The Specter of Bankruptcy Haunts California

Will state lawmakers heed the lesson of Stockton?

The most optimistic pension reformers had hoped that the decrepit city of Stockton’s 2012 bankruptcy would be a “day of reckoning” — a point where the city’s leaders would pare back overly generous retirement benefits and embark on a road to fiscal responsibility.

They saw hope for hard-pressed cities everywhere, as Bankruptcy Judge Christopher Klein set up a possible showdown over pension payments when he rejected efforts by bond insurers to stop the bankruptcy motion. Klein said he was leaving everything on the table, meaning that city employees might eventually join the bond guys in taking a haircut.

But as often happens with government-reform efforts, the pessimists turned out to be right. Earlier this month, the Stockton City Council approved a plan that restructures debt and fully funds the California Public Employees’ Retirement System, thus leaving pension benefits for city employees unscathed.

If there’s any doubt who won out, one need only read the CalPERS statement: “By continuing to fully fund its pension obligations, Stockton ... acknowledged the importance of a secure retirement to its current employees and retirees, and the positive impact that pensions have on recruitment and retention of quality public servants.”

It’s hard to believe that such lush pensions are needed to lure “quality public servants.” But whatever the case, when cities run out of money everyone should share the pain. Instead, the key “stakeholders” — city employees, union leaders, Wall Street creditors — declared a “win-win,” but the deal is not without its losers: taxpayers.

The so-called Plan of Adjustment is based on the passage of Measure A, a Nov. 5 sales-tax-increase measure that is being sold to residents as a means to assure that sufficient police officers are on the street. If voters say “yes,” the restructuring numbers work out. Officials elsewhere will get the message: Just raise taxes after the spending spree hits the fan.

Stockton had paid its employees 25 percent above the California public-sector average, and still offers its police and firefighters a “3 percent at 50” plan that allows them to retire at age 50 with 90 percent of their final years’ pay. The city had offered lifetime medical benefits for people who worked there only a short time, causing one council member to dub it a “Lamborghini” plan. That benefit is rolled back, but there has been no reckoning.

“It’s dead man walking,” said Carl DeMaio, the former San Diego councilman, current congressional candidate and pension-reform activist. “You can’t tax your way out of an unsustainable fiscal obligation.”

Apparently, Stockton is following the footsteps of Vallejo. That San Francisco Bay Area city “is again facing a budget crisis as soaring pension costs, which were left untouched in the bankruptcy reorganization (two years ago), eat up an ever-growing share of tax revenues,” according to Reuters.

In refusing to take on what Vice Mayor Stephanie Gomes called “a giant behemoth like CalPERS,” Vallejo took the easy way out but never fixed its fundamental problems. Services are still subpar. And now Stockton, where residents joke about not calling police unless there is blood in the streets, is doing the same thing.

“They’re not even kicking the can very far down the road,” said Jack Dean, vice president of California Pension Reform, which is crafting a statewide pension-reform initiative for the November 2014 ballot. “It’s like what happened in Vallejo. The [bankruptcy] judge should say, ‘We’ll see you back here in a few years.’”

Stockton’s proposed three-quarter-cent sales-tax increase is great for creditors, who now have hope of being made whole after providing the city with pension-obligation bonds several years ago. But opponents say in the official ballot arguments that the $28 million annual tax hike will “be swallowed up by escalating employee pension costs.” Opponents also complain that the profligate City Council can squander the money in myriad ways.

After Judge Klein allowed Stockton’s bankruptcy to proceed in April, the bankrupt city of San Bernardino, which had halted payments to CalPERS, started its payments again. Officials there no doubt figured that it’s too tough to take on the nation’s largest pension fund, which has threatened legal battles if pensions aren’t at the top of the payment heap.

Other California cities, struggling with pension costs but still far from hitting the bankruptcy wall, are left to reckon with an increasingly intractable problem.

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  • Aresen||

    I wonder what happens with the pensions of City Councillors...

  • ||

    California's got the most of them.
    Boy, they got a host of them.

  • BakedPenguin||

    You can stab and shoot and spit, but they won't be fixing it.

  • Bardas Phocas||

    "Plan of Adjustment" - is that like the 'Plan of Salvation'?
    http://upload.wikimedia.org/wi.....vation.jpg
    Is California in the Outer Darkness yet?

  • Scarecrow Repair||

    I kind of approve. If common sense ever applied, it's that these clowns will be back in bankruptcy Real Soon Now, and Vallejo seems to bear that out. The longer they push it off, the harder the final fall will be.

    Go for it! you stupid short-sighted sunzabitches. Wrap your fist around as much as you can now, because that bottle neck is gonna squeeze more away than your worst fears.

  • GregMax||

    As long as idiot continue to raise taxes on themselves there will be not final fall.

  • Bill Dalasio||

    Yes, there will. The thing is, you can only tax so much before citizens decide to leave. What's in Stockton that you just have to be in Stockton?

  • Square||

    It has low property values and proximity to both Sacramento and San Francisco.

    It's also a shithole that doesn't have enough proximity to either place to overcome the fact that it's a shithole (same for San Bernardino).

    Hence, when SF and Sac boom, Stockton rises with the tide. When the tide recedes, Stockton is the first place to turn into a stinking mud flat.

  • Francisco d Anconia||

    I had a conversation at CNN yesterday and have subsequently lost all hope that America's problems can ever be solved politically:

    Jack

    ...I bet you howled when Reagan tripled the debt and bush doubled it didn't you? I'm so tired of these right wing hypcrites getting on here spouting their nonsense. Bush doubled the debt to fund 2 wars and give his rich buddies tax cuts...

    Me

    Let's do a little math Jack. Reagan took the national debt from $1T to $3T. That's an increase of $2T. Bush took the debt from $5T to $10T. An increase of $5T (which is an abomination BTW). The current President has gone from $10T to $17T in 5 1/2 years...
    The current President increased the debt more in 4 years than Bush did in 8.

    LeRoy

    Not in percentage terms. Do people even UNDERSTAND percentages anymore? Has America become so dumbed down that people's eyes glaze over when you start talking about percentages?

    I explain yet again

    What do percentages have to do with it? Bush doubled the debt, but only increased it by $5T because it was lower to start with. Obama only increased it by 70%, BUT THATS SEVEN TRILLION DOLLARS!
    Who did better, the guy who raised it $5T or the guy who raised it $7T (with 2.5 years left to go). Which increase would you choose LeRoy?

    LeRoy

    Francisco, would you rather increase your wealth by 70%, or by 100%?

    This guy votes.

  • Carolynp||

    Sooo...with you. We're even now pricing out options in New Zealand. I feel like we are skilled enough to wait out the crash somewhere else. I assume the boneheads will eventually figure out that dictatorship isn't all that cool when the guns are pointed at you, but who knows?

  • Francisco d Anconia||

    I looked at NZ, but I think it's Chile for me.

  • ||

    Isn't Chile socialist? My best friend's wife is Chilean and they think socialism is just swell.

  • Francisco d Anconia||

    Ranked #7 on Heritage Economic Freedom Index.

    And #11 on CATO's.

  • Francisco d Anconia||

    Argentina is socialist.

  • ||

    For the life of me, I can't figure out how Canada is ranked so highly. Just how bad are things in the land of the free? Canada is not a bastion of freedom. I guess relatively looks like we are. That's pretty telling about the state of things.

  • ||

    Holy shit. That's depressing.

    Percentages! PER.CENT.AGES!

  • Bill Dalasio||

    "Francisco, would you rather increase your wealth by 70%, or by 100%?"

    Wouldn't that depend on my initial wealth? I'd rather increase my $100M wealth 70% than my $50 wealth 150%

  • some guy||

    Did you point out that if the debt were 0$, then any increase would be an abhorent infinity percent?

    Clearly this guy is aware of percentages and knows how to calculate them, but doesn't know when to actually use them meaningfully. He has just enough rope to hang himself...

  • Mumu Bobby||

    Mainstream economics is also a failure in this regard. Measuring government spending as a percentage of the economy is ludicrous. On a per person basis. That makes some sense, with maybe a per square mile augmentation for the sparsely populated states. Adjust for inflation.

    Measuring the government as a percentage of the economy is to willingly attach a tape worm to your economy. The tape worm, and half the country, are in favor of an ever fatter tape worm. When the worm gets big enough to eat Paulie Krugtron we'll do something about it.

  • DarrenM||

    Some people care more about assigning blame that fixing the problem.

  • Square||

    These cities are absolutely counting on CA real estate bouncing back, which it certainly will (and already is starting to).

    Stockton, county seat of San Joaquin County, saw a greater increase in property tax revenues from 2000-2007 than, I believe, any other county seat in the country.

    What I know for fact is that San Joaquin County saw the greatest drop in property values from 2007-2010 in the country.

    Vallejo saw a similar cycle - Vallejo is far enough from San Francisco that 10 years ago it was the up-and-coming place to be. Once property values crashed, Vallejo was one of the first places to see property values plummet.

    These suburban/exurban CA areas like Vallejo, San Bernardino County, and SJ County got dollar signs in their eyes in a big way during the bubble, and when everything crashed they found themselves holding onto far more financial obligations that they could manage.

    One thing that so far you can absolutely count on, however, is that CA real estate prices will bounce back. This is what CA governments always assume, and so far they have always been right.

    I predict that in 5 years, Vallejo will be swimming in cash.

  • Aresen||

    The only cash that they will be swimming in will come from the feds, if Team Blue can push the funding through. And that won't last long.

    The current federal government hyperspending cycle is barely lifting the economy and even Krugmann admits that there is a limit to how much debt the US can sustain. Eventually, the people buying Treasuries are going to want a real return on their investment and demand higher interest rates. A 2% rise in interest rates will add $340 billion to the budget deficit, at which point you enter a deficit death cycle.

    That may be more than 5 years off, but if the US Federal Government does not control spending, it will eventually have a Greek style crisis. When that happens, every state and local government is going to find itself unable to pay the bills.

  • Square||

    CA gives far more to the Federal Government than it gets.

  • Calvin Coolidge||

    By "CA", so you mean the citizens pay more in taxes than they receive, or that the state government does?

    Most of the stimulus money has gone to state and local government to keep unionized Democrat voters on the payroll and to keep their pension plans solvent. When the Federal spigots run out, the states are the next in line to learn that you can't give away more free stuff than you can afford forever.

  • Carolynp||

    We were in California a month ago. My husband was born and raised in San Diego and has always dreamed of going back. When we got home, my husband got on line and started applying for jobs...in Texas. If Californians really believe anyone wants to live in the hellhole they've made of the state, they are sadly mistaken. We question whether or not we'll take our kids there again.

  • Square||

    Please don't. California sucks. Stay away.

  • DarrenM||

    "Hellhole"? I live in San Diego (I moved here from Phoenix 13 years ago) and I am so far perfectly satisfied with it. No place is perfect, but I have no desire to move, though Australia might be interesting.

  • Mumu Bobby||

    It never rains in Southern California was sarcasm folks!

  • Stevecsd||

    Their ever increasing pension costs will sink them, no matter how high property values & corresponding property tax revenues go. When cities & counties are paying 25-28% of their budgets to their pension plans, it is not sustainable.

  • Mumu Bobby||

    On a micro level it might be a different story. The top shelf at Google made billions on paper today. Twitter is about to IPO and Facebook is up more than 50% from it's IPO price.

  • OldMexican||

    Other California cities, struggling with pension costs but still far from hitting the bankruptcy wall, are left to reckon with an increasingly intractable problem.


    Oh, don't you worry! California is showing a spectacular economic comeback that will solve everybody's problems pretty soon, thanks to the Democratic leadership that the state is enjoying. Tony told me so, just yesterday, so it must be true.

  • Square||

    California is, in fact, experiencing a spectacular economic comeback, at least in construction. We can't seem to price jobs too high to not get them.

    Team Blue will squander the wealth the way they always have, but CA's wealth doesn't have anything to do with anybody's political ideology.

  • igotnuthin||

    Pensions should be illegal for public employees. A 401K (or the public employee equivalent) is a fine option. Defined benefits have not existed for most of private sector for 30+ years...The fact that pensions exist for the majority of Public Employees is a JOKE!

  • Aresen||

    Pensions should no more be illegal for public employees than any other group.

    What should be illegal is unfunded pensions. If the state and local governments had to set the money aside at the time they signed the pension agreements, they would have to pay for them out of current taxes, not the taxes of their children and grandchildren. City councils would be a lot more reluctant to agree to overly generous pensions if they had to raise taxes and risk the wrath of taxpayers in the next election.

  • Square||

    ABSOLUTELY!!

    This is the whole nature of the scam - CA public employees by and large make less than market rate wages for their job titles (for their competence levels is a different discussion).

    Since govs don't have the now money to pay people market rates, they accept inferior quality people at lower rates and then promise them big big retirement packages to be paid for "by the future."

    This is unethical in the extreme and should not be tolerated - the contracts should be declared void based on their being premised on the illegal transfer of wealth from people who don't exist yet.

  • ||

    "...if the state and local governments has to set aside the money..."
    Yeah, so what? If my aunt had balls, she'd be my uncle.
    If local, state and the federal govt had to fully fund pension obligations, we'd have much less spending on said pensions. It's a lot like Keynsians who agree with deficit spending in bad times, but don't like to save during the good times.

  • DarrenM||

    It's a lot like Keynsians who agree with deficit spending in bad times, but don't like to save during the good times.

    Those aren't real Keynesians (and I don't defend this as an economic theory). They'll gladly use the cover of Keynesianism, but will abandon it in a heartbeat when it no longer supports their agenda.

  • Ornithorhynchus||

    S-P-E-C-T-R-E!!!! The R comes before the E!!

    I swear, this is even more annoying that when people spell 'quandary' as 'quandry'.

  • Square||

    Legitimate regional alternates, like "theater" and "theatre."

  • vicky||

    Public schools. Union run public schools.

  • PaulW||

  • Square||

    The Brits are going to catch on to aluminum, too . . .

  • ||

    Massachusetts just instituted a perpetual gas tax hike. Who needs a legislature? /tosses piece of paper over shoulder.

  • ||

    So.

    Liberal Democrats still think only Bush spent money and can't seem to grasp Obama is a bigger spender for some draconian reason. It fits well with their 'blame Bush' narrative. California is an economic basket case and the biggest state in the land. How ever will they spin this to blame right-wing extremists, conservatives, Bush and the GOP?

  • Square||

    Easy. They won't tax the rich enough to cover the government's expenses. That's why the government is going bankrupt.

    If you live here, these things roll right off your tongue.

  • dora622||

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  • vicky||

    Well............California deserves what California gets. They are run by Democrats and Unions.
    I have no sympathy.

  • bassjoe||

    The article's subheading was pure click-bait. There's nothing in it about "state lawmakers" unless somehow the city council of Stockton has replaced the California legislature.

  • Square||

    Also ignoring the fact that San Joaquin County tends to lean Republican, does it not? Don't know about the Stockton City Council . . .

  • PaulW||

    If they are getting paid lucrative amounts of money, are they still considered public servants?

    Sad when our government employees make on average 14% more than their private sector counterparts, and that is just at the federal level. It is probably even more than that at some local levels, especially Stockton.

  • Square||

    From what I've seen those ratios go down as you go more local, not up.

    I work for a public works contractor in Northern CA, and I've done jobs in San Joaquin County, and I get the impression that the guys who run those projects are paid less than their counterparts in the private sector.

    I recently did a job direct for the State Department of Education, however, and those guys had some fancy suits.

  • Square||

    Not that they're doing it out of some selfless sense of public service, mind you - in my experience they're not the kind of people you would hire in the private sector because, you know, they're incompetent. So they take less pay and work for the government for the job security and the great retirement package.

  • Sevo||

    “You can’t tax your way out of an unsustainable fiscal obligation.”
    You can in CA. Dem voters will vote for any tax under any circumstance. It's only 'fair'.

  • ||

    having charged too much on your credit card, and raised your balances 100% from $10,000 to $20,000 it is then a lesser percent, BUT A BIGGER PROBLEM YET, to charge another $15,000 raising your debt to $35,000.

    The first go-round you added $10,000 but on the second, you added $15,000. Bigger problem.

    The higher the national debt goes, the bigger of a problem "a mere 70% increase" becomes. Right now? HUGE. BIGGER THAN EVER BEFORE.

    and fuddermore - they're not following the path of Vallejo, they're following the path of Detroit. Keep raising taxes and PRETENDING that's going to raise revenue. WRONG. It raises the rate of exodus, fewer people & businesses coming in, more going out, faster than before and then Revenue goes DOWN not up. Pretend that fixed it when it actually poked a bigger hole in the boat than it was before.

  • Nixonfan||

    My understanding is that the problem in CA as well as in MI is that pensions are protected by the state constitution. At some point, a federal bankruptcy judge will challenge that protection on the basis of the supremacy clause, and the matter will be decided by SCOTUS. Detroit may be the test case.

  • concerned cynic||

    Until state and local governments freeze their defined benefit pension plans, and move their employees to Social Security and defined contribution plans, the finances of state & local governments will be a continuing crisis. The headache will grow into constant agony. The consolidation of local government retirement plans into CALPERS means that every taxpayer in California is on the hook for profligate promises made by any single jurisdiction. This is an extreme instance of the free rider problem.

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  • thorax232||

    Citizens are nothing but livestock to be used in the interest of the thieves.

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  • Bankruptcy help||

    We're on our own in dealing with the rest of the federal government's power to destroy, too.

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