Union Greed Drives California to Bankruptcy

The Stockton example could encourage cities to view bankruptcy as something other than a last resort.

Few non-local people pay much attention to the goings-on in Stockton, a hard-pressed Gold-Rush-era industrial city of 300,000 that sits in the agriculturally rich San Joaquin Valley at the eastern edge of the California Delta. But bond-holders, 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 bond-holders.

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, such as lush pensions. 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 March 25-27 in the Sacramento federal courthouse, then the public-sector unions and the scandal-plagued 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.

Granted, no one should feel too sorry for the lenders (and their insurers) who provided the pension-obligation bonds to the city. They knew the risks when one lends money to a city—especially one controlled by the unions. But their argument is strongest. 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.

On Tuesday, a Stockton management consultant called at the trial stated that the city would have a $100 million budget deficit in a decade if it does not take the bankruptcy route, in an attempt to show that it had no choice but to declare Chapter 9. But how hard has the city tried to deal with its debts?

As the attorney for the bond insurer noted in his closing comments on Wednesday, the city intended, from the outset of this process, to shortchange the bond holders. It has refused to address its biggest debt—the payments that it owes to CalPERS to pay for its 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.

Essentially, the city plan has put pension debt off the table, arguing that pension payments and benefits cannot legally be touched. A bankruptcy would be the place to challenge that assumption, but Stockton officials have no interest in doing so, figuring 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 Wednesday morning, when bond-insurer Assured Guaranty’s attorney Guy Neal questioned city councilmember Kathy Miller about a July 2012 video that explained the fiscal situation to city residents. Here are some of her statements from the video:

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.

That's common. But 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” health plan the city’s employees received:

This was free medical care for a retiree and a dependent for the rest of their lives. No co-pays, no generic requirements, no HMOs, and no premiums. See any doctor, stay in any hospital, purchase any drug, and just send the bill to the city of Stockton.

Absurd pay and benefits are common, and not just in Stockton. San Francisco Chronicle columnists Matier and 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. Some Newport Beach lifeguards receive $200,000 a year pay packages. 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 closed parks, reduced policing and other cutbacks to protect outrageous pension and pay levels?

Currently, Stockton leaders are floating a tax increase plan to fund police officers. But money is fungible so this should be viewed as a tax designed to pay for past boondoggles. Whatever the court decides, it’s time for the public to stand up to these misshapen priorities.

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  • ||

    California politician knows which side their bread is buttered. While the Wall Street banker can loan them the money, the public employee union calls the shot. And the union pension is THE sacred object that must be protected above all others. The point of the city is not to provide service, but to provide guarantee union pension.

  • PapayaSF||

    I believe public pensions are guaranteed by the California constitution, so good luck trying to change that.

  • heart_of_flint||

    Federal bankruptcy law and the supremacy clause. Done.

  • califernian||

    you can't pay if you don't have the money. Even if you can't eschew the obligation it won't matter if you're broke.

  • Brett B||

    The town of Prichard Alabama guarantees their pensions as well. It's just too bad that the town is bankrupt, and people aren't getting said pensions.

    http://blog.al.com/live/2012/0.....on_pa.html

  • Dweebston||

    As a friend of mine joked, revolutions have been fought over lesser instances of public pilfering.

    How can reason so carelessly endorse the militia movement? Doesn't Greenhut know a neoconfederate when he sees one?

  • Dweebston||

    Also, what is the call-out tag so I don't have quote with italics?

  • PapayaSF||

    Do you mean blockquote?

  • Dweebston||

    I think so.

  • Dweebston||

    That does it.

    Thanks!

  • John Galt||

    *shrugs*

  • Rabbit||

    Thanks for the clarification on the word revolution. Who knew it meant neoconfederate? It can never mean a revolt nonviolent against something repulsive.

  • section9||

    People who dissent from the Ruling Party when Democrats are in power are automatically racists and Neoconfederates.

    It's not as if the Ruling Party actually knows what the fuck it's doing, other than gorging itself at the Looter's Table, preparing for an Undeclared War against Syria, and getting the country used to No Knock Entry without a Warrant.

    However, if you oppose all of the above, you must be a racist and a Neoconfederate Militia Member.

    There has to be cross around here somewhere we can burn.

  • section9||

    Well hand me a mint julep and burn my cross, California is bankrupt as shit!

  • MoreFreedom||

    Perhaps you've not heard of the Tea Party rebellion in Boston Harbor, the Whiskey Rebellion, and I could probably find others. But a more likely explanation is your equating "rebellion" with "militia movement."

    It's telling, and humorous to me, that you jump from the author's sentence to say he "endorses the militia movement." This says more about you than the author.

  • heart_of_flint||

    Stockton's plan is simple. Ruin the credit of California cities, and make the next government declare bankruptcy all over again. It's a win/win. Cities across the state and country won't be able to borrow recklessly, and the pension issues can be resolved in just a few years. Only a federal bail out could prevent a reckoning.

  • califernian||

    If not I predict the return of "ghost towns" where California will be littered with various cities that everyone has left because the city couldn't get out of its pension obligations.

    "We are raising our sales tax to eleventy billion percent in order to pay the streetsweepers!"

    "I guess I'll move a few miles down the road."

  • section9||

    If China wasn't starting to have such problems of its own, normally I'd say that's when the Chinese would swoop in and buy places like Oxnard and Modesto for pennies on the yuan. But I'm not sure they want to invest in California, given the fact that the place is run by people who actually BELIEVE in Communism, something they gave up years ago.

    It's as if Madame Mao decided to leave the Gang of Four after finishing her last version of The Red Detachment of Women and moved to California to become a Democratic Activist. That's how my native state got to where it is.

  • Sevo||

    "It's as if Madame Mao decided to leave the Gang of Four after finishing her last version of The Red Detachment of Women and moved to California to become a Democratic Activist."

    She's mayor of Oaktown...

  • MoreFreedom||

    There's a few problems with your statement. First, what city has declared bankruptcy and had their obligations reduced? None that I know of, so they can't "declare bankruptcy all over again." Secondly, who's going to loan such cities any more money? If you don't have creditors, you can't declare bankruptcy (in bankruptcy either the creditors are wiped out, or they lose part of their holdings). Those who default on their debts, seldom find anyone who'll loan them any money.

    Finally, there is no win/win in bankruptcy. Either the taxpayers of Stockton (who'll be moving away) will pay the bills, or creditors of Stockton (mostly their retired government employees on gold plated pensions), or both, will get the shaft.

  • pinostabaum||

    quick! time to learn how to short the muni bond market

  • Libertarius||

    Even as recently as three years ago (while I was still a registered rep), they were pumping California munis as the safest and best place for wealthy folks to park their money, and selling 'em like hotcakes.

    I wonder if they're still singing "California munis are the place to be"

  • MoreFreedom||

    I was recently contacted by a guy looking to get my investment business, promoting a bond for teachers in Illinois. He touted it's high return.

    I told him the reason the return was so high, was they didn't have the assets to pay it back. Obviously, he didn't get my business.

  • Kyfho Myoba||

    Au & Ag, baby! StacketyStackStackStack!

  • GWBrooks||

    Great piece and one of the only ones I've seen that really lays out what's at stake in terms of ongoing, systemic moral hazard.

    One quibble though, in the last paragraph: Money is fungible, but a court case in Arizona last year found that elected officials (a school board, in this case) had a responsibility to spend bond money on only those things originally presented to voters.

    I know: One case does not blanket precedent make, but it's a start.

  • aaliyahjuhan||

    my co-worker's step-mother makes $81 hourly on the computer. She has been laid off for 6 months but last month her check was $17826 just working on the computer for a few hours. Read more on this site
    http://jump30.com

  • Sevo||

    aaliyahjuhan| 3.29.13 @ 4:10PM |#
    "my co-worker's step-mother makes $81 hourly on the computer"

    Nope. She's a cheap fuck; she makes that on her bed.

  • Rabbit||

    I only paid her $10

  • ΘJΘʃ de águila||

    She gives 8.1 virtual head jobs per hour.

  • section9||

    I held out for Lisa Ann...

  • Smack MacDougal||

    Why should residents of Oxnard pay for the pensions of muni workers from Stockton or elsewhere?

    Why do city workers have statewide taxpayers' funded pensions?

    The same goes with school teachers. Why do public educators have district—level employment contracts by statewide taxpayers' funded pensions?

    There is too much beggaring of thy neighbors going on in Caliland.

  • section9||

    The point of rent-seeking is, well, to seek your fucking rent, my friend.

  • chunkylover3||

    This is the problem with bailouts - no one is worried about fixing financial problems if they think there's some entity that will save them from failing. If you know you'll be bailed out then you're incentivized to take risks you wouldn't otherwise take. That's why it's important for individuals, businesses, cities, counties and states to face the consequences of their decisions and not be able to pass their debts on to someone else to cover. If you end bailouts you'll end alot of the problems of irresponsible behavior.

  • Sevo||

    "If you end bailouts you'll end alot of the problems of irresponsible behavior."

    Probably not the first time; they'll think you're kidding and you'll hand over the dough anyhow.
    The second inning'll get more attention. By the time of the third go-round, the message will take.

  • Sevo||

    "The point of the city is not to provide service, but to provide guarantee union pension."
    That and issue PR statements hoping the population continues to pay the taxes for the benes.
    Sorta like Moonbeam's choo-choo; it is a union hiring hall on wheels; all else is incidental.

  • Sevo||

    Jerry Bag| 3.30.13 @ 11:13AM |#
    "Every day I see another story on reason about how Cali is such a basket case. Nobody dares to suggest it is immigrants that are the problem. But everybody knows it."
    No, only racists presume so.

  • ΘJΘʃ de águila||

    No they are not, though you are free to suggest it. This article lays bare the problem.

  • jb4479||

    Fuck off you racist sockpuppet!

    It's not the immigrants who are promising pie-in-the-sky pensions, or outrageous compensation packages. It's the elected officials who are screwing over the state.

    I'm glad that I managed to escape when I did.

  • Sevo||

    Jerry Bag's calim represents the blow-off valve. The Dem gov't promises "free" stuff, runs out of money doing so, and (hint, nudge, hint) sort of suggests the problem is those damn illegal immigrants!
    Nope. The problem is the "free" stuff.

  • zanike||

    Whatever the court decides, it’s http://www.celinebagsaleuk.com/ time for the public to stand up to these misshapen priorities.

  • zanike||

    Even as recently as three years ago (while I was still a registered rep), they were pumping California munis as the safest and http://www.tomsshoesoutletv.com/ best place for wealthy folks to park their money, and selling 'em like hotcakes.

    I wonder if they're still singing "California munis are the place to be"

  • zanike||

    my co-worker's step-mother makes $81 hourly on the computer. She has been laid off for 6 months but last month her check was $17826 just working on the computer for a few hours. Read more on this site http://www.nikeblazerswomensale.org/.

  • raz||

    I think the headline misses the point. The unions were no more "greedy" (oh how I hate that overused word) than corporations are greedy for seeking to increase profits. The real points of the story are, in my opinion, (i) the corruption or incompetance (or both) of the city officials who granted the generous pensions or (ii) the failure of the voters to monitor what their elected officials were doing. The unions did what they are supposed to do - enhance their membership.

  • Sevo||

    "The unions did what they are supposed to do - enhance their membership."
    You are correct. The (majority of the) voters got the government they deserve. And the (majority of the) voters continue to presume that lefty politicos will look out for them.
    It really does test my optimism.

  • grey||

    Agreed, the 'greedy' word puts the focus on the self interest of the unions, which is made to seem inherently bad. Self interest is good. That's not to say the Public Sector Unions are not inherently susceptible to corruption, the very nature and structure of the relationship with government has built in conflicts of interest on both sides.

  • MoreFreedom||

    The difference between corporations and government unions, is that corporations get their money by selling goods/services at prices people are willing to pay. While government unions get their money by forcibly taking it from taxpayers. The first is a voluntary exchange where individuals make decisions for themselves, the second is legal theft, where a majority decides who will get robbed - kind of like two wolves and a sheep voting on what's for dinner.

  • grey||

    It's only an important difference if you believe forcefully taking from one person to give to another is different than an uncoerced exchange.

  • mariya||

    my co-worker's step-mother makes $81 hourly on the computer. She has been laid off for 6 months but last month her check was $17826 just working on the computer for a few hours. Read more on this site and go to home tab for more detail http://www.JUMP30.com

  • Mudhen||

    I fully expect Obama to attempt to bail out the states. Just another step in ensuring a continued Democratic majority stay in control in California, Illinois & New York.

  • grey||

    I'm starting to hear the words, "a more perfect union" in libtard blog chatter, referring to the relationship between the states and the federal government. They want a 'closer' relationship between the states and the federal government, meaning fewer powers left to the states. Bailouts would be in line with this movement.

    I don't like this, I don't like this at all.

  • section9||

    "The Banner High, the Ranks are Close Together..."

  • section9||

    That's partly what the Stimulus was about; if you look where a lot of the bill was directed, it was meant to go towards Illinois, New York and California.

    Porkulus was designed to keep the Rotten Boroughs rotten.

    Think of Porkulus as the domestic version of the Iraq War, with Jerry Brown and Our Friend Blago taking the role of Kellogg, Brown, and Root and Halliburton.

    The more things change...

  • juliusaugustus||

    The State of California is not bankrupt at all it has billions of funds in rainy day funds, Billions in Calstyrs. Look up CAFR. None of the states are bankrupt at all

  • oldeagle||

    From the California State Controller in the following website:

    http://www.sco.ca.gov/Files-AR.....ar1112.pdf

    "The Special Fund for Economic Uncertainties (the State's "rainy day fund") was fully depleted,resulting in a zero balance at the end of the current fiscal year".

  • grey||

    Libtard 101:
    1. Lie
    2. Deny
    3. Repeat 1

    Pesky facts do not get in the way.

  • Sevo||

    juliusaugustus| 4.1.13 @ 12:25AM |#
    "The State of California is not bankrupt at all it has billions of funds in rainy day funds,"

    And I'll bet you think Social Security has the cash just sitting there, right?

  • Johnno||

    I wonder if anyone has done the math on the Alemeda county executive that is retiring on a $423,000 per year pension for life at age 50. What would one have to have saved working in the private sector to receive such payments annually at age 50?

    Such a sacrifice, being a public "servant". Is it too late to quit the private sector and sign up for that plan, because anyone making a low six figure income in the private sector would be foolish not to.

  • MoreFreedom||

    Anyone who goes to work for the government, expecting a gold plated pension, is taking a risk that it won't be there. How will Stockton pay its bills when voters object to increased taxes (via their votes, or by voting with their feet and moving to Texas or some other no income tax state)? They will be unable. California won't bail them out, less they risk having to bail out other cities since they will create that moral hazard by doing so. And I don't expect our representatives in Congress to bail out a state. After all, would you vote for a rep who voted to bail out another state?

    Since they can't take more from taxpayers (killing their golden geese) the creditors (government employees on pensions) will take the hit.

  • section9||

    We could have the Russian Kombinat take over California and see how that works out. One day, millions of California Democrats wake up thinking they have free health care, the next day, "POOF!", a 75% haircut on their bank accounts.

    The poor Proggie slobs don't realize that that's what's coming to them. All those decades of voting Fascist and, in the end, Calgov will raid their bank accounts to fully fund Medical or some such Progressive nonsense.

    From afar, I don't know whether to laugh, cry, or reread Francisco D'Anconia's Speech on Money.

  • Chuckie||

    Stockton is facing what all "blue" cities face - astronomical crime rates. Stockton is populated with a struggling middle class who are mostly public sector workers, a black ghetto on the east side, Mexican transient laborers in the middle, and Hispanic gang territory in the south side.

    Life is cheap in Stockton, and you are as likely to get a parking ticket downtown as you are assaulted. The only difference is, the assailant will get away with it.

    Why? The public unions have turned California into their own personal piggy banks, unanswerable to anyone.

    Why? because candidates first have to convince the unions they will represent public union interests first. Any plans of "reform" are secondary and unimportant.

    In exchange they get an ocean of money, and a weak opposition candidate who's campaign has been financed by the public employee unions to beat back any credible threat. Then the opposition candidates money supply is pulled for the general election, and he faces a tidal wave of union money.

    It's a racket, but it's the reason why California leads the nation in unemployment and entitlement consumption.

  • chubster30||

    I thought only rapacious private sector robber barons were greedy...?

    I'm so confused...

  • chubster30||

    Private Sector Unions and Owners divide what they Make...

    Public Sector Unions and Politicians divide what they Take...

  • KeninIL||

    the nanny state has a fix for oversize pensions -- The Pension Benefit Guaranty Corp. All an entity has to do is roll there pension assets and liabilities into it and it takes care of things, couldn't be simpler !!

    -- except the max pension allowed is ~$40K at 65, that is if the assets of the entity allow for it.

  • LEONA||

    I was shocked when my neighbour told me she was averaging $95 but I see how it works now. see it http://JUMP30.COm

  • alybdar||

    Isn't it always interesting how easy it is to beat up those who do the work each day? What is wrong with this country? No middle class while the spread between the top and the bottom grows each day. Union members are outlaws. I don't want to take away money at the top but it needs to be realized that the top could not obtain that kind of money without the workers. The general public want all of the services but yell no new taxes. Gosh! What a mess. But, leave workers to raise their family, own a home, send their children to college or trades school with fair wages and pensions. And, it surely isn't the workers who are getting rich.
    Alybdar

  • Alton543||

    Connor. I see what you mean... Curtis`s rep0rt is super... last thursday I bought themselves a Land Rover Range Rover from making $5517 this past month and even more than ten-k this past-month. this is certainly the best-job I've had. I actually started six months/ago and practically straight away got me over $77, p/h. , http://www.wow92.com

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