California, on average, were only 75% funded.

Imagine what would happen if CalSTRS had to pay $25 billion per year (column six, row five), instead of what they actually paid in 2012, $5.8 billion? Replicate these methods with nearly any pension fund in California, and you will almost always get similar results. And anyone who thinks a rate of return of 3.5% (column one, row five) is overly pessimistic should refer to the actual “risk free” rates of return shown in the previous bullet points. Better yet, consider this:  The federal funds lending rate today, the amount the federal reserve charges to banks, is 0.25% – that’s one-quarter of one percent. This is free money. That money is essentially being given to banks rates to turn around and loan at very low rates to corporations and consumers who use the cheap credit to buy things which, temporarily, stimulates the economy which causes asset values to rise – we are repeating 2008 all over again.

Pension funds depend on continuously expanding debt fueled asset bubbles for solvency. That is how they earn high returns that are anything but “risk free.” That is their glass jaw. Hopefully, when the bubbles pop and the glass jaws shatter, as an “arm of the state,” with “police powers,” CalPERS, CalSTRS, and every other pension fund in California won’t seize every municipal asset we’ve got and impose genuinely punitive taxes, so they can keep on paying those benefits.

*   *   *

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

RELATED POSTS

More Taxes and Tuition Buy Time for the Pension Bubble, November 25, 2014

The Amazing, Obscure, Complicated and Gigantic Pension Loophole, November 18, 2014

Two Tales of a City – How Detroit Transcended Ideology to Reform Pensions, July 22, 2014

Public Pension Solvency Requires Asset Bubbles, April 29, 2014

Add ALL Public Workers to Social Security, March 25, 2014

Pension Funds and the “Asset” Economy, February 18, 2014

Middle Class Private Sector Workers Are NOT “Ripping Off the Next Generation”, December 17, 2013

Unions and Bankers Work Together to Protect Unsustainable Defined Benefits, November 26, 2013

A Member of the Unionized Government Elite Attacks the CPC, November 19, 2013

Adjustable Pension Plans, April 16, 2013

Federal Judge Smacks CalPERS on Sanctity of Pensions

Exceptionally good news from California today: A federal judge ruled Calpers claim of “Sanctity of Pensions” is invalid. Today’s ruling went even further than the bankrupt city of Stockton originally sought in court.

For details, please consider the New York Times article In Ruling on California Town’s Bankruptcy, Judge Challenges Sanctity of Pensions.

 A federal bankruptcy judge on Wednesday upended the widely held belief that public workers’ pensions have a special status in California that makes them impossible to cut, further chipping away at the idea that pensions are sacrosanct in a municipal bankruptcy. The ruling, which came during a hearing on a plan by the City of Stockton to exit bankruptcy, did not order the city to cut its pension plan or take any specific action. The judge said that he needed more time to reflect on Stockton’s situation and that he would decide Oct. 30 whether the city could emerge from its two-year bankruptcy or whether it still had more work to do. But the decision, by Judge Christopher M. Klein of the Eastern District of California, dealt a blow to California’s giant state-led pension system, known as Calpers, which has been leading efforts to preserve defined-benefit pensions nationwide. Calpers had argued that if Stockton stopped making payments and dropped out of the state pension system, the lien would let it claim $1.6 billion of its assets. But Judge Klein said those statutory powers were suspended once a California city received federal bankruptcy protection. “Why should I take that lien seriously?” he asked a lawyer for Calpers, Michael Gearin. “I may avoid it as a black-letter matter of bankruptcy law,” he said, referring to well-established legal principles. He did not dispute that Stockton would be billed $1.6 billion to leave Calpers and said such a termination fee “can be seen as a golden handcuff.” But in bankruptcy, he said, Stockton could legally refuse to pay the bill because it arose from the city’s contract with Calpers, and contracts are broken routinely in bankruptcy. “The bankruptcy code provides that the lien can be avoided and be treated as an unsecured claim,” Judge Klein said. In court proceedings in July, Judge Klein said it was not clear to him that Calpers was even a creditor. He adjourned the hearings until the city and other parties could brief him on Stockton’s relationship with Calpers.

Bizarre Position of Stockton’s lawyer

One has to wonder just what side  Stockton’s lawyer is on.

 In oral arguments on Wednesday, Stockton’s lawyer, Marc A. Levinson, said that for Stockton to switch to another retirement plan administered by a different entity would probably take two years, and in the meantime all the city’s workers were likely to quit. Their first choice would be to seek similar jobs in cities that were still part of Calpers, he said, adding that he thought Calpers was a more efficient plan administrator than any other entity Stockton might try.

The idea that the entire city force would quit is lunacy. Moreover, it would be a good thing if they did!

All Stockton need do is submit a bankruptcy plan that stipulates employees lose 100% of their benefits if they quit before some stipulated date. How many would leave? None.

The position of Stockton’s lawyer is so bizarre, one wonders if he is attempting to protect his own pension.

Stockton does not need another defined benefit retirement plan. Rather, it needs to eliminate the one it has. And this excellent, common-sense ruling from Judge Klein paves the way.

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.

Pension Battle Shifts to San Jose, San Bernardino, Stockton

Now that a federal judge in Michigan has properly ruled pension obligations are not sacrosanct (see Lesson for Union Dinosaurs) the spotlight is once again on union dinosaurs in California.

Bankrupt San Bernardino foolishly did not attempt to shed pension obligations in bankruptcy, but perhaps it can now reconsider.

What about Stockton and Vallejo?

On April 1, 2013 Judge Rules Stockton CA Bankruptcy is Valid, City Acted in Good Faith. Hopefully Stockton will follow inevitable pension cuts in Detroit.

Second Chance for Vallejo

Vallejo had a golden opportunity to shed pension obligations in its first bankruptcy. When the city failed to do so, I made an easy prediction: Within years, Vallejo would be back in bankruptcy court.

That prediction appears well-founded. On October 20, 2013 I penned Vallejo, Mired in Pension Debt Again; Lesson for Stockton and Detroit – Shed Those Pension Obligations Now!

My comment from above: “Stockton and Detroit have a choice. They can cut pensions now, or cut them later in a second bankruptcy, just like Vallejo will.

Will Stockton get it right? Hopefully, but some things will depend on Detroit. We have not yet seen the final ruling, but steep haircuts on pension promises and unsecured general bonds should be forthcoming.

Battle in San Jose

The battle in San Jose, population 983,000 and California’s third-largest city, is of a similar nature.

San Jose spends 33% of its general fund revenue on pensions, the highest among the 25 most populous U.S. cities.

Mayor Chuck Reed wants to make changes to the pension plan. Specifically, Reed, a 65-year-old Democrat, is leading a statewide voter initiative to allow changes in future benefits for existing employees.

Union Dinosaurs Part II

Of course union dinosaurs are fighting the initiative, which means unions would rather see San Jose go bankrupt than negotiate.

Bloomberg reports San Jose Pension Crush Spurs Bid to Ease California Pacts.

San Jose, a city of 983,000 that is California’s third-largest, has been forced to make deep cuts in basic services as its retirement costs soared to $245 million in 2012 from $73 million in 2002. The city’s pension and retiree health-care liability is almost $3 billion, according to Reed, who was first elected in 2006.

San Jose voters last year approved retirement changes requiring new employees to pay 50 percent of the plan’s total cost, or about twice as much as current employees. Workers already on the city’s payroll could keep their existing plans by increasing their contributions or keep their costs steady by choosing a plan with more modest benefits.

Unions including the San Jose Police Officers’ Association and the San Jose Retired Employees Association sued to block the change. The case is pending.

Reed’s ballot initiative would amend the California constitution to give local governments the power to negotiate changes to existing employees’ future pension or retiree health care, while protecting benefits they’ve already earned.

“What they’re trying to do is overturn decades of case law, Supreme Court decisions and change the California constitution to allow public employers to either change, cut or eliminate public employees’ pensions in the middle of their career,” said Dave Low, executive director of the California School Employees Association and chairman of Californians for Retirement Security, a coalition of public employees and retirees.

“It’s a vested right,” Low said.

“In talking with other mayors around the state, everybody would benefit from having clear authority to be able to negotiate changes for future benefits for work yet to be performed for current employees,” Reed said of his ballot measure.

Mayors Pat Morris of bankrupt San Bernardino, Tom Tait of Anaheim and Bill Kampe of Pacific Grove are backing the plan. Santa Ana Mayor Miguel Pulido dropped out as a formal supporter and was replaced by Vallejo Vice Mayor Stephanie Gomes. Opponents include Oakland Mayor Jean Quan and San Francisco Board of Supervisors President David Chiu.

Also assailing the plan are the California Public Employees’ Retirement System, the largest U.S. public pension, and the California State Teachers’ Retirement System, the second-biggest U.S. public pension contending with a $70 billion unfunded liability.

The proposal “threatens the retirement security of existing and future educators, who have provided many years of service to California’s students,” Jack Ehnes, the teacher pension’s chief executive officer, said in a statement.

Reed said cities can continue to cut services and raise taxes, make employees pay more, cut benefit payments to retirees or cut benefits for current employees.

“None of those is fair, so it is better to talk about changing expectations of future accruals for future work,” Reed said.

CalPERS, Oakland Mayor Against Reed’s Plan

It’s not yet official, but Oakland is as bankrupt as bankrupt can be. Why its mayor would not want to back Reed’s initiative has three possibilities: reelection motives, sheer stupidity, or to preserve her own ill-gotten pension.

Rights of Dinosaurs vs. “Right Thing” 

Dave Low, executive director of the California School Employees Association and chairman of Californians for Retirement Security, a coalition of public employees and retirees, whines “It’s a vested right“.

Low can whine all he wants, but bankruptcy is a “right” as well. And rights in bankruptcy overrule alleged rights of unions.

Speaking of which, those alleged rights were primarily obtained via a process of coercion, threats, bribery, and back-room deals with crooked politicians willing to give unions what unions want so the politicians can get elected.

What’s “right” about that?

From a taxpayer perspective, the “right thing” to do is end collective bargaining of all public unions, after-which public unions, like dinosaurs, will become rightfully extinct.

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.

Vallejo Faces 2nd Bankruptcy Because They Didn’t Restructure Pensions

Editor’s Note:  An article published today in the Stockton Record’s reports “Deis: City won’t tackle pension reform.” Bob Deis is Stockton’s city manager. Apparently he doesn’t want Stockton to be the first to fall. As soon as one city restructures their pensions, every city and county in California will follow, because the alternative is a state where literally 30% or more of every municipal agency’s general fund is turned over to the pension bankers. Something’s got to give, as the following report on Vallejo amply demonstrates. Vallejo’s city managers didn’t restructure their pension obligations two years ago when they had the chance in bankruptcy court. So now they’re back. Why? They can’t afford their pension payments. The pension funds – “Wall Street,” by any other name – provided overly optimistic projections, the unions believed them, and the politicians did what the unions told them to do. Public sector pensions are the last, biggest bubble left from the debt overload that nearly took down the U.S. economy in 2008. Even public sector unions can’t alter this reality. Deis can take his orders from public sector union bosses, or he can choose to fight the axis of unionized government and taxpayer-funded pension bankers who wish to exempt themselves from the economic challenges facing everyone else.

When Vallejo entered bankruptcy, it had a golden opportunity to shed pension obligations. When the city failed to do so, I made an easy prediction: Within years, Vallejo would be back in bankruptcy court.

And here we go again: Two years after bankruptcy, California city again mired in pension debt.

 Less than two years after exiting bankruptcy, the city of Vallejo, California, is again facing a budget crisis as soaring pension costs, which were left untouched in the bankruptcy reorganization, eat up an ever-growing share of tax revenues.

Vallejo’s plight, so soon after bankruptcy, is an object lesson for three U.S. cities going through that process today – Detroit, Stockton and San Bernardino, California – because it shows the importance of dealing with pension obligations as part of a financial restructuring, experts say.

The Vallejo experience may be particularly relevant to Stockton, which is further along in its bankruptcy case than Detroit and San Bernardino and has signaled its intention to leave pension payments intact.

“Any municipal bankruptcy that doesn’t restructure pension obligations is going to be a failure because pension obligations are the largest debt a city has,” said Karol Denniston, a municipal bankruptcy attorney in San Francisco.

“A city like Vallejo can be reasonably managed but it is still going to be flooded out because it cannot be expected to keep up with its pension obligations.”

Vallejo, a port city of 115,000 near San Francisco that was staggered by the closure of a local naval base and the housing market meltdown, filed for Chapter 9 bankruptcy protection in 2008 with an $18 million deficit.

During its three-and-half year bankruptcy, the city slashed costs, including police and firefighter numbers, retiree health benefits, payments to bondholders and other city services.

The only major expense the city did not touch was its payments to the $260 billion California Public Employees Retirement System.

“We realized we did not have the time or the money to take on a giant behemoth like Calpers,” said Stephanie Gomes, Vallejo’s vice mayor.

When it exited bankruptcy at the beginning of 2011, the payments to Calpers were just over $11 million, or 14 percent of the fund. The latest budget pegs those payments at $15 million, or 18 percent of the general fund.

The increase comes largely from the recent decision by Calpers to lower its projected investment return rate, from 7.75 percent to 7.5 percent, and to change the way it calculates long-term pension maturity dates.

Those changes mean cities, state agencies and counties must pay rate increases of up to 50 percent over the next decade. Vallejo expects an increase in pension contribution rates of 33 to 42 percent over the next five years.

Marc Levinson, of the law firm Orrick, Herrington & Sutcliffe, was the lead attorney for Vallejo in its bankruptcy and has the same role for Stockton. He says his clients would welcome pension reform in California, and he is the first to say that contributions to Calpers are a big problem for cities.

But, Levinson said, dealing with the issue is no simple matter.

“How does a city start a new pension plan when it can’t pay its bills?”, Levinson said. “How can a city break away from Calpers and still retain employees when other jurisdictions have a pension plan?”

Incompetence or Something else?

Allegedly the city did not want to take on CalPERSs then. Instead, it is going to face another drawn out bankruptcy drama.

Was there really much of anything to take on? I doubt it. The city had free rein in bankruptcy court to do what needed to be done: slash pensions.

As for Levinson’s ridiculous question “How does a city start a new pension plan when it can’t pay its bills?” … The city cannot pay its bills precisely because of preposterous pension payments!

The simple solution would be to make sure the plan is fundable at a reasonable discount rate. The yield on 30-year US treasuries seems about right.

Yes, that would be quite a haircut, but so be it. I also propose that the higher the current mandated pension payout, the bigger the cut. That way, some lowly clerk with a small pension would be more protected than city officials, police, and fire workers with high pensions.

Retaining employees would be easy enough. I suggest the city seek a bankruptcy court agreement such that any city employees who quit now would forfeit their pensions (or whatever portion is necessary to make the system solvent).

Ongoing, Vallejo should kill their defined benefit pension plan completely. With millions of people unemployed, I assure Vallejo would be loaded with qualified applications for whatever hires it needed to make (if indeed any).

In retrospect, the vice mayor’s statement “we did not have the time or the money to take on a giant behemoth like Calpers” sounds like a bald-faced lie. I suggest the real reason Vallejo did not go after pensions is the city bureaucrats would have cut their own pensions, and they did not want to!

Regardless, Stockton and Detroit have a choice. They can cut pensions now, or cut them later in a second bankruptcy, just like Vallejo will.

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. Every Thursday he does a podcast on HoweStreet and on an ad hoc basis he contributes to many other websites, including UnionWatch.

CalPERS Pension System in the Crosshairs of Stockton Bankruptcy Dispute

A few days ago a federal judge sided with the city of Stockton, validating its bankruptcy. See Judge Rules Stockton CA Bankruptcy is Valid, City Acted in Good Faith.

Bondholders screamed, but the ruling made sense. What did not make sense (except from the point of view of politicians protecting their own undeserved pensions), was that while Stockton defaulted on other payments, it kept funding its CalPERS pension obligations.

Shouldn’t government employees who were responsible for this mess share some of the fallout? I think so, and I would suggest before other bondholders or at least equal to other bondholders.

The issue now is whether federal bankruptcy takes precedence over California law.

CalPERS in the Crosshairs

The Huffington Post describes the setup in Stockton Pensions Present Problem In Bankruptcy

At the conclusion of a three-day trial, a judge on Monday formally granted the city Chapter 9 protection, over the objections of creditors who questioned whether it was fair for the city to fully meet its obligations to the state pension system while other debt holders go partly paid.

The issue – whether federal bankruptcy law trumps the California law that requires pension fund debts to be honored – could have huge implications across the state and the rest of the nation, experts say.

“The fear is that there is going to be a run on the bank,” said bankruptcy attorney Michael Sweet, who has been monitoring the Stockton trial. “Everyone is going to be cutting CalPERS” payments if Stockton is allowed to do it.

Last year, the Congressional Joint Economic Committee reported that unfunded pension obligations across the nation amount to more than $2.8 trillion and may be as high as $4.4 trillion. Illinois lacks funds for nearly 72 percent of the pensions it guarantees, while California and Texas are short by more than half. North Carolina’s debt is lowest but is still more than a third short of what its system has promised to pay out.

Either the judge will decide that CalPERS obligations must be cut and the state will appeal, or he will say state law forbids CalPERS from negotiating and the creditors likely will appeal.

Throw CalPERS in the Pot

In spite of this huge runup in stocks and bonds, pension funds are still underfunded by a minimum of $2.8 trillion. If these undeserved pensions have priority, taxpayers will be on the hook for them.

For the sake of the average taxpayer, let’s hope CalPERS is thrown in the mix and benefits are not just cut, but massively slashed, and those who have the highest benefits cut the most.

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. Every Thursday he does a podcast on HoweStreet and on an ad hoc basis he contributes to many other websites, including UnionWatch.

California’s Public Employment Relations Board Thwarts Pension Reform

When it comes to state government, most people think of the governor and the members of the Legislature, those who are elected by the voters and do their business under the Capitol dome.

However, there is an entire class of faceless, unelected appointees to the state’s hundreds of boards and commission who determine whether or not state residents receive good services and a decent return for billions of dollars of taxpayer money.

These boards and commissions are generally tasked with oversight of various aspects of state management. However, some of these obscure agencies have proven to be nothing more than fronts for special interests.

One of the most egregious of these is the powerful Public Employment Relations Board (PERB) which is comprised of officials who behave as if they were a separate branch of California government. The members of PERB are currently taking aggressive action that could have a major negative impact on taxpayers in San Diego, San Jose, and potentially other communities.

PERB describes itself as quasi-judicial administrative agency charged with administering the collective bargaining statutes covering employees of California’s public schools, colleges, and universities, employees of the State of California, employees of California local public agencies (cities, counties and special districts), trial court employees and supervisory employees of the Los Angeles County Metropolitan Transportation Authority.

PERB is now using its tremendous clout in an effort to overturn landmark pension reform initiatives overwhelmingly approved by voters in the cities of San Diego (67%) and San Jose (70%). Board lawyers have filed complaints against the two cities claiming that public officials failed to bargain in good faith on pension issues with unions representing city employees, prior to the passage of the initiatives.

Voters in San Diego and San Jose acted proactively to avoid the fate of Vallejo, Stockton and San Bernardino, cities that have gone financially toes up because past city council members, elected with the support of government employee unions, agreed to lavish pension benefits that were unsustainable. With the future of their own cities on the line, citizens used the initiative process to approve reforms that would put pensions on an actuarially sound footing.

While the reforms approved by each community are slightly different, neither takes anything away from what employees have already earned. For public employees, having to contribute a little more to their own pensions, or to work several extra years for pension eligibility, is not a bad trade off if it means both cities will avoid bankruptcy and will be in a position to meet their future obligations to these workers.

However, Jerry Brown, who talks a good game of pension reform, is nonetheless beholden to the government employee unions for his repeat trip to the Governor’s office. Therefore, it should come as no surprise that he has used his discretion to stack the PERB with union hacks.

So now the dirty work to overturn pension reform at the local level is being done by PERB, and the governor will raise his hands, palms outward, and say, “Who me?”

With the huge public support for reasonable reform, isn’t it time for the governor and PERB to get out of the way and allow these pension changes that are fair to both employees and taxpayers to proceed?

Jon Coupal is president of the Howard Jarvis Taxpayers Association — California’s largest grass-roots taxpayer organization dedicated to the protection of Proposition 13 and the advancement of taxpayers’ rights.

To the Public Sector Unions, California is now the model for America

Ever since California’s voters approved the Prop. 30 sales-and income-tax increase on the November ballot, liberal commentators have been gloating about the resurgence of the Golden State after many years of predicted doom and gloom. Their evidence: Higher taxes seem to have cleared up the state’s budget deficits.

As New York Times columnist Paul Krugman wrote recently, “California isn’t a state in which liberals have run wild; it’s a state where a liberal majority has been effectively hamstrung by a fanatical conservative minority that, thanks to supermajority rules, has been able to block effective policy-making.”

Krugman blames the “radical right-wing” for California’s problems, claims that the school system – which captures 40 percent of the state’s general fund plus local bond initiatives – is insufficiently funded (thanks to those evil right-wingers again) and believes that all is well now that “Mr. Brown [is] free to push an agenda of tax hikes and infrastructure spending … .”

It’s odd to blame Republicans in a state where they have had only miniscule power for at least a decade and even weirder to suggest that California’s milquetoast GOP is beholden to the radical right. The real questions: Has California been saved? Are higher taxes, more regulations and massive debt spending on public works the answer for the rest of the country?

California still has a great future, but we need to be realistic about its problems rather than embrace this “California is resurgent” myopia from ideologues pushing a big-government, union agenda.

For starters, California is far from being saved. All that has happened is a temporary elimination of the deficit on paper. That can quickly change and the state is still living off of borrowed money. Longer term, many businesses will move. They’ll probably leave their headquarters here because this is where the CEOs like to live, but job growth and expansion will take place elsewhere. That’s already happening.

California’s dominant Democrats can now raise taxes, float debt and expand government at will. Republican “obstructionism” forced the state’s liberal leaders to control themselves, but that control is over. Every hare-brained idea will have at a high likelihood of passing. Democrats already are pushing a host of new taxes and proposals that will make it easier for local officials to raise taxes, also. So the taxing and spending has just begun.

Of course, to Krugman and other leftists, that’s the goal. As William Anderson of Frostburg State University in Maryland writes, “The fact that California has the highest taxes in the country, has a virulent anti-business governmental culture, and has rules that increase the cost of just about everything has nothing to do with it. After all, in Wonderland, higher costs translate into more spending, and more spending creates more wealth, so these ‘problems’ to which Krugman refers actually are opportunities for more government spending, which means a brighter future.”

Note that these massive infrastructure projects – most of which are needless – will saddle the state with a crazy level of debt. Gov. Jerry Brown, who during his first time as governor adopted a “small is beautiful” approach that halted infrastructure projects, is now pushing outrageously grandiose projects such as High Speed Rail, which is now even opposed by the author of the rail initiative because the project doesn’t live up to its original promise. Brown also is pushing a Delta tunnel project – something that will cost tens of billions of dollars to change the flow of the Delta to save a tiny endangered baitfish known as the Delta Smelt.

Krugman skirts over the obvious bigger issues. The state’s public schools are poor performers thanks to the lock that the California Teachers Association has over the school system. There used to be a time when liberal writers cared about poor kids, but no more. They rather defend the bureaucrats and the union officials that put their job protection above education.

Krugman claims that the right wing has invented a “new line of attack” – i.e., claiming that “liberal big spending and overpaid public employees were bringing on collapse.”

But look at bankrupt Stockton. That city is decrepit largely because it spent most of its money on absurd levels of compensation for its workers and could no longer provide crucial services. Stockton may have taken it further than most, but it exemplifies the situation throughout California, which faces a half-trillion-dollar unfunded pension liability according to Stanford (obviously run by right-wingers!).

Then there’s that little thing called freedom. California ranked as the 49th freest state in the union in a new Mercatus Center study. As the authors noted, “California not only taxes and regulates its economy more than most other states, but also aggressively interferes in the personal lives of its citizens.”

This isn’t to say that California is hopeless. I have no intention of leaving. But despite some good news on the revenue front, the state has abundant problems that need to be addressed. California may be a model for those who believe that most other states have not sufficiently copied the unsustainable welfare-state models of Western Europe, but it should offer warnings for everyone.

Steven Greenhut is vice president of journalism for the Franklin Center for Government and Public Integrity; write to him at steven.greenhut@franklincenterhq.org.

Judge Rules Stockton CA Bankruptcy is Valid, City Acted in Good Faith

Today a judge ruled that the city of Stockton California is indeed bankrupt and that the city acted in good faith. Creditors asked the judge to void the bankruptcy, saying the city could raise taxes instead.

I have been watching this story for a while. Here is some background on the Stockton bankruptcy as reported by Arizona Central.

 By outward appearances, Stockton, a city of nearly 300,000 on the Sacramento-San Joaquin River Delta, seemed in the mid-2000s to be emerging from decades of struggle.

After the city’s population grew by nearly 20 percent between 2000 and 2005 and real estate tripled in value, home prices plummeted 40 percent the following year before bottoming out at 70 percent.

Within two years, Stockton had accumulated nearly $1 billion in debt on civic improvements, money owed to pay pension contributions and the most generous health care benefits in the state — coverage for life for all retirees plus a dependent no matter how long they had worked for the city.

By 2009, the city began slashing its budget to stay afloat. The police department lost 25 percent of its 441 sworn officers and the fire department was cut by 30 percent. City staff was cut by 40 percent. The city general fund budget, now $155 million, has been cut by $90 million over three years.

The impacts were felt everywhere. Wells Fargo bank seized three parking garages when the city defaulted on the $32 million in bonds that financed them. Bond holders also seized the $40 million downtown high rise that was to become City Hall.

Last summer, the city began negotiating with creditors, a requirement before entering bankruptcy. Ten employee unions agreed to temporary wage and benefits cuts.

Retired employees have also been asked to pick up a larger share of health care premiums, closing a $540 million retiree health care cost liability.

But the holders of the biggest share of the debt were the companies that in 2007 insured nearly $165 million in pension bond obligations to allow the city a lower interest rate and make them stable for investors. They were unable to negotiate a deal and want the city to avoid bankruptcy, which would likely allow Stockton to avoid repaying the debts in full.

City Acted in Good Faith 

Today, Bloomberg reports a Judge Decided City Acted in Good Faith, Creditors Didn’t

 The judge in a trial over whether the city of Stockton, California, can stay in bankruptcy said he found that the city negotiated in good faith with its creditors, and that the creditors didn’t.

Creditors, including Assured Guaranty Corp. and Franklin Resources Inc. (BEN) had argued that Stockton didn’t qualify for bankruptcy because the city isn’t truly insolvent, and that its leaders didn’t negotiate a potential settlement in good faith.

Negotiation is a “two way street,” said U.S. Bankruptcy Judge Christopher M. Klein in Sacramento, addressing creditors who he said didn’t negotiate in good faith. “You cannot negotiate with a stone wall.”

In the course of the hearing today, Klein has also said that the city’s witnesses were credible and that the city was “by any measure” insolvent when it filed for protection from creditors.

The city is slated to stop paying for retiree health care on June 30 as part of a spending plan the City Council approved in June, citing a $417 million unfunded liability. The benefit had allowed workers employed as little as a month to receive city-paid health coverage for life, for both the employee and his or her spouse, Bob Deis, the city’s manager said.

Stockton’s unemployment rate was 18.7 percent in January, almost twice the state jobless rate of 9.8 percent, according to the California Employment Development Department. The national unemployment level that month was 7.9 percent, according to U.S. Labor Department data.

This was a good ruling. The city is of course bankrupt and taxpayers should not have to pay for it more than they already have.

Once again the main problem was untenable salaries for public unions and city workers. The housing crash simply brought the crisis to a head sooner.

In addition to reduced healthcare benefits, the pension plan should be scrapped as well, but don’t expect city officials to cut their own throats no matter how much they deserve it.

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. Every Thursday he does a podcast on HoweStreet and on an ad hoc basis he contributes to many other websites, including UnionWatch.

Union Greed Drives California to Bankruptcy

Few non-local people pay much attention to the goings-on in Stockton, a hard-pressed Gold-Rush-era industrial city of 300,000 that sits in the agriculturally rich San Joaquin Valley at the eastern edge of the California Delta. But bondholders, taxpayers and government officials throughout the country will be listening to U.S. Bankruptcy Judge Christopher Klein’s expected ruling on Monday as he decides whether the city may remain in bankruptcy and pursue a plan that stiffs its bondholders.

If Klein sides with the city, then municipalities will face a disturbingly low bar for pursuing bankruptcy. They will be emboldened to choose Stockton’s course — i.e., using bankruptcy as a strategic policy tool to offload debts without having to confront the main reasons that they went bankrupt in the first place, such as lush pay and pensions. Bankruptcy will no longer be a policy of last resort. This should have an impact on bond markets.

If the city wins the case, argued March 25-27 in the Sacramento federal courthouse, then the public-sector unions and the scandal-plagued California Public Employees Retirement System are right. No matter what problems befall a city, public services and taxpayers suffer first while union members and public retirement systems are protected.

Granted, no one should feel too sorry for the lenders (and their insurers) who provided the pension-obligation bonds to the city. They knew the risks when one lends money to a city — especially one controlled by the unions. But their argument is strongest. A city shouldn’t use bankruptcy as a means to get rid of uncomfortable debts. It should use this tool only when it has slashed its costs but still can’t get out from under the load.

On Tuesday, a Stockton management consultant called at the trial stated that the city would have a $100 million budget deficit in a decade if it does not take the bankruptcy route, in an attempt to show that it had no choice but to declare Chapter 9. But how hard has the city tried to deal with its debts?

As the attorney for the bond insurer noted in his closing comments on Wednesday, the city intended, from the outset of this process, to shortchange the bond holders. It has refused to address its biggest debt—the payments that it owes to CalPERS to pay for its pension obligations. It only modestly pulled back compensation from rates far above the market to somewhere near the average for public-sector workers in California.

Essentially, the city plan has put pension debt off the table, arguing that pension payments and benefits cannot legally be touched. A bankruptcy would be the place to challenge that assumption, but Stockton officials have no interest in doing so, figuring it’s easier to go after Wall Street than the unions. If Stockton gets its way, then cities can spend anything on pensions and there is no way to ever get out from under that debt.

Some of the most telling testimony came Wednesday morning, when bond-insurer Assured Guaranty’s attorney Guy Neal questioned city councilmember Kathy Miller about a July 2012 video that explained the fiscal situation to city residents. Here are some of her statements from the video:

In the 1990s, Stockton granted its employees some of the most generous and unsustainable labor contracts in the State of California.… Safety employees could now retire at the age of 50.… Many safety retirees today earn 90 to 100 percent of what they made when they were still on the job.

That’s common. But Miller noted that:

Stockton went even further than most other cities and granted things like unlimited vacation and sick time that could be cashed out when an employee retired, and added pay categories for almost everything imaginable.… Our public safety employees were costing us on average more than $150,000 a year each. That’s three times more than most of us in Stockton make in a year.

She described the “Lamborghini” health plan the city’s employees received:

This was free medical care for a retiree and a dependent for the rest of their lives. No co-pays, no generic requirements, no HMOs, and no premiums. See any doctor, stay in any hospital, purchase any drug, and just send the bill to the city of Stockton.

Absurd pay and benefits are common, and not just in Stockton. San Francisco Chronicle columnists Matier and Ross revealed recently that an Alameda County executive receives a $423,000 a year pay package for life. Compensation for California firefighters is in the $175,000 a year range. Some Newport Beach lifeguards receive $200,000 a year pay packages. As a friend of mine joked, revolutions have been fought over lesser instances of public pilfering.

Stockton pulled back on some abuses, but has left the main problem in place. Why is it OK that Stockton residents have to put up with closed parks, reduced policing and other cutbacks to protect outrageous pension and pay levels?

Currently, Stockton leaders are floating a tax increase plan to fund police officers. But money is fungible so this should be viewed as a tax designed to pay for past boondoggles. Whatever the court decides, it’s time for the public to stand up to these misshapen priorities.

About the Author:  Steven Greenhut is vice president of journalism for the Franklin Center for Government and Public Integrity. Previously, Greenhut was the founding editor-in-chief of Cal Watchdog, an independent, Sacramento-based journalism venture providing original investigative reports and news stories covering California state government. Greenhut was deputy editor and columnist for The Orange County Register for 11 years. He is author of the book, “Plunder! How Public Employee Unions are Raiding Treasuries, Controlling Our Lives and Bankrupting the Nation.”

The Bankruptcy Tsunami

First Vallejo, then Stockton, then Mammoth Lakes and now San Bernardino.  As Orange County Supervisor John Moorlach told Bloomberg News, the bankruptcy dominoes are starting to fall. One California city after another — following a decade-long spree of ramping up public-employee pay and pension benefits, as well as redevelopment debt — are becoming insolvent.

Not that the state’s legislators have anything constructive to offer. California’s Democratic leaders are not only unwilling to rein in the costs of benefits for their patrons, the public-sector unions, but they have been erecting roadblocks to those localities that want to fix the problem on their own. Yet all the political blockades in the world cannot fix the basic problem of insolvency.

Stockton negotiated the new process created by a state law requiring a 60-day period of negotiations before filing for Chapter 9 bankruptcy. That period is over and the city – a hard-pressed port on the edge of the California Delta – has become the largest city in the country to pursue municipal bankruptcy. The cause was a pension system eating up 30 percent of the budget, an absurdly generous retiree medical program that provided lifetime benefits after working for the city for a short period, and excess bond debt for pension obligations and redevelopment projects.

Soon after, Mammoth Lakes decided to pursue bankruptcy. That city’s problem came after it lost a judgment in a development case. Although not tied to public-employee compensation, the situation was caused by city officials who prefer to play developer than tend to the nuts-and-bolts of city government – a long-term problem in that eastern Sierra vacation town. In 1996, Mammoth Lakes lost a court case after it declared its downtown area blighted because of excess urbanization, in a ruling the judge said exemplified the misuse of redevelopment power.

The latest city to declare bankruptcy is San Bernardino, which has declared an emergency situation that will allow it to evade the negotiation period mandated by state law. The city simply doesn’t have the cash to keep operating. As Bloomberg reported, “San Bernardino and its agencies have more than $220 million of debt, including $48.6 million of taxable pension-obligation bonds, according to financial statements.” Pension-obligation bonds are used by cities to pay ongoing pension expenses, yet San Bernardino’s problems show that a city cannot borrow its way out of debt.

Other big cities, including Los Angeles, are talking more openly about the bankruptcy option. Not long ago critics who mentioned the B-word were considered Chicken Littles.

The latest talking point is that these cities couldn’t control what happened to them – that they were victims of the foreclosure crisis that rocked the inland areas where housing construction boomed during the housing bubble.

Foreclosures

The Riverside Press-Enterprise reported: “The city of San Bernardino’s financial woes are a directly correlation to a torrent of foreclosures in the Inland area of Southern California, the national foreclosure tracking firm RealtyTrac said Thursday. ‘Property taxes plunged in San Bernardino because of an avalanche of foreclosure activity during the recent housing bust,’ said RealtyTrac vice president Daren Blomquist.”

There’s no doubt San Bernardino and Stockton — Ground Zero for the housing crisis — suffered from the problem described above. But what did those cities do with the rapid increase in property tax revenues during the price run-up? We know – they squandered it on increased compensation for government employees, on redevelopment projects and other questionable spending deals. They squandered the money when it came flowing in, now depict themselves as victims of circumstance when the funds dried up.

The real culprit, as I argue here in City Journal, is foolish decision making. Stockton, for instance, refused to take advantage of an exemption in prevailing wage laws – something that could have saved it money but would have angered the powerful unions.

The housing bubble hit the hardest in cities inland from the growth-controlled major metropolitan areas. When the prices went up in Los Angeles and San Francisco, developers moved inland, where it was easier to get the permits necessary to respond to the demands of the marketplace.

Coastal cities

But even coastal cities are struggling. Los Angeles is not a victim of the foreclosure crisis. Pension costs in San Jose — where the housing market has rebounded thanks to a healthy tech-based economy — rose 350 percent in 10 years and now consume 20 percent of the general-fund budget. That city passed pension reform on the November ballot to stop the fiscal bleeding.

Here Joe Mathews debunks San Bernardino’s allegations that the state is to blame for its fiscal problems: “Local elected officials who complain about a lack of state money have things backwards. The state of California is relatively spare in its spending, compared to national averages. California’s local officials are, by contrast, big spenders, at or near the national lead in compensation for local workers, especially law enforcement.”

There’s no doubt the problem is fiscally profligate local governments, who busted the bank on public-safety pay and benefit packages and now are looking to cast blame anywhere they can.

Bankruptcy is not a great option but at least it gives cities a chance to get their house in order and start fresh. Unfortunately, Vallejo and Stockton refused to tackled existing pension debt in their bankruptcy plans. Orange County emerged from bankruptcy in the 1990s in better shape than ever, but as Chris Reed explained for CalWatchdog, subsequent boards of supervisors then began spending like crazy on public-sector compensation.

Bankruptcy cannot stop future officials from wasting the taxpayer dollar. But when there’s no money, there’s nothing left to do. In Scranton, Pa., a judge issued an injunction to stop the mayor’s plan to begin paying all city employees minimum wage. But there’s no money left to pay any more than that, he said. The city will gladly pay more as soon as it has the cash to pay it.

Only when the money runs out will cities find the necessary solutions. That’s perhaps the saddest commentary on the situation in California cities these days.

Steve Greenhut is vice president of Journalism for the Franklin Center for Government and Public Integrity.

Stockton CA Files Bankruptcy, Largest City Ever

The city of Stockton, California, is Bankrupt. It has stopped making bond payments and will become the largest city in the US to seek protection via US bankruptcy law.

The bankruptcy was inevitable.

California law requires blame to be assessed. To be sure there is plenty of blame to go around.

Here are a few paragraphs from the LA Times that explain the setup.

How Stockton found itself so mired in debt can be seen everywhere in the city’s core. There is a sparkling marina, high-rise hotel and promenade financed by credit in the mid-2000s, mere blocks from where mothers won’t let their children play in the yard because of violence.

During the economic boom, this working-class city with pockets of entrenched poverty tried to reinvent itself as a draw to Bay Area refugees and a popular site for conventions. It offered generous city employee pension plans and benefits.

When the bust came, few places fell as hard as Stockton. The city has the second-highest rate of foreclosures in the country and the second-highest rate of violent crime in the state.

The city made $90 million in drastic cuts from the general fund in the last three years, including reducing the Police Department by 25%, the Fire Department by 30%, and cutting pay and benefits to all employees. There is a state investigation into whether Stockton’s financial devastation was entirely due to shortsighted optimism or if there was corruption. The state mediation law requires assigning blame.

Public Union Pensions, a Death Trap for Cities

I added emphasis to the two sentences that explain what really happened and where the blame will be placed. Sure, Stockton politicians made gross errors in its budget. Yet, that is not what did Stockton in.

The thing Stockton could not  correct over time is ever-escalating pension promises and public union salaries. Union pensions wrecked Stockton. The only way to escape the death-grip of inane pension promises is bankruptcy.

Things like parks and marinas are one-time foolishness that can be corrected over time.

Ever-escalating public union wages and pension costs cannot be corrected over time (Indeed they are 100% guaranteed to get worse). Prevailing wage laws that force cities to overpay for every city project cannot be undone over time either.

Both have to be fixed big-bang. The former by bankruptcy, the latter by brute political force, preferably at the national level.

Scapegoating Short-Sighted Optimism

Blame will not be placed where it most belongs. Here is the key sentence: “There is a state investigation into whether Stockton’s financial devastation was entirely due to shortsighted optimism or if there was corruption.

Note the two choices.

Political pandering by politicians to unions is not on the list. Nor are pension plans. Nor are public unions salaries.

$51.71-an-Hour Summer Job Program

Let’s turn our focus to New York for a second, but the problem described by the New York Post applies to California, New York, and every prevailing wage state. If federal funds are involved, it applies to every state.

Please consider NY’s $51.71-an-Hour Summer Job Program

The small Hudson Valley city of Poughkeepsie is now home to some of the best-paying summer jobs ever: $51.71 an hour.

That’s right: $51.71 an hour.

The project started off as perfectly sensible. The work involves restoring Fallkill Creek, damaged in last summer’s post-Hurricane Irene flooding. To get the job done and put up to 150 unemployed young people to work, the state Labor Department tapped a federal storm-cleanup grant.

Clearing debris and lifting heavy objects isn’t easy, but why pay temporary manual laborers the same hourly rate as a skilled employee in a $100,000-a-year full-time job?

The ultimate source of funding for the Fallkill cleanup is a federal National Emergency Grant, whose terms require paying wages at the highest of the federal, state or local minimum wage or at the comparable rates of pay for individuals employed in similar occupations by the same employer.

The state Labor Department decided that this meant the prevailing wage for public-works projects. But “prevailing wage” is a term of art that actually means a pay rate based on collective-bargaining agreements between labor unions and private employers.

For the Mid-Hudson region, the prevailing hourly rate for laborers comes to $51.71 — $30.71 in wages plus $21 in benefits. But the temporary workers on the Fallkill won’t be union members, so they’ll get the entire amount as a wage, the Labor Department ruled.

If not for the prevailing wage, the Fallkill grant could’ve provided seasonal employment for 1,000 young people at the minimum-wage rate of $7.25 an hour — which might have gotten the job done sooner, to boot.

Or the state might have employed the same number of people, paid them $10 an hour and saved taxpayers $219,000 a week.

The project illustrates how government all too often works — that is, as wastefully as possible. It also stands as a testament to the power of unions in dictating government wage rates.

Who Benefits From This?

Bear in mind, that government spending adds to GDP, by definition. It does not matter how little product is actually produced, or even if the results are negative.

Fixing 1 bridge instead of 10 adds as much GDP if the amount spent is the same.

Want to create 1,000 jobs for the summer or 140? If you are one of the politically well-connected the answer is 140.

Want to bet who got those jobs? I bet is sons and daughters of the politically well-connected. I would like to see a report.

Let’s return our focus to California.

University of California Faces Mounting Pension Costs

Here is an interesting article that came my way a few days ago: University of California faces mounting pension costs.

The cost of pensions and retiree health benefits are soaring at the University of California, increasing pressure to raise tuition and cut academic programs at one of the nation’s leading public college systems.

The 10-campus system is confronting mounting bills for employee retirement benefits even as it grapples with unprecedented cuts in state funding that have led to sharp tuition hikes, staff reductions and angry student protests.

The UC system, including medical centers and national laboratories, is scrambling to shore up its pension fund as it prepares for a wave of retirements and tackles a roughly $10 billion unfunded liability.

“The regents made a serious error and the Legislature made a serious error by not putting money aside for 19 years while accumulating this obligation,” said Robert Anderson, a UC Berkeley economist who chairs the system’s Academic Senate. “Now we have to pay for it.”

Notice the self-serving attitude and blame-placing by Robert Anderson, essentially whining that taxpayers did not dole out enough money to give him his expected benefits.

What benefits are we discussing? The article explains.

The UC system faces spiraling pension costs for 56,000 current retirees and another 116,000 employees nearing retirement.

As of May, there were 2,129 UC retirees drawing annual pensions of more than $100,000, 57 with pensions exceeding $200,000 and three with pensions greater than $300,000, according to data obtained by The Associated Press through a state Public Records Act request.

The number of UC retirees collecting six-figure pensions has increased by 30 percent over the past two years, according to Californians for Fiscal Responsibility, an advocacy group that has analyzed UC pension data.

Topping the list is Marcus Marvin, a retired professor of dentistry and public health at UCLA, who receives an annual pension of $337,000.

If UC President Mark Yudof, 67, serves for seven years, he would receive an annual pension of $350,000 — in addition to regular benefits he accrues through the UC Retirement Plan, according to university documents.

The university caps employee pensions at the IRS limit of $250,000, but that ceiling does not apply to the “supplemental retirement benefits” promised to Yudof.

With inane pension benefits like that, is it any wonder the system went unfunded?

Those benefits cannot and will not be paid. The system is bankrupt. Sadly, young kids graduating from college tens or hundreds of thousands of dollars in debt are bankrupt as well. However, student loans cannot be discharged in bankruptcy.

Students are the one who have paid the highest price for our corrupt education system. Nothing is done “for the kids”. It is all done for grossly overpaid administrators and public union employees.

School tuition has to be ridiculously high to support $350,000 a year pension plans for life.

What’s the Solution?

  1. The immediate solution is bankruptcy. Expect to see more cities file. However, longer-term structural problems must also be addressed.
  2. Untenable pension contracts need to be tossed out by the courts and benefits reduced. Every taxpayer not on the public dole should cheer bankruptcy, not resist it.
  3. End defined benefit pension plans for public union workers.
  4. End collective bargaining for public union workers. Governor Scott Walker in Wisconsin has proven that can be done.
  5. Scrap Davis-Bacon and all state prevailing wage laws.
  6. Institute national right-to-work laws.
  7. Merit pay for teachers
  8. More competition from accredited online schools to drive education costs way down
  9. Scrap student loan programs that only benefit administrators and educators, not the kids.

It’s time to stop overpaying for all government-sponsored services including but not limited to police, fire, prison-workers, and education. The vicious, self-serving grip unions and their political supporters have on this nation has to end. Governor Walker partially paved the way in Wisconsin. Other states must follow through. At the national level, we desperately need right-to-work laws while ending prevailing wages.

About the author: Mike “Mish” Shedlock is a registered investment advisor representative for Sitka Pacific Capital Management. His top-rated global economics blog Mish’s Global Economic Trend Analysis offers insightful commentary every day of the week. He is also a contributing “professor” on Minyanville, a community site focused on economic and financial education. Every Thursday he does a podcast on HoweStreet and on an ad hoc basis he contributes to many other websites, including UnionWatch.

Fiscal Mess Coming to City Near You – Thanks to Public Sector Unions

Stockton, Calif., a hard-pressed industrial city of nearly 300,000 people in the agriculturally lush Central Valley 80 miles east of San Francisco, is grabbing national headlines because it might become the largest U.S. city yet to enter Chapter 9 bankruptcy.

First, it must go through a 90-day mediation process mandated by a new California law designed to put the brakes on an expected wave of municipal bankruptcies. But the city is out of cash, and other cities aren’t far behind.

Stockton’s situation epitomizes the reality of local government in California today: City governments don’t exist to provide services to the public, but function mainly to dispense high salaries and pensions to the people who work for the government.

Ninety-four of Stockton’s retirees, for instance, receive six-figure pensions, placing them among a rapidly growing list of 15,000 California public retirees in the $100,000 pension club.

No wonder that 81 percent of Stockton’s general-fund budget goes to pay for employee costs, including a generous health care plan that pays the entire medical costs for city employees and spouses for life.

As is typical in California, the city’s police and firefighters can retire at age 50 with 90 percent of their final year’s pay, cost-of-living adjusted — and that’s before the pension-spiking gimmicks that often push their retirement pay above the pay they received while working.

To make ends meet, the city floated $124 million in pension-obligation bonds, which is the equivalent of taking out a home-equity loan to pay the current mortgage.

These Ponzi schemes, as the new city manager referred to them, cannot go on forever, even in California, which prides itself on its exceptionalism.

For all these costs, one would think that Stockton residents are receiving gold-plated services: but alas, the city is decrepit. It’s a historic city with grand old neighborhoods and a prestigious university, but one finds trash everywhere, an unresponsive city government that closes its offices every other Friday (a common employee benefit), a soaring crime rate, and empty buildings throughout downtown — despite tens of millions of taxpayer dollars to finance a minor-league baseball stadium and urban renewal projects.

Democratic leaders insist that all is well and that right-wing union haters are behind the press attention. But running out of money focuses the mind. The policies Stockton has embraced are not exceptions.

Of late, Los Angeles officials have been mentioning the b-word — bankruptcy — and problems are brewing in wealthy cities as well as poorer ones. It’s not just California, either, as cities including Providence, R.I., and Harrisburg, Pa., struggle to pay their bills.

Employee expenses are soaring, and we’re well past the point where a rebounding economy will fix everything. It’s not just a question of finances, but of the quality of public services.

Some liberal Democrats, such as San Jose Mayor Chuck Reed and San Francisco Public Defender Jeff Adachi, understand that unless pensions and overall public-employee costs are soon reduced, the state’s public services will continue to erode.

Stockton is a perfect example: the police union there would rather see massive layoffs than negotiate reductions in pay and benefits, even as the city struggles with a record-high murder rate.

Stockton is in worse financial shape than most cities, but anyone who thinks it’s an aberration hasn’t been paying close attention to their own city’s wastrel ways.

Expect other dominoes to start falling unless politicians of both parties confront the unions that care so little about the public or the cities for whom their members supposedly work.

Steven Greenhut is vice president of the Franklin Center for Government and Public Integrity, a regular contributor at PublicSectorInc.org, and a contributing writer for City Journal California.

Stockton Nears Bankruptcy Because of Untenable Union Benefits

Bondholders of Stockton, California debt are about to be punished as City Manager Takes Steps Toward Bankruptcy.

Stockton, California, may take the first steps toward becoming the most populous U.S. city to file for bankruptcy because of burdensome employee costs, excessive debt and bookkeeping errors that misrepresented accounts, city officials said today.

The Stockton City Council will meet Feb. 28 to consider a type of mediation that allows creditors to participate, the first move toward a Chapter 9 bankruptcy filing under a new state law. The council will also weigh suspending some payments on long-term debt of about $702 million, according to a 2010 financial statement.

“Somebody has to suffer and in this case the city manager has decided it should be the bondholders who suffer,” Marc Levinson of the Sacramento-based law firm Orrick, Herrington & Sutcliffe LLP, which represents the city, said at a news briefing at Stockton’s City Hall today.

Stockton, a farming center about 80 miles (130 kilometers) east of San Francisco, has fought to avert bankruptcy by shrinking its payroll, including a quarter of the roughly 425- member police force. At 292,000, the city has more than twice as many residents as Vallejo, California, which became a national symbol for distressed municipal finance in 2008 when it sought protection from creditors.

Stockton’s council will be asked to reduce the current budget by $15 million because of newly uncovered accounting errors and fiscal mismanagement that have left the city almost broke, City Manager Bob Deis told reporters. To keep the city solvent through the end of the fiscal year June 30, the City Council will be asked to default on $2 million of debt payments owned to bond holders.

“Our employees and the citizens of Stockton who receive city services have borne the entire brunt of our restructuring efforts so far and now it’s time for others to do the same,” Deis said in a report to the council. “We can’t ‘grow our way’ out of the problem and no amount of forward looking financial planning will properly fix it.”

Deis said the city is facing a $20 million deficit in the next fiscal year. Expanded retiree health insurance commitments in the 1990s have left the city with a looming $450 million unfunded liability.

“Next year, we expect to pay more for retiree health insurance than for our current employees,” Deis said, likening the promises to a “Ponzi scheme.”

A state law backed by unions and passed last year in response to Vallejo’s bankruptcy requires cities to work with a “neutral evaluator” for at least 60 days before seeking bankruptcy court protection. The process is similar to mediation and gives creditors a right to participate. It can be bypassed if the city declares a fiscal emergency, according to the law.

Entering the 60-day mediation process could cause a “run on the general fund” by vendors, bankruptcy attorney Lee R. Bogdanoff of Klee, Tuchin, Bogdanoff & Stern LLP, the firm that filed the biggest municipal U.S. bankruptcy on behalf of Jefferson County, Alabama, said today in a telephone interview.

Once again we see fraud and untenable union benefits at the heart of the problem. The bondholders should suffer, and so should the unions. Those contracts should be wiped out in bankruptcy.

I commend the actions of the city manager to not tax its citizens to death to meet ridiculous, probably fraudulent, union benefits that should never have been granted.

Chapter 9 bankruptcy was established to deal with these situations. Unions better get used to it, because more actions like this are coming.

About the author: Mike “Mish” Shedlock is a registered investment advisor representative for Sitka Pacific Capital Management. His top-rated global economics blog Mish’s Global Economic Trend Analysis offers insightful commentary every day of the week. He is also a contributing “professor” on Minyanville, a community site focused on economic and financial education. Every Thursday he does a podcast on HoweStreet and on an ad hoc basis he contributes to many other websites, including UnionWatch.