OT: Public Employees Bankrupt yet another California City: Stockton

[paramount]

In California only government and the rich are doing well.

Stockton bankruptcy showcases results of public employee union greed

Sacramento — Few non-locals pay much attention to the goings-on in Stockton, a hard-pressed Gold-Rush-era industrial city of 300,000 in the San Joaquin Valley. 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. 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 recently in the Sacramento federal courthouse, then the public-sector unions and the 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.

No one should feel too sorry for the lenders and insurers who provided pension-obligation bonds to the city. They knew the risks when one lends money to a city that has been controlled by unions. But 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.

As the attorney for the bond insurer noted in his closing comments on Wednesday, the city has refused to address its biggest debt – the payments to CalPERS to pay for 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.

The city plan has put pension debt off the table, arguing that pension payments and benefits cannot be touched. A bankruptcy would be the place to challenge that assumption, but Stockton officials figure 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 when bond-insurer Assured Guaranty’s attorney Guy Neal questioned City Council member Kathy Miller about a July 2012 video that explained the fiscal situation to city residents. Here are some of her statements:

“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.”

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” lifetime health plan the city’s employees received.

Absurd pay and benefits are common. San Francisco Chronicle columnists Phillip Matier and Andrew Ross revealed recently that the 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. 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 cutbacks to protect outrageous pension levels? Whatever the court decides, it’s time for the public to stand up to these misshapen priorities.

[SK in CV]

This isn’t another one. Stockton filed for bankruptcy protection more than 9 months ago.

[SD Realtor]

I think the poster is inferring that obligations to public pensions have contributed (in some cases substantially) to more then one city being forced to either declare bankruptcy or are on a path towards bankruptcy. (as opposed to Stockton filing multiple times)

[livinincali]

This is just another example of how can kicking coupled with over optimistic future assumptions gets you in trouble. In this case the biggest fighters against the bankruptcy are those holding general pension obligation bonds. You know those bonds that were going to be the savior of the pension system because you were going to borrow at 3% and make up your shortfall with a projected 8% return. Illinois has all kinds of these bonds outstanding. At least City of San Diego hasn’t gone down this path although I do believe Filner did mention this as a solution during the campaign.

It’s probably wise to assume that if you stand to get a public sector pension much above the median citizen’s income and/or free health care the day is probably coming when they are going to claw some of that back. I definitely wouldn’t count of being able to spend your defined benefit contribution for the rest of your life in full. The mathematical odds are stacked pretty high against you.

[NeetaT]

I have always paid my debts the few times that I borrowed money and felt that I should go to jail if I didn’t pay the debts.

[The-Shoveler]

When the City of Los Angeles goes the whole house of cards falls IMO.
It’s the 800 pound gorilla,

Note, also I believe 8-10% inflation would make all this a non-event if it were to last over 5 years.

The pension short fall would be reduced to a small amount, (so would DB pensions as well).

For a city with annual revenue of 3.6 billion, a 26 billion pension short fall seems insurmountable,
No fear, inflation will save the city…
• In 2012-13, Los Angeles’s pension costs are expected to rise to $1.3 billion, or 18% of the city’s budgeted expenditures. In 2002-03, just 10 years ago, pension costs were only $157 million, or 3% of total expenditures.
• Over the last decade, pension costs have grown at an annual average growth rate of 25% and have outpaced spending growth for every major area of the city’s budget.
• In 2012-13, the city of Los Angeles is expected to spend up to 32 cents toward pension benefits for every dollar it spends on total payroll for its employees. Employees will pay 9 cents for every dollar of payroll.
• From 2003 to 2012, the total official funding ratio of the city’s pension plans declined from 99.7% to 77.2%. Correspondingly, the city’s officially-reported unfunded liability increased from $87 million to $9.4 billion, more than a 100-fold increase.
• The growth in the unfunded liability and declines in the funding ratio are largely attributable to investment returns falling below the rate pension plans assumed they would earn (on average 7.75% per annum, net of expenses, on a portfolio consisting largely of bonds and equities). Over the last 10 years, LACERS, LAFPP, and LADWP pension trust funds have earned compound annual rates of return of 6.46%, 6.68%, and 5.11%, respectively. Over the last five years, these return rates were 0.68%, 1.06%, and 1.47%, respectively.
• Using Moody’s investment return assumption (5.5%), the unfunded liabilities would nearly triple to $25.9 billion.

[The-Shoveler]

I also believe that this was the entire reason for the Fed-Gov tireless reflating of the housing bubble.

THEY HAVE TO.

There is no other way to bail out local municipalities

[SK in CV]

[quote=The-Shoveler]I also believe that this was the entire reason for the Fed-Gov tireless reflating of the housing bubble.

THEY HAVE TO.

There is no other way to bail out local municipalities[/quote]

That only makes sense in CA, where the state and municipalities have only limited flexibility to adjust property tax rates. Other states have political pressure to keep property tax rates down, but not the statutory limitations that exist in CA. If the Fed were pushing inflation, the argument would have some merit. They haven’t. And it’s unlikely they ever will.

Beyond that, I don’t think there have been any government fiscal policy where the intent was to re-inflate RE prices, only to stop falling prices. Which govt action do you think has been undertaken with the intent to re-inflate prices?

[The-Shoveler]

Interest rates and enabling selling blocks of REO’s to Big investment houses.

Also Ben (official statement) denying that QE had any effect on Stock market and housing.

These aren’t the droids you’re looking for.

Really there was no pressure applied to banks (not).

In a larger sense, even without housing you would still need a fair amount of inflation to monetize these debts.

Housing is just the most direct way to inject money into state coffers.

[SK in CV]

[quote=The-Shoveler]Interest rates and enabling selling blocks of REO’s to Big investment houses.

Also Ben (official statement) denying that QE had any effect on Stock market and housing.

These aren’t the droids you’re looking for.

Really there was no pressure applied to banks (not).

In a larger sense, even without housing you would still need a fair amount of inflation to monetize these debts.

Housing is just the most direct way to inject money into state coffers.[/quote]

Starting at the end…

How so? Specifically, how is housing a direct way to inject money into state coffers?

Now, back to the beginning…I asked about government (not the Fed) action which had as its intent to re-inflate housing prices.

I would accept that the Fed, is at least in part, motivated to inflate housing prices, but it’s not their primary motivation. The Fed is bankers. The vast majority of housing debt is not owned by bankers. It was almost all private money and the GSE’s.

It’s unclear to me how selling big blocks of debt, or REO inflates housing prices. Bankers suck at dealing with distressed assets. They always have. It has always been the way that large quantities of REO and distressed debt has been dealt with. They sell them cheap, the faster the better. In the past, it has at times stabilized prices, but I can’t think of a single RE bubble in the past that it has re-inflated prices. (This IS different than past bubbles. The question here is not outcome, but rather motivation.)

I’m not sure how Bernanke’s claim that the QE programs have not had any effect on housing or the stock market is the least bit pertinent to the discussion. Nor do I have any recollection of him actually saying that. It seems contrary to the stated aims of the programs.

[SD Realtor]

Let’s be clear….Selling blocks of real estate has no effect at all on pricing. Housing prices are determined at the retail level. It is of no consequence whatsoever if the seller is a homeowner, an investor, a holder of a note, or any commercial entity.

Bankers do not only suck at selling homes, they don’t sell them at all. Liquidation of assets is always done by third parties for a variety of reasons.

[The-Shoveler]

I don’t have time to dig up the link to the interview, but admittedly Ben was talking more to the Record Stock market levels than housing saying that QE was not the cause.

But RE-Prices development fees and Tax’s do have a direct effect on the States bottom line.
And there is such a thing as supply and demand

Other than that (YOU WIN!!)
This is not going anywhere and I don’t have time.

[livinincali]

[quote=The-Shoveler]When the City of Los Angeles goes the whole house of cards falls IMO.
It’s the 800 pound gorilla,

Note, also I believe 8-10% inflation would make all this a non-event if it were to last over 5 years.

The pension short fall would be reduced to a small amount, (so would DB pensions as well).
[/quote]

How exactly would 8-10% inflation make this go away. Most defined benefit pension plans have a COLA associated with them that is based on CPI.

I guess your hope is that with 8-10% inflation you’ll end up with a corresponding 8-10% increase in wages which will drive a corresponding increase in tax revenues. Those tax revenues will now be sufficient to pay the pension shortfall but at the same time you’ve increased liability on the pension side. Why do we need 8-10% inflation? Why can’t we just go with the deflationary solution and default/reduce benefits?

This is the problem with most economic models and economists. They look for a solution to a problem by adjusting one variable and assuming everything else is going to stay the same. The thing is it doesn’t work like that. In a 10% inflation environment wages might only go up 5% while gas and food goes up 20%. It’s extremely tough to get uniform high inflation across the board. In your case it’s lets inflate wages and hold everything else constant.

[SD Realtor]

Agreed Cali…As you know, if you take a close look at the prices of food, water, and energy we have been on a very nice inflationary clip. Most people just like to gulp down stats that are calculated in a friendly way. I love the “inflation will get us out of the mess argument” as it is always assumed the rising tide will lift all boats. In reality the disparity between rich and poor will accelerate and the majority of those in the middle will not enjoy that theory because no chance their wages will keep up… that is assuming they even keep their jobs as more quality jobs bite the dust.

[The-Shoveler]

Deflation only helps people who have no debt, a constant fixed income (Retired mostly) or a very large bank account.
ie… not the majority of Americans or working people paying off debt.
Most DB pension plans have a fixed inflation adjustment cap (most are 2% some go up to 5%) I have never seen an unlimited one or at 8-10%.

Wages and everything except DB payouts.

[Author]

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