On Monday, a federal judge allowed Stockton’s bankruptcy to go forward, but most people agree that the fight is not over and the end game could see the US Supreme Court weigh in on the issue of how bankrupt cities are able to deal with their pension liability.
Assured Guaranty, the city’s bond insurer, has argued that the city of Stockton has failed to renegotiate its pension debt with CalPERS (California Public Employees’ Retirement System), unlike with all other creditors with whom the city has been working to restructure debts, and in some cases, make just partial repayments.
“The city of Stockton was, by any measure, insolvent on June 28,” Federal Bankruptcy Judge Christopher Klein declared on Monday, “specifically, cash insolvent, unable to pay debts as they came due.”
As the Sacramento Bee‘s editorial notes this morning, “The next urgent order of business is for Stockton to come up with a plan of adjustment, a plan to put its fiscal house in order. Until it does so, the city of 290,000 people cannot address comprehensively the most basic responsibility of any municipal government – to protect the health and safety of its residents.”
The Bee notes, “Service cuts and concessions from its labor unions, including pay and benefit reductions totaling 23 percent for current city employees, have freed up some money to allow Stockton to hire more officers.”
The Bee continues, “But the plan of adjustment that the city negotiates with its creditors in bankruptcy is key to Stockton’s rescue. High crime and record homicide rates seriously impede the city’s ability to improve its fiscal condition.”
The problem that Stockton faces is a cautionary tale for communities like Davis.
If Davis does not face imminent bankruptcy, we should feel quite fortunate. Unfortunately, we are not off the hook here. What Davis instead faces is something very different, but just as challenging.
Unlike Stockton, Davis is not bogged down in a huge amount of debt. Davis did not overextend its redevelopment. What Davis did do, however, is finance the huge pay and pension increases over the last decade through a double-digit a year property tax revenue increase, with a short-term boost in sales tax revenue through a half-cent sales tax.
The problem is that, once the real estate market tanked, the city was cut off from that revenue generation. Instead of taking steps immediately before and after the economic collapse in September of 2008, the city of Davis balanced its nominal budget through attrition.
To this day, Supervisor Don Saylor likes to brag that they had a balanced budget with a 15 percent reserve. He, of course, does not mention the tens of millions in unfunded pension and retiree health liabilities.
And he does not mention the most serious problem that the city now faces – failure to put money into basic infrastructure repairs, from roadways to parks to water lines. For all of the biggest ticket capital needs in the city, the city basically put no money into, over the course of more than half a decade.
The result is that, while the city of Davis is not encumbered in debt, it faces hundreds of millions in capital improvement costs for the most basic city infrastructure.
That money is going to have to come from somewhere. Some of it will come from borrowing – ironically, the city avoided debt but now will need to go into debt to rebuild infrastructure.
Some of that money will undoubtedly come from the taxpayers, already leery in the wake of a massive water rate hike and continued increasing parcel taxes.
And finally a sizable amount will have to come from labor concessions from city employees.
Stockton serves as a cautionary tale.
Last December a scathing editorial from the Sacramento Bee linked Stockton’s skyrocketing murder rate to its bankruptcy.
Wrote the Bee, “The sad saga of bloody, financially struggling Stockton should serve as a cautionary tale for other financially beleaguered cities in California. Good fiscal management isn’t some esoteric goal. It is essential to the health and safety of real people.”
Stockton has been forced to lay off almost a quarter of its police force, with pay and benefits cuts to those who remain. In 2008, the police force was 441, which the Bee called “already too small for a city of close to 300,000.” Now it’s 329.
“Experts blame Stockton’s soaring murder count partly on its collapsing finances,” the Bee argued.
But there is more.
The Bee goes on to note, “As police and residents work to curb the violence, the city’s finances remain in shambles. Stockton has filed for bankruptcy protection, but squabbling between the city, bondholders, employee unions and others has kept a formal court declaration of bankruptcy on hold and delayed indefinitely the city’s efforts to rebuild its fiscal house.”
“To make things worse, a City Council that did the hard work of reducing spending, including cutting the workforce by 25 percent and trimming pay by 29 percent, was booted from office in November,” the Bee writes. “Political and financial chaos at City Hall will make stemming the carnage on city streets that much more difficult.”
The take-home lesson: “Other cities – notably Sacramento and San Jose – are grappling with an uptick in crime. But what is happening in Stockton should be a wake-up call for everyone who has a stake in municipal finances.”
There is irony here. The firefighters’ union has attempted to rally the public AGAINST staffing changes, inducing panicked residents to write letters to the editor arguing that “our safety truly matters.”
But one lesson of Stockton is that safety is threatened when we fail to properly manage our finances.
Wendy Benner argues, “What is a life worth to you? Not the inflated figure of $570,000 you published, which was actually more accurately $360,000, per the City Council meeting.”
But, then again, how many lives has the fiscal mismanagement in Stockton already cost?
Many in this community do not understand the depths of the fiscal crisis that the city faces. Right now, we are facing a $444 million deficit on road maintenance that will explode if we do not inject about $20 million immediately, and then $8 million per year thereafter.
Our parks, despite the recent parks tax, face a myriad of repairs and the city faces the potential of closing parks in addition to pools.
The city has engaged in a lengthy collective bargaining process with city employees, and, remarkably, the firefighters are just one of two bargaining units in the city that have yet to agree to labor concessions.
The firefighters are the highest compensated of the city’s rank and file employees, and they make more than $1000 more per month than their police counterparts. During the last decade their salaries alone almost doubled, and that does not include the expansion of the fire department to accommodate four on an engine and it does not include the enhanced 3% at 50 benefits.
So, when the firefighters attempt to reposition this issue as one of public safety rather than budget, they are being disingenuous. As we reported previously, if the firefighters simply took salary concessions to reduce their pay to be on par with that of police officers, in addition to taking the pension, cafeteria cash out, and retiree health concessions that all other employees in the city have already agreed to, we might not need to have to this conversation.
But they have not.
In so doing, they put the public at risk for other dangers. Crumbling road conditions could lead to more accidents. Lack of city resources means that the city cannot deal with other public safety problems.
Already, citizens in Davis have worked to form neighborhood watch groups, fearful that the crime rate may be rising – despite specific evidence that it probably isn’t – and realizing that the city of Davis does not have resources to put more officers on the streets at this time.
The firefighters received by far the largest pay increases in the last decade – in addition to the enhanced public safety benefit that they share with police officers, and in addition to the staffing increases. And yet, as stated, they remain one of only two bargaining groups not to make concessions.
The city of Davis is facing a very real economic crisis and, frankly, it just a lot worse in the last few months. The city may not be facing bankruptcy at this time, but it is far from out of the woods.
—David M. Greenwald reporting
What if the bondholders end up getting the shaft and the public employees win out? What will that do to the rates of all future bonds issued in California? What will be the effect of such a ruling on the water project bond? Are we looking at much higher rates?
Growth Izzue wrote:
> What if the bondholders end up getting the shaft
> and the public employees win out?
In the GM Bankruptcy bondholders got the shaft and the UAW did real well so I expect the same thing to happen in Stockton (Since that is what happened in the Vallejo Bankruptcy)…
When the risk of not getting paid back goes up borrowing money will become more expensive for every city and county and the US and taxes will go up to pay it (and the $100K a year union pensions and health care for life for past Stockton and other city employees).
P.S. As I have mentioned before I wish I knew I could have got a GED at 17 taken a couple JC fire science courses and got a job as a firefighter and be retired today with a $10-$15K a month pension (including free health care saving another ~$20K a year). I also wish that I got a part time job in SF in the 90’s since after only a year of work I could have had free health care for life. Every time I see the price of parking go up in SF I know that part of it goes to a friend that had a part time job with the city of SF while he was in law school at Hastings in the 90’s and still is on the SF health insurance plan.
SOD, yes the Obama administration set a bad precedent in sticking it to the GM bondholders to the benefit of the unions. If this is the new status quo then look for more debt downgrades in states, counties and cities. Who is going to take a chance on a low interest bond when the judges are going to bypass them in favor of public employees? I predict bond rates are going to skyrocket as that investment becomes much more risky.
i think the real issue here is that unless davis city employees take real concessions you are going to see a huge increase in public safety risks. it’s an ironic comment because the firefighters believe they are the only ones who are in this boat for some reason.
CalPERS preliminarily decided to increase its pension funding rates for employers by another 50% over 6 years beginning in 2015-16. The public safety rates are now scheduled to jump from 25.551% in 2012-13 to 27.823&#xin; 2013-14 to 29.3% in 2014-15. The CalPERS plan will get that up to 43.95% in 2020-21.
For the $100,000 per year (base salary) employee, that means the annual cost of funding his pension, on the employer side, will climb from $25,551 this year to $43,950 in 8 years. If his base salary increases 3% per year (which is much less than its average rate of increase has been over the last 20 years), then his salary in 8 years will be $126,677 and the employer pension funding cost will be $55,675 on top of that.
But all of these costs are minimal compared to the real pension crisis in California–the teachers’ retirement system. It released a report in February which said it needs to increase its funding by 75%. Right now, CalSTRS gets 8% from each teacher and 8.25% from each school district. Assuming that the teachers’ union makes sure that the amount teachers pay does not increase–seems likely–then the employer funding share (which likely would have to come out of the state’s general fund) will increase from 8.25% to 19.9375%. In Davis, this year, that would be an extra $4 million. The DJUSD bill for CalSTRS would rise from $2.81 million to $6.78 million*.
There is no way the state or any districts can afford that. The only fiscally sound solution would be to reduce the pension payments to current and future retirees. However, that’s not going to happen, given our politics. I guess we will just double the size of all K-12 classrooms and shut down the UC and Cal State systems.
*This expense is on top of the much greater CalPERS bill and the ever increasing costs of other benefits. And it will only be worse when our school board gives a big pay raise to the unions.
Rich wrote:
> But all of these costs are minimal compared to the
> real pension crisis in California–the teachers’
> retirement system. It released a report in February
> which said it needs to increase its funding by 75%.
I read a summary of the report and estimate that they need to increase funding by much more than 75%… Looking back at the “average” investment returns over 60 years is nice, but unless we bomb just about every factory in Europe and Asia like we did in WWII, roll back the clock so almost of all of South America is full of peasants farming bananas and China has few factories and schools with starving people debating the “one child” rule, and get rid of most of the regulation, work rules and environmental rules here in the US it is unlikely that the US will have the same growth rates over the next 60 years.
Like Rich I don’t think we have enough elected officials with the guts to even seriously talk about our current problems (much less make any changes to fix them) so we will just keep underfunding the pensions until they run out of money and say “too bad so sad” to all the teachers, firemen and cops that worked hard for years thinking they would be set in retirement.
Back in High School I got a chain letter in the mail telling me that if I mailed $1 to the five people on the list and sent out 10 more letters with my name in the 5th position I would soon have $1,000. My Dad explained to me that I not only had no chance at getting $1,000, but that the people that sent out the letter are probably the only people that would come out ahead. Unless we can get a large groups of young teachers, firemen and cops to understand the current “pension system” is has more in common with a “chain letter” or “Ponzi scheme” we won’t see any changes since the retired and senior teachers, firemen and cops (the people at the top of the list) are going to keep quiet and see how much cash that they can get from a pension that will be giving them many times over what they (and their employer match) actually “earned” for the pension fund.
SouthofDavis: you should include Social Security and Medicare in your concerns… at least PERS/STRS admit their liability and are accounting for it with increased premiums, etc. Not true to date for SS & MC.
Public employee retirees, if they choose to still work in the private sector pay into both SS & MC, but will never see one cent of benefit in SS [b]even if[/b] they earn 40 credits, and unless they earn the credits, or unless they qualify via their spouse, they won’t be eligible for medicare, either.
[i]” it is unlikely that the US will have the same growth rates over the next 60 years.”[/i]
That is true. The US economy is too mature to expect extraordinary growth rates. However, your point is actually irrelevant when it comes to the profitability of large cap stocks.
I don’t think there are more than a half dozen companies in the S&P 500 which makes a majority of their profits today in North America. Almost all of them are global companies and they seek out profits wherever they can all over the world. If they can make 20% profits in Vietnam and Thailand and only 10% returns in China and 5% in the U.S., they will invest most of their money in Vietnam and Thailand. And if years later Romania becomes a profitable investment location, they will be big in Bucharest.
If you buy a broad-market portfolio of these large cap stocks, your long-run risk from volatility will be low and you can expect returns over the next 30 years as good as returns any investor in a similar portfolio has had in any historic 30-year period. Typically, you will get a compounded annual growth rate from 10% to 13% ([url]http://www.moneychimp.com/features/market_cagr.htm[/url]) with an average CAGR closer to 12%. That has been true ever since the Securities Exchange Act of 1934, when the stock markets in our country became “regularized.”
Consider these 30 year periods:
January 1, 1933 to December 31, 1962 13.10%
January 1, 1938 to December 31, 1967 12.69%
January 1, 1943 to December 31, 1972 13.30%
January 1, 1948 to December 31, 1977 10.92%
January 1, 1953 to December 31, 1982 9.98%
January 1, 1958 to December 31, 1987 10.44%
January 1, 1963 to December 29, 1992 10.89%
January 1, 1968 to December 31, 1997 12.16%
January 1, 1973 to December 31, 2002 10.71%
January 1, 1978 to December 31, 2007 13.01%
January 1, 1983 to December 31, 2012 10.87%
I have two good friend retiring from their Federal government jobs this year. Both are 55. Both made a very good salary in their jobs. Both will get about 75% of their pay and full family healthcare for the rest of their life. Both are healthy and capable.
I am 53 and I hope to retire at 67. I have to save enough to fund my own retirement. I have to save enough to fund my own healthcare. I have do this while my taxes have been increased to pay for the pension and healthcare for all the public sector workers that get to retire a decade or more before me with all their material needs fully covered until death overtakes them.
The absurdity of this situation is dwarfed only be the absurdity of those that would defend it.
Frankly… if you make less than 100 k, am sympathetic. Someone who retires @ 75%, who made $50 k is one thing. If you’re making $180k, and have to fund your own retirement, not so sympathetic.
You won’t be eligible for Medicare and/or SS @ 67? Or are you thinking of Part B & drug benefit?
What makes you’d be paying less in State, Federal or property taxes, if public employees only got 40% of max income when they turn 75, after 50 years of service? Just curious…
[quote]What makes you’d be paying less[/quote]Should have read, ‘What makes [b]you think that[/b] you’d be paying less…’
[i]If you’re making $180k, and have to fund your own retirement, not so sympathetic.[/i]
Assuming a retirement age of 55 and life expectancy of 90, the cost of an immediate annuity to fund 75% of 180k salary plus full healthcare (assume $11,250 in pay and $2,500 in healthcare costs per month… or $13,750 per month) is $3,325,000 (with an estimated 6% ROR and 2% annual inflation).
So, assuming I made the same and wanted to retire the same as my two friends, I would need $3,325,000 in the bank at age 55.
Like I wrote, the absurdity of this situation is dwarfed only be the absurdity of those that would defend it.
Along Frankly’s point … some 4-5 years ago I calculated the Present Value of the pension + retiree medical benefits of a public safety employee in Davis who retires at age 50 after 30 years with PERS making a final salary of $100,000 and who lives to age 85. It was then worth about $4 million. Much, of course, depends on how long a person lives, how much medical costs inflate in the future, if the person is married throughout his retirement, and if he has dependent children on his medical plan. It’s also important to point out that a portion of the value of his retirement package was financed by deducting 9% of his base salary for his pension. Of course, that really didn’t happen in Davis, because our idiotic city council in 2001 gave the firefighters a permanent 9% pay raise (on top of their “market” pay raise that year) so that it looked like the firefighters were funding their retirements, when in fact they were not. (The police got the same 9% deal the following year, when they went on 3% at 50, too.) … What would be justified would be to reduce the salaries of all city employees on 3% at 50 by 3% per year for 3 years in order to reverse that 2001/2002 hijacking. … Chances that will happen in Davis? About equal to the chances that the morons on this council will junk the Weist-staffing model and replace it with the Kenley model, which costs less and improves public safety. Alas, morons will be morons.