OT: San Bernardino votes to file for bankruptcy protection

[Anonymous]

[quote=davelj]In my opinion the most interesting part of this will be the determination of seniority (or liquidation preference) between the pension funds and the bond holders, as this is uncharted territory.[/quote]

Isn’t there some precedent for this in the Stockton bankruptcy?

[Anonymous]

[quote=CDMA ENG]You lend yourself no creditablity when you immediately villify people. I am no fan of unions but there is no need to constantly attack and name call.

Why don’t you start in on the “mormons” or the “darkies” next?

Jeessess… Just give it a brake.

CE[/quote]

Will you post the same response the next time a certain poster vilifies “Wall Street?”

You’d better hurry, she’s already started on the “the blacks” and the “illegals” living in their “barrios…”

[equalizer]

[quote=davelj]In my opinion the most interesting part of this will be the determination of seniority (or liquidation preference) between the pension funds and the bond holders, as this is uncharted territory.

I suspect that at least some judges will deem the pensions to have been willfully ignorant in assuming that the taxpayers would be willing to pay what the pensioners assumed they would bear. And if that happens – whoa Daddy – things will get very interesting.

San Diego isn’t as bad off as San Bernardino County, but… we’re still pretty damn sickly. I give it even odds that we eventually go through the same process as Stockton – better than even odds if the Stockton BK (or others that follow it) end up with pension liability reductions as that dramatically increases the attractiveness of the BK option.

The fundamental mistake that the unions have made is in assuming that the taxpayers would be willing to meet whatever pension burden the local politicians saddled them with. (This is not unlike a banker ignoring a borrower’s willingness – as opposed to its ability – to pay its debt… and finding out the underlying collateral is insufficient to repay the principal.) In any case, it’s going to be pretty interesting.[/quote]

Calpers cut assumed annual return rate to 7.5% instead of 7.25% recommended by state chief actuary. As long as SB pension is in line with range, Judge can’t rule it legally unconscionable. Of course the rate should probably be 7% because the only people who have worse investment track record than me are pension fund managers who are peddled junk by Wall Street.

http://pensionpulse.blogspot.com/2012/03/calpers-cuts-assumed-rate-of-return-to.html

Only San Jose has voted for pension cut for current workers but that is headed for the courts now. http://calpensions.com/2012/06/11/san-jose-san-diego-pension-reforms-go-to-court/

A Danish pension manager has interesting risk management strategy. Something about hedging against future pension liabilites – so hedging against interest rate drop in long term bonds that would cut income portfolio, but I can’t spell CFA so it’s just a guess.

http://pensionpulse.blogspot.com/2012/02/worlds-best-hedge-fund-pension-fund.html

[no_such_reality]

Some things are decided out of whack. And I’m sure there is plenty of blame to go around, however, one report I saw from the LA Times basically said that they didn’t have enough revenues to even cover the police budget by itself.

Tax proceeds may have fallen, but they haven’t fallen that much. It’s a sign of the massive over building, over staffing cities have done.

[bearishgurl]

[quote=no_such_reality] . . . Tax proceeds may have fallen, but they haven’t fallen that much. It’s a sign of the massive over building, over staffing cities have done.[/quote]

Actually, NSR, tax proceeds to CA cities and counties HAVE fallen a great deal, due to downward adjustments made by many CA county assessors in accordance with Proposition 8. This was done en masse to prevent a HUGE backlog of assessment appeals, for which no assessors had the staff to handle.

By law, an assessment appeal made by a property owner must be adjudicated or settled within two years of the assessor’s date of receipt of the appeal (CA Revenue and Taxation Code 1604(c)), or the valuation sought by the appellant automatically stands.

http://www.leginfo.ca.gov/cgi-bin/displaycode?section=rtc&group=01001-02000&file=1601-1615

Where there is a decline in value, the current full cash value of real property (as of lien date) is less than the factored/trended base year value (also referred to as a Prop 8 value).

http://boe.ca.gov/proptaxes/faqs/prop8.htm#1

Proposition 8 requires the county assessor to annually enroll either a property’s adjusted base year value (Proposition 13 value) or its current market value, whichever is less. When the current market value replaces the higher Proposition 13 value on the assessor’s roll, that lower value is commonly referred to as a “Prop 8” value.

Although the annual increase for a Prop 13 value is limited to no more than two percent, the same restriction does not apply to values adjusted under Prop 8. The market value of a Prop 8 property is reviewed annually as of January 1; the current market value must be enrolled as long as the Prop 8 value still falls below the Prop 13 value. Thus, any subsequent increase or decrease in market value is enrolled regardless of any percentage increase or decrease. When the current market value of a Prop 8 property exceeds its Prop 13 value (adjusted for inflation), the county assessor reinstates the Prop 13 value.

See sec 2b: http://www.leginfo.ca.gov/.const/.article_13A

See sec 51: http://www.leginfo.ca.gov/cgi-bin/displaycode?section=rtc&group=00001-01000&file=50-54

The “overstaffing” was done by the cities and counties who permitted the massive overbuilding. After these new tracts were nearly fully occupied, cities and counties felt they “needed” this additional staff to serve the new residents. They (erroneously) figured the proceeds from the new property taxes would cover all the costs of the additional staff. When these new areas went bust (due to all the units being originally OVER-financed during the “millenium boom” with “funny money”), this massive “crash” took the valuations of nearby long-existing communities down with them and hence, negatively affected the property tax proceeds from long-existing properties. Had all these tracts in the stix not been approved, new buyers in these areas would have had to buy existing homes (using Stockton and SB, for example) or look elsewhere. They likely wouldn’t have come at all. This new construction attracted many thousands of buyers who would not otherwise have purchased that far away from their hometowns/jobs had it not been that the homes were **new** and cheaper (at the time), since there were no other redeeming qualities to these areas in comparison to more established coastal areas.

Had these negatively affected cities not grown by 100% or more in the last decade or so, they would have had no need to hire additional staff. In any case, the vast majority of the staff they DID hire after 2005 and have now laid off did not even stay long enough to vest in their municipal pension plan (union rules dictate the “LIFO” doctrine when layoffs are enacted [last-in, first out]).

As it stands, the remaining municipal employees in these now “distressed” cities (the vast majority with 10+ years seniority) are now having to “pick up the slack” to service many thousands of additional residents (who were not even there just ten years ago) IN ADDITION to the existing residents who were always there. The existing residents have lost their level of services (tree trimming, sewer repair, library/pool hours, etc) in favor of spreading the existing personnel out to the newer areas. Everybody loses … all due to City Council/County Supervisor greed and shortsightedness.

The CA county/municipal employees who have retired in the last decade and will continue to retire planned all throughout their careers to retire in 2002, 2007 or 2012. The “millenium boom crash and resulting recession” really had no bearing on their plans.

I’ve heard here a few times that there is simply not enough existing housing in CA to serve its current population and find that argument to be ill thought-out and disingenuous. The truth is, Stockton and SB’s new subdivisions were mainly purchased by families from outside those cities and counties and even outside of the state. Many were lured in by billboards placed in NV cities and lower-income parts of CA coastal counties, as well as thru heavy radio and TV advertising. There was NEVER enough of a well-paying employment base in these cities to lure new residents in of this magnitude.

Had their been no new “cheap” tracts built in SB, RIV and San Joaquin Counties and simultaneously “funny money” available to purchase them, these buyers would have stayed in NV, Compton or Tracy. For every buyer who leaves an older home (whether rented or sold) to move to an outlying new home they just purchased, that leaves the older home vacant. And older homes (especially those in VERY desirable CA locations) are much more “thinly traded” than newer “lookalike” tract homes (as sdr has mentioned). These now-distressed cities wouldn’t have needed nor paid for hundreds of new employees and wouldn’t be in the fiscal mess they’re in and ALL their residents would have far better services.

Besides local governments, a huge ripple effect of urban sprawl in CA has adversely affected the ability of its hospitals, court systems, state-provided local services (such as DMV offices) to do their jobs and even services from local Federal offices/courts.

Case in point: SF was not affected by the “millenium boom” RE crash solely due to not having any buildable land (which was not small-plat infill) and has remained solvent and steady through it all. Their workforce hasn’t fluctuated much, if any, over the years and services have remained steady. SF even has MORE services available to low-income residents than all other CA cities, has rent-control in place and a VERY LARGE portion of its longtime property owners (both residential and commercial) have property tax bills protected by Prop 13!

Go figure.

And guess what? If a SF homebuyer is seeking *new construction,* they will be VERY hard-pressed to find it from 45 miles south of the city to 25 miles north of the city on the west side of all bridges. These lizardland-seeking buyers will have to go elsewhere. And there’s nothing wrong with that. It is as it should be and should have been for the more unfortunate inland cities we seeing in the news today.

CA never needed this massive infusion of tract development in the stix to begin with and we don’t need it now. One only needs to study the similarities between San Joaquin and SB Counties and compare them to SF, San Mateo, Marin and Contra Costa Counties, for example, to see why. :=0

[davelj]

[quote=harvey][quote=davelj]In my opinion the most interesting part of this will be the determination of seniority (or liquidation preference) between the pension funds and the bond holders, as this is uncharted territory.[/quote]

Isn’t there some precedent for this in the Stockton bankruptcy?[/quote]

No, there is not. The Stockton bankruptcy process is ongoing and will be for some time. My understanding is that the unions are working with the various parties to cut benefits as they understand that it’s inevitable. But the actual extent of the cuts is as yet undetermined.

[davelj]

[quote=equalizer]
Calpers cut assumed annual return rate to 7.5% instead of 7.25% recommended by state chief actuary. As long as SB pension is in line with range, Judge can’t rule it legally unconscionable. Of course the rate should probably be 7% because the only people who have worse investment track record than me are pension fund managers who are peddled junk by Wall Street.
[/quote]

A lot of work has been done on assumed forward rates of return given certain asset mixes, and most folks who don’t have an agenda – that is, they’re not consultants being paid by the municipality to justify a higher rate, or politicians who support a higher rate (to reduce the amount of funds necessary to plow back into the pension) – come out at 5%-6% as a reasonable assumption given current interest rates and asset valuations. Personally, I think 6.5% is aggressive but supportable; anything above that and you’re venturing into Fantasyland. I believe that SD City pension fund uses 8% and the County uses 8.25% (I could be off by 25 bps on these).

A Stanford study (which I had a few small issues with) came out late last year suggesting the use of 5.5%. SDCERA issued a response to that study (and justifying their ~8% assumption) that would have earned an F in Finance 101.

The trustees and administrators are well aware that their assumptions are too aggressive but to publicly acknowledge reality is just too painful so they’ll try to bleed the rate down over time and continue to kick the can down the road until someone comes along and says “enough.”

[no_such_reality]

Sorry BG. The facts in San Bernardino don’t support you. The Bk filing is on the la times today. Tax revenues have fallen a mere 12.8% http://documents.latimes.com/san-bernardino-bankruptcy-report/

Peak revenues in 2007-2008 of $89.7m versus $78.2m in 11-12 (that’s a subset), their total revenue appears to have peaked at $133M in 2007-2008. Don’t know where the rest cost from. The chart on page 13 shows revenues barely dipped.

Its a spending problem. Not a build out problem. Its an inefficiency problem

[The-Shoveler]

The main issue is that local Gov’s can’t resist setting revenue expectations to the last best years return (they use inflation as justification most of the time).
Also the unions push for unrealistic investment return expectations then expect the Gov. to back-stop those expectations.
The math just does not work, eventually even if you took 100% of all sales etc.. eventually you would still hit the wall.

If inflation actually did or does occur, they would get closer however.

[paramount]

Fact: The San Bernardino City Council was installed by Public Employee Unions.

Fact: San Bernardino Council members were then owned by the public employee unions.

The San Bernardino Council members then eagerly agreed to incredible/unbelievable compensation packages for cops and firefighters who then promptly bankrupted the city.

That’s it…really isn’t any more complicated than that.

[sreeb]

Calpers just reported that they made 1.0% last year.

http://www.calpers.ca.gov/index.jsp?bc=/about/press/pr-2012/july/preliminary-returns.xml

But no problem:

“It’s important to remember that CalPERS is a long-term investor and one year of performance should not be interpreted as a signal about our ability to achieve our investment goals over the long-term,” said Henry Jones, Chair of CalPERS Investment Committee.

[quote=davelj][quote=equalizer]
Calpers cut assumed annual return rate to 7.5% instead of 7.25% recommended by state chief actuary. As long as SB pension is in line with range, Judge can’t rule it legally unconscionable. Of course the rate should probably be 7% because the only people who have worse investment track record than me are pension fund managers who are peddled junk by Wall Street.
[/quote]

A lot of work has been done on assumed forward rates of return given certain asset mixes, and most folks who don’t have an agenda – that is, they’re not consultants being paid by the municipality to justify a higher rate, or politicians who support a higher rate (to reduce the amount of funds necessary to plow back into the pension) – come out at 5%-6% as a reasonable assumption given current interest rates and asset valuations. Personally, I think 6.5% is aggressive but supportable; anything above that and you’re venturing into Fantasyland. I believe that SD City pension fund uses 8% and the County uses 8.25% (I could be off by 25 bps on these).

A Stanford study (which I had a few small issues with) came out late last year suggesting the use of 5.5%. SDCERA issued a response to that study (and justifying their ~8% assumption) that would have earned an F in Finance 101.

The trustees and administrators are well aware that their assumptions are too aggressive but to publicly acknowledge reality is just too painful so they’ll try to bleed the rate down over time and continue to kick the can down the road until someone comes along and says “enough.”[/quote]

[sdrealtor]

1% this year and 15.5% next year. Its all good. It all evens out over the long run.[img_assist|nid=15879|title=Only the best!|desc=|link=node|align=left|width=100|height=75]

[Allan from Fallbrook]

CalPERS article from Mish Shedlock on Business Insider: http://www.businessinsider.com/stunning-what-if-charts-of-californias-pension-shortfall-2012-7

Simple arithmetic, not partisan solutions, will ultimately determine what happens.

[The-Shoveler]

The math and the fact that the current unstable condition remains(always just one step from disaster ie.. another great recession/depression).

How many more years can we avoid another one while we wait for the most or one of the most crucial sectors to become stable (ie… the majority of underwater home owners are no longer under water).

The situation is going to remain precarious at best until the condition above is no longer the case.
Were the above to happen at the current level, things will go south fast.

[paramount]

How close are we to the new depression (video)?

http://www.cnbc.com/id/48193471

The Collapse is on the way (Peter Schiff):

http://finance.yahoo.com/blogs/breakout/america-heading-towards-collapse-worse-2008-europe-says-155504860.html?l=1

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