Skip to comments.California Goes Bankrupt (The dominoes are falling one after the other)
Posted on 07/21/2012 9:31:14 AM PDT by SeekAndFind
First Vallejo, then Stockton, then Mammoth Lakes, and now San Bernardino and soon possibly Compton. As Orange County Supervisor John Moorlach told Bloomberg News, the bankruptcy dominoes are starting to fall. One California city after anotherfollowing a decade-long spree of ramping up public-employee pay and pension benefits, as well as redevelopment debtare becoming insolvent.
Not that the states legislators have anything constructive to offer. Californias 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 citya hard-pressed port on the edge of the California Deltahas 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, and excess bond debt for pension obligations and redevelopment projects.
Soon after, Mammoth Lakes decided to pursue bankruptcy. That citys 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 governmenta 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 doesnt 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 Bernardinos 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 couldnt control what happened to them. The Riverside Press-Enterprise reported: The city of San Bernardinos 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.
Theres no doubt San Bernardino and StocktonGround Zero for the housing crisissuffered 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 knowthey 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 is foolish decision making. Stockton, for instance, refused to take advantage of an exemption in prevailing wage lawssomething 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.
But even coastal cities are struggling. Los Angeles is not a victim of the foreclosure crisis. Pension costs in San Josewhere the housing market has rebounded thanks to a healthy tech-based economyrose 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.
In the Prop Zero blog Joe Mathews debunks San Bernardinos 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. Californias local officials are, by contrast, big spenders, at or near the national lead in compensation for local workers, especially law enforcement. Mathews misses a big pointCalifornia state government spends its money poorly, but he is right about local government wastrels, 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 tackle existing pension debt in their bankruptcy plans. Orange County emerged from bankruptcy in the 1990s in better shape than ever, but as writer Chris Reed explained in 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 theres no money, theres nothing left to do. In Scranton, Pa., a judge issued an injunction to stop the mayors plan to begin paying all city employees minimum wage. But theres 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. Thats perhaps the saddest commentary on the situation in California cities these days.
-- Steven Greenhut is vice president of journalism at the Franklin Center for Government and Public Integrity.
CA and it’s cities are on an unsustainable trajectory. I view Californians as swirling the toilet bowl while their leaders just won’t let go of the flush handle.
Californias **Democratic leaders** are not only unwilling to rein in the costs of benefits for their patrons, the public-sector unions.
It’s a matter of do or die,you have an option.
I look for stealth tax increases which will continue the downward spiral.
Thank goodness the LAPD has an independent pension system run by the PPL. When the city declares Chapter 9, their retirement funds are still (relatively) safe.
I am thinking a federal bailout will be floated. California can’t print money, but Obama and the Fed certainly can.
Of course, this bailout will be under the guise of “Too Big To Fail” and doing it “For the Children.”
California Democrats were recently bragging about how there were no longer any Republicans holding statewide office.
Some won't be so stealthy. Repeal of Proposition 13, which limits residential property tax increases, is now in their sights. It really galls liberals that they can't increase property taxes to the point that retirees are forced out of their paid-for homes.
Recent San Jose actuarial reports show $3.5 billion of city debt for underfunded pension and retiree health benefits -- a shortfall that works out to about $11,000 for every household in the city.
Yet, as Mayor Chuck Reed proposes substantive pension reform, workers and a local television reporter are hyperventilating about irrelevant numbers that distract from the ballooning problem.
If not for major layoffs and salary cuts last year, the shortfall would be much worse. It would also be much larger if the city used more realistic investment earnings assumptions rather than relying on overly optimistic forecasts.
Nevertheless, the calculations show the city's retirement programs combined have only 56 percent of the funds they should. Put another way, the unfunded liability equals about eight years of city payroll.
To understand what's going on here, keep in mind that employees earn additional future retirement benefits for each year that they work along with their salaries.
The city has three problems: First, the amount that should be set aside for those newly earned benefits has increased. Second, even that greater amount isn't enough because the payment calculation relies on those optimistic investment assumptions. Third, past reliance on unrealistic assumptions, retroactive benefit increases and actuarial changes have caught up with the city, leaving it with huge unfunded liabilities for pensions.
As for retiree health benefits, only small amounts have been set aside for future benefits. The resulting debts are treated like mortgages, with annual payments spread over as much as 30 years, thereby passing costs to the next generation.
The city must pay off the entire pension shortfall; workers have no obligation. For retiree health, workers make a small contribution...(Excerpt) Read more at contracostatimes.com ...
I think they are in a race to the bottom. Illinois and California both know only the first state will get bailed out by the Feds. Then the people in more responsible states will revolt. Civil war will result.
The author doesn't know squat about the corruption underlying California mega-real estate deals. In the 1980s, the LAT owned vast swaths of "the Inland Empire" (theirs), a series of alluvial fans below the San Gabriel Mountains between Claremont/Pomona and the city of San Bernardino. They got pork out of FedGov to install over sized freeways and flood control. Somehow magically, the greenies got all bothered about groundwater pollution from the dairies around Clovis, thus putting pressure on the holders to sell and eventually creating a public district (Santa Ana Water Project Authority) to treat that groundwater.
All was made "developable," not a little of it with Federal money. Then they hyped that "market demand" riding the mortgage bubble selling it to said developers, knowing that the public was on the hook for the loans. The LA Times Mirror Corporation and Catellus Development made out like bandits, with the rest of us holding the bag.
Pump and dump, it's the Democrat way.
California deserves everything California gets.
Ex: I have a friend who lives in LA, lost her long term job 3 years ago. She was picked up by the State, a program that places Mexicans in businesses with the government paying their salary. Stupid #1
They also run a summer camp - Bigger Stupid #2 — the summer camp is solely for, again, Mexicans. For them to be trained and placed they have to take a test AND ... are you ready ?
They have to fail the test to get in AND they’re told up front that they have to fail the test. Rock on California.
CalWORKS and the program I just posted is . . . LAWORKS.
Historical America being looted by tightly organized cohesive groups that have at once flattered the old elite, demonized them if they resisted, and imported junior partners to the crime. All the fancy ideology our intellectual betters in Conservatism Inc. spew is nothing but their faction’s cover for the loot and wealth stripping our new “elite” is doing to America. David Brooks is right for once, the new elite is more akin to a criminal org. for its lack of foresight and nobless oblige.
“I am thinking a federal bailout will be floated. California cant print money, but Obama and the Fed certainly can.”
Another reason to vote the Obama Bunch out of the White Hut in November. I am a Californian, and I do not want this state to be “bailed out.”
Those who profess noblesse oblige,
Confess to droit du seigneur.