California’s government unions are nothing like private sector unions. Their bosses are selected via elections where these unions are the dominant campaign contributors. They get their money through compulsory taxes and therefore don’t have to run efficient operations. They run the machinery of government which lets them intimidate their opponents and act as gatekeeper to business interests. Their agenda – more government workers and more pay and benefits for government workers – is intrinsically at odds with the public interest, which must focus on achieving an optimal government, not bigger government for its own sake.
For these reasons, government unions are not only drivers of government inefficiencies and financial challenges, they discredit government itself. In three parts – local, state, and federal – here are ways that government unions have taken away much of the credibility once enjoyed by government agencies, and the good people who staff these agencies.
Part One – Local Government Credibility
A friend of mine just got a ticket for making a right turn on a red light. They weren’t pulled over and given the ticket. They had no idea they’d committed a traffic violation. The ticket arrived in the mail – complete with photos and payment instructions. Apparently this driver, who had even come to a complete stop before turning, encountered one of the rare intersections in California where it is illegal to turn right at a red light.
The fine? $546 before the cost of traffic school, which itself represents nearly a full day of what is basically incarceration.
Another California friend just added on to their house. It was a straightforward bit of construction that involved converting a basement to livable space by adding plumbing, electricity, insulation and flooring. Getting permits, however, was anything but straightforward. The rules were almost impossible to understand, and even the clerks and inspectors provided contradictory instructions. Getting the permits took several months, and cost nearly $20,000. Just the permits.
Stories of excessive fines and fees abound. Yet another California friend wanted to build a granny flat, or “Casita” on his property, which occupies several acres in a rural area. Once he realized that acquiring the permits would add as much as $50,000 in costs, literally doubling the price to do the work, he changed his mind.
Wealthy people are indifferent to these inconveniences. It is the law abiding middle class that bears the burden of excessive traffic fines and excessive fees for building permits.
Is any of this in the public interest? Or is some other motive at work?
Just for the sake of argument, let’s suppose we could be just as safe in our homes and neighborhoods, and could deter just as much poor driving, with much lower fees and fines. What’s going on?
The Real Reason Taxes and Fees Are Always Increasing
A few weeks ago, in a post entitled “For Nov. 8th: $32B in Local Borrowing, $2.9B in Local Tax Increases,” we reported on just how much more revenue California’s local cities and counties are asking their residents to approve in this election. In that same article, we presented data that explains the insatiable desire for revenue: Underfunded retirement pensions for government workers. California’s state and local governments are underfunding their pension systems by at least $15 billion each year. Here is the relevant table from that post:
California State/Local Pension Funds Consolidated
2014 – Est. Funding Status and Required Contributions at Various ROI ($=B)
Now if public employee pensions were the “modest” benefits that spokespersons for the government employee unions and the pension systems say they are, then taxpayers ought to willingly pay more to fund them. But they aren’t. In California, the average retirement benefit package for a retiring state or local government worker with 30 years of service is worth over $70,000 per year. The average Social Security benefit for private sector retirees with 45 years in the workforce is under $20,000.
How Generous Pensions Alienate Public Servants from the People They Serve
It is difficult to overstate the ramifications of this disparity. Government workers do not have to save money for retirement. If they’ve worked a full-term career, their pension will be enough for them to even continue to pay a mortgage when they’re retired. If they are at all responsible with their budget, their pension will be enough for them to actually save money during their retirement.
Conversely, private sector workers have to prepare for retirement by saving money in a 401K plan, where if the investment earnings fall short in a market downturn, they can go broke, because Social Security will barely pay enough to cover medicare premiums and property taxes. Meanwhile, public sector pension funds claim they can earn 7.5% per year “risk free,” because whenever the funds earn less than that, they increase taxes and cut public services to make up the difference.
The idea that 7.5% annual investment returns are “risk free” is an insulting travesty to anyone actually trying to build their own retirement fund. A “risk free” treasury bill pays about one-third that rate. For a private sector worker to collect an inflation-hedged income of $70,000 per year they would have to save at least $1.5 million in their 401K – and they would still be subject to the vagaries of the investment markets and the economy.
When public sector agencies and the unions that represent their workers pass laws that elevate fines to punitive levels, when they make the process to engage in home improvement an expensive nightmare, and when they raise taxes, they claim they are acting in the public interest. But they’re not. They are acting to preserve their status as an economically privileged elite, one that has less and less in common with the average citizen they supposedly serve.
And when these facts are obvious – that government workers are granted a degree of retirement security that is out of reach to all but the wealthiest private citizens – the credibility of public service is undermined. Suddenly there is a new filter, a compelling filter, through which all public sector proposals must be evaluated: Is this tax just to pay more money to the pension funds? Because if every state and local tax increase that is on the ballot this November is passed, it will barely, barely cover the annual shortfall of California’s state and local pension funds under the best set of assumptions.
Part Two – State Government Credibility
Oppressive taxes, excessive fines, and punitive fees are all the direct result of unsustainable pension costs. But something much bigger is at work – because these pensions were “negotiated” by government unions who, just in California, collect and spend over $1.0 billion per year. That kind of money buys a lot of politicians, who support not only unsustainable pensions, but bigger government at all levels, because that suits the agenda of government unions.
In this context, consider these policies that are driving middle class families and businesses small and large out of California:
(1) Land use restrictions elevate the price of 1,200 square foot homes to over a million dollars – resulting in more property tax revenue, and more asset inflation to buttress the real estate portfolios of the pension funds.
(2) Electricity rates soar to $.40 per kilowatt-hour or more despite a global energy glut – resulting in higher absolute profits (the percent is fixed by law) for the public utilities, funding the unionized utility worker pensions which are nearly as generous as public sector pensions.
(3) Decrees and ordinances restrict urban water use, causing dying trees, dead lawns, and short showers – so the tax revenue that might have been spent on upgrading water infrastructure can instead be used to over-hire and over-compensate state and local government workers.
(4) Drivers contend with the most pitted, congested roads in the nation, where road improvements are deliberately neglected so people will ride trains that take three times as long to get them places – so the tax revenue that might have been spent on upgrading our roads is instead used to over-hire and over-compensate state and local government workers.
The Environmentalist Twist
To justify all of the above, the union propagandists, abetted by their allies in the Silicon Valley (who push laws to mandate all major appliances are internet enabled and connected to smart meters so users can be punitively billed if they use them at the “wrong” times) and on Wall Street (where the government pension funds are the biggest players), invoke environmentalist values.
So come to California, where the unionized public sector has redefined their jobs to incorporate “global warming mitigation” so they can get their hands on the carbon auction emission proceeds. Transit workers qualify – they take cars off the road. Teachers qualify – they educate students to conserve, etc. Police and firefighters qualify – they contend with more crime and more fires in hot weather. Code inspectors qualify – they enforce new environmentalist inspired mandates. And planning commissions qualify their entire agencies by zoning ultra high density. In California, this cabal of government unions, Silicon Valley “entrepreneurs,” and powerful financial interests have conned an entire population into not only submitting to this nonsense, but militantly opposing anyone who questions it.
And while ordinary Californians dig deep to pay for these supposedly beneficial policies, genuine, tragic, urgent environmentalist challenges across the world are unanswered. Orangutans are incinerated in Borneo to pay for “carbon neutral” biofuel plantations on an immolated landscape. Asian trawlers strip-mine the ocean for protein. Terrorist gangs finance their weapons purchases with elephant and rhino ivory. Women spend their lives stripping the hillsides to burn wood in smoke-filled kitchens because natural gas development is taboo.
Part Three – Federal Government Credibility
At the national level, the big government agenda of government unions aligns perfectly with the interests of monopolistic corporations. The American taxpayer doesn’t just pay for a bloated, overpaid, inefficient and totally self-interested unionized public sector. They pay for global military security, medical and pharmaceutical research and development, and bleeding edge environmental mitigation and clean energy technologies. As a percentage of GDP, no other nation imposes nearly such a burden onto their citizens in these three areas.
If government policies – local, state and federal – are going to ask so much of private citizens, then public servants should have to follow the same rules and work under the same set of incentives. Otherwise public service is an oxymoron, and public servants have no credibility. There are clear solutions, but they aren’t easy. First, abolish government unions, because civil service law already provides them adequate protection as employees. Next, enroll every government employee in Social Security instead of defined benefit pensions. Only then will government employees and private sector workers face the same economic issues, and search for better answers together.
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Ed Ring is the VP of Policy Research for the California Policy Center.
There is a clamor in Sacramento for “tax reform.” But for every political pundit, politician and bureaucrat in the room, there is a different definition of “tax reform.”
For fiscal conservatives, tax reform means tax cuts. The State of California takes too much of our money now and this heavy tax burden unquestionably hurts working families and hinders economic growth.
But for self-styled “progressives,” tax reform means even more tax hikes to feed an ever growing government and the demands of tax hungry special interests.
Because these two visions of “tax reform” are polar opposites, is it even possible to agree on anything related to changing California’s tax system? Surprisingly, the answer is yes.
Both conservatives and liberals have at least acknowledged that California government is too reliant on revenue that fluctuates wildly. In other words, there is some agreement that the mix of things that are taxed might be altered so that tax revenue is more predictable.
The desire to address revenue volatility is understandable. Indeed, a commission was created by former Governor Schwarzenegger to address this very issue. Unfortunately, the commissioners themselves could not agree on a solution.
Now, newly elected state Senator Robert Hertzberg has proposed that California start taxing services, not just sales of physical goods. The reasoning behind Senate Bill 8 (SB8) is that services make up a much larger slice of today’s economy than in the past and in order to have a “balanced” tax system, we should consider expanding the tax base to things like car repair, legal services, kids piano lessons and dry cleaning.
But taxing services is a bad idea for California. First, such a levy would have a depressing effect on California’s service economy. It is a simple fact of economics that when you tax something you get less of it.
Second, and somewhat related to the first, is the ability to avoid the tax by exporting the service. For example, one can avoid California’s tax on accounting services simply by hiring an out of state accounting firm. And speaking of avoiding the tax, unlike a sales tax where there is an inventory of physical goods that can be tracked, it is much more difficult to ensure compliance with a tax on services. California already has a massive problem with tax avoidance due to the huge percentage of the economy that is “underground.” A tax on services would drive even more economic activity into the shadows.
Some respected tax experts have not rejected out of hand the notion of extending a tax to services but only if done incrementally and in a manner that does not result in a net tax increase. And here is where the Hertzberg proposal is especially flawed. Rather than extend the tax to services and lowering the tax rate on both sales and services so the proposal is “revenue neutral,” SB 8 has no provision for lowering the rate. So what is the tax hit on Californians? It is estimated to be $10 billion annually.
Last week, a Wall Street Journal article noted how several states in America are now cutting taxes to stimulate economic growth and provide needed relief to their citizens. But the ruling class in California apparently wants to head in the opposite direction.
Taxpayer advocates should always be prepared to discuss legitimate tax reform. But, at this point, Senate Bill 8 doesn’t qualify.
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
Spokespersons for California’s government employee unions perpetuate a myth of staggering absurdity and tragic consequences – that they are protecting working Californians from wealthy corporations and wealthy individuals.
The reality is that government employee unions are focused on one thing: Expanding government employee pay, benefits and privileges. This requires expanding government, and that priority comes in front of everything else, including the cost to society at large. Expansive environmentalist regulations have made prices in California for housing and utilities the highest in the nation. Expansive compensation packages for unionized government workers have resulted in chronic deficits and accumulating state and local government debt that by some measures already exceeds $1.0 trillion. Expansive taxes and regulation have made California consistently rank as the most inhospitable place in the nation to run a small business.
Exactly how does any of this protect the poor from the wealthy?
It doesn’t, of course. But the deeper story is how government employee unions are not only failing to “protect” California’s aspiring multitudes, but are in fact enabling the wealthy special interests they claim to protect us from. The most entrenched and massive corporate entities are not harmed by excessive regulations, because they can afford to comply. An obvious example would be California’s impending $13 per hour minimum wage. Large corporate entities like MacDonalds will simply automate a few positions, tinker with the menu and recipes, incrementally raise prices, and go forward. Large corporations can hire attorneys and lobbyists, they have access to capital, and when the smaller players go out of business they gain market share. They benefit from over-regulation, but the consumer suffers.
Less obvious is how the financial sector also benefits from an overbuilt, financially irresponsible, unionized government. When excessive rates of pay and benefits consume government budgets, financial institutions step up to extend debt. Bond underwriters collect billions each year in fees in California to issue new debt and refinance existing debt. When excessively generous pension plans are granted to unionized government employees, pension funds pour hundreds of billions into Wall Street investment firms, earning additional billions in fees. As for “carbon emissions auctions,” now in its third year of implementation in California, as that ramps up, virtually every BTU of fossil fuel energy consumed will put a commission into the hands of a financial intermediary. Trillions are on the table.
Unionized government hides behind environmentalism to justify pay and benefits over investment in infrastructure – which after all is environmentally incorrect. As the cost-of-living inevitably rises through artificial constraints on the supply of land and energy, the unionized government workers negotiate even higher pay and benefits to compensate, and the corporate monopolies that control existing supplies of land and energy get more revenue and profit. And of course the resultant asset bubble is healthy both for pension funds and wealthy investors, even as low and middle class private sector workers are priced out of owning homes – or even automobiles – and struggle to make ends meet.
The power of public employee unions starts with the fact they collect and spend more money than any other special interest. In California they collect well over $1.0 billion per year in dues and fees. About one-third of that money is reported as explicitly political spending – that’s over $600 million per two-year election cycle. The rest of it is still spent indirectly on politics, since all of their negotiating and public education campaigns concern how we manage our public institutions. The portion of this billion per year that goes to entirely nonpolitical activity is negligible.
With the best academic studies, political consultants, public relations firms, and lobbyists that money can buy, with political action committees that extend down to the most obscure local elections, government employee unions make or break candidates at every level in California.
It is crucial to perceive the irony. Government unions empower the worst elements of the capitalist system they persistently demonize. The crony capitalists and speculative financial interests benefit from an overbuilt, over-regulating, state and local government populated with overpaid unionized workers. Those virtuous capitalists who want to compete without subsidies are successfully lumped together with these robber barons, discrediting their support for reform. Those small business owners who want to grow their enterprises are harassed and marginalized.
If government employee unions were illegal, the most powerful political force in California would cease to exist. But it wouldn’t “turn California over to the corporations and billionaires.” Quite the opposite. It would take away the ability of those corporations and billionaires to collude with local and state government unions who currently control the lawmakers. It would force them instead to compete with each other, lowering the cost of living for everyone. It would restore balance to our debate over environmental policy, energy policy, and infrastructure investment.
Government unions have taken over California. Their agenda is inherently in conflict with the public interest, their rhetoric is compelling and formidable and utterly deceptive, their financial power is immense. They are turning California into a feudal state, where the anointed and compliant corporations build monopolies, government workers lead privileged lives, the rich get richer, the middle class diminishes, and the poor become dependent on government. Nobody who is serious about reversing California’s decline – or America’s potential decline – can ignore the fundamental enabling role unionized government is playing in its demise.
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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.
Shame on You! I am appalled to see your “quick facts” focus almost exclusively on public pensions. This is not the stuff of an independent, non-profit think tank. It is clear to me that you are pursuing an “agenda [that] includes opposing … [universal] health-care and climate-change regulations, reducing union protections and minimum wages, cutting taxes and business regulations, tightening voting restrictions, and privatizing education.” As Tracie Sharp, the president of the SPN, noted, your collective goal is apparently to “win in your state.” Californians will not accept your push back to the 1920’s (and look what happened then); we are on to your partisan goals and funders.
Submitted via the CPPC “Contact Us” form by a University of California professor on 11-16-2013
There are myriad ways to respond to these accusations. For starters, they don’t question whether or not our “Quick Facts” are factual. That’s too bad, because they are. One of the reasons the California Public Policy Center is being taken seriously by journalists and policymakers in California is because we produce work that has intellectual integrity. And the CPPC is absolutely independent, founded by Californians in 2010, with less than 5% of its funding to-date coming from out-of-state. And while we were pleased to have our application for SPN membership approved in July of 2013, they have had zero impact on either our independence or, unfortunately, our funding status. So much for the great right-wing conspiracy.
If you want to really get at the problem that the CPPC is trying to educate Californians about, the agenda that our UC professor critic ascribes to us only address the symptoms. The core problem is unionized government. While unions have earned a heroic historical legacy in the United States, and even today can play a legitimate role at times in the private sector, they have corrupted our public sector with a self-serving agenda that is bankrupting our state and local governments, oppressing taxpayers, and, ironically, empowering the monopolistic crony capitalists and casino banking interests these unions rhetorically oppose. There are no partisan “wings” to that perspective.
To personify this, let’s examine the employment circumstances of our critic, who is a public sector employee. Because they were honest – or naive – enough to provide us their name and email when they submitted their comment, we will repay the favor by not identifying them by name, campus, or department. But we found them. And they live a life of extraordinary privilege.
The person who feels we are, apparently, not looking out for “working people” is a tenured UC professor who collected a salary of $132,981 in 2012 (ref. “State Worker Salaries” to look up any UC employee). In exchange for this, we may assume that our professor is not working during the summer, nor during Christmas or spring break. We can safely assume they work during the Fall, Winter and Spring quarters, which run from Sept. 23 through Dec. 15 (Fall), Jan. 7 through March 23 (Winter), and April 1 through June 16 (Spring). That is, taking into account six holidays that fall within those dates, they work 33 weeks per year.
For those of us who work, taking into account vacations and holidays, 46 to 50 weeks per year, 33 weeks seems like a pretty good deal. But maybe this professor works really hard during those 33 weeks. Or not. A review of their faculty profile – verified by a call to the University – confirmed they are teaching one class during the Fall 2013 quarter. This requires our champion of working families to be present for office hours for one hour per week, from noon until 1 p.m. on Tuesdays, then to teach their class from 1 p.m. until 3:50 p.m on Tuesdays. Got that? They work four hours per week.
Ah, but perhaps our idealistic friend of the downtrodden does research. Perhaps they write books that bequeath seminal insights onto humanity? Well, maybe. A review of this professor’s resume indicates they published three articles in professional journals during 2010, consuming a total of 70 pages. In 2011, they published two articles consuming a total of 26 pages. They presented one research paper in 2010, and one in 2011. According to their resume, they haven’t conducted a workshop since 2009. We don’t know about their 2012 activity, because their online resume hasn’t been updated.
It would be unfair to jump to conclusions. Perhaps these research papers, workshops, and “reviewing and refereeing activities” consume a monstrous amount of time. Not to worry however. Our professor who is looking out for the little guy is almost certainly eligible for retirement soon, since they got their Ph.D. back in 1991. At 2.5% per year times 23 years, they’ll get a pension equivalent to 57.5% of $132,981 if they retire at the end of this academic year; that’s $76,464 per year. And in the real world, that is an awful lot of retirement income for someone whose formal working hours were four hours a day, one day per week, 33 weeks per year.
A primary educational agenda of the CPPC is to expose exactly why unionized government is making California unaffordable for ordinary people. Our altruistic critic has helped further that agenda, by providing another opportunity to expose their own all-too-common world view that mingles economic illiteracy with rank hypocrisy.
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Ed Ring is the executive director of the California Public Policy Center.
Add Desert Hot Springs, CA to the list of California cities in dire straits due to poor management, union wages, and ridiculously unaffordable pension promises.
A resort town in California warned on Tuesday that it will run out of money by March due to burdensome salary and pension costs and could join other U.S. cities that have recently filed for bankruptcy protection.
A bankruptcy filing by Desert Hot Springs, a city of 26,000 about 110 miles east of Los Angeles, would make it the third California city along with San Bernardino and Stockton to seek court protection from creditors.
San Bernardino and Detroit – the biggest U.S. city to seek Chapter 9 protection – are likely to set precedent on whether retirees or Wall Street bondholders suffer the most when a city goes broke.
The problems in Desert Hot Springs came to light last week when a new finance director reviewed the city’s records and discovered a $3 million shortfall in its budget of $13.5 million. Amy Aguer, the interim director of finance, did not have details on how the shortfall occurred but said it was the result of higher-than-expected pension and salary costs, especially in the police department, and overly optimistic estimates of revenue.
“It’s obvious we can’t continue with salaries and pensions that are in the stratosphere, no matter how much love there is for our police department,” said Russell Betts, a council member.
Desert Hot Springs, which is near Palm Springs, filed for bankruptcy in 2001 after losing a multimillion dollar lawsuit and still servicing $9.7 million of bond debt issued to fund its exit from Chapter 9 bankruptcy.
In a report issued last week, Aguer said bankruptcy was a real option under consideration, although on Tuesday she expressed hope that the city could avoid that fate this fiscal year.
Aguer said nearly 70 percent of the city’s budget was consumed by police costs, most of which were spent on salaries and pension payments to the California Public Employees’ Retirement System, or Calpers.
Calpers is America’s biggest public pension fund, with assets of $277 billion. It has argued strenuously in court that pension payments cannot be touched, even in a bankruptcy.
The “Only” Option
It is ridiculous to hope Desert Hot Springs can avoid bankruptcy. Its fate is sealed for the second time. Bankruptcy is the only option.
The choice is now or later. Now makes more sense.
Just Desserts for CalPERS
I long for the day that a judge rules pension costs are not sacrosanct. And that day is coming soon!
I expect such a ruling in Detroit. And when it happens, it will open up a floodgate of cities willing to do the right thing, and the right thing is to force clawbacks in absurd pension promises.
I had an original title to this post of “Screw CalPERS”. That title was wrong. It is taxpayers who are being screwed, not overpaid, underworked, undeserving public union workers.
Clawbacks of 50% or more in union pension promises are not only sane, but “fair“.
Taxpayers should not have to foot the bill for union threats, coercion, bribery, and vote buying. It’s that simple.
About the Author: Mike Shedlock is the editor of the top-rated global economics blog Mish’s Global Economic Trend Analysis, offering insightful commentary every day of the week. He is also a contributing “professor” on Minyanville, a community site focused on economic and financial education.