Government Spending

We Are So Totally Out of Money

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Here's a long, thorough, and therefore depressing and enraging article in Barron's about the public pension bomb under the nation's hood. The big-picture, we-are-so-screwed stuff:

Moral of the story: When we use clip art, be VERY afraid

[M]ost Americans have ignored at their own peril a far bigger pocket of privilege [than Wall Street greed]—the lush pensions that the 23 million active and retired state and local public employees, from cops and garbage collectors to city managers and teachers, have wangled from taxpayers.

Some 80% of these public employees are beneficiaries of defined-benefit plans under which monthly pension payments are guaranteed, no matter how stocks and other volatile assets backing the retirement plans perform.  […]

According to a survey last month by the Pew Center on the States, a nonpartisan research group, eight states—Connecticut, Illinois, Kansas, Kentucky, Massachusetts, Oklahoma, Rhode Island and West Virginia—lack funding for more than a third of their pension liabilities. Thirteen others are less than 80% funded. [..]

The more likely outcome is dramatic cuts in essential services, such as police and fire protection, health spending, education and infrastructure improvements, in order to cover ballooning pension payments. State and municipalities, after all, must do something: Most have a legal obligation to pay out earned pension benefits. And some don't even have the courage to switch new teachers, bureaucrats and police to a defined-contribution system, to prevent the funding problem from worsening as time rolls on.

OK, you've talked me onto the ledge. So, what about cities and counties and states just cold going bankrupt, and maybe preventing our grandchildren from paying defined-benefit pensions the likes of which they'll never enjoy? Don't bank on it:

Copyright Barron's, available at the link provided. Also, we're hosed.

[L]ook no further than the San Francisco Bay city of Vallejo, which filed for Chapter 9 bankruptcy in 2008 as a result of insolvency.

The California municipality, which has 120,000 residents, is proposing a three-year moratorium on all interest and principal payments on the $53 million of municipal debt that is backed by its general fund. But it is keeping fully intact its $84 million in pension-fund obligations. […]

And only one state—Arkansas in 1934—has defaulted on its GO bonds in the past century with their holders suffering losses. Arkansas, however, was a special case. In addition to the Great Depression, it was ailing from large local debts it had assumed as a result of catastrophic floods in the 1920s. […]

Though Vallejo is still months away from getting a court decision on whether it can go ahead with its debt-adjustment plan, it has succeeded through contract renegotiations and major layoffs in cutting its employee costs by nearly a quarter.

But the fallout has been brutal. Employee health-care benefits have been decimated. Holders of the city's municipal bonds are unlikely to get all their money back. And violent crime rates have shot up dramatically as a result of reductions in its police force from 158 to 104 officers.

The only thing that will be left untouched? The very thing that tipped the California city into Chapter 9—its $84 billion in future pension obligations.

Whole thing here; we told you so here; link via Instapundit.

NEXT: Dying People Shouldn't Have to be Beggars

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  1. Unlike the federal government, state and locals cannot print their own money. These pensions are not going to be paid without massive help from the federal government. The problem with that is that the feds don’t have any money either. So they will have to print the money creating inflation and making the pensions worthless anyway.

    I don’t think the Feds are going to bail out the state and locals. The Democrats thing they will. But I don’t think they will. I think we are going to see wave after wave of municipal bankruptcies and all of these pensions radically reduced over the next ten years. These people better save their money, because the gravy train is about to run dry.

    1. “These people better save their money, because the gravy train is about to run dry.”

      They wiln’t, people are far too conditioned to make demands on management ( in this case the municipality ) without having to worry about the ‘details’ of how they do it or the long term consequences. Our political system and, more importantly, economic system are set up (or might as well have been)to defer cost. Most of these municipalities had surpluses in their funds at the height of the boom. You know what they did with? Took the surpluses then cut taxes, increased services, and told their employees about the big pay outs coming to them (since the trend would continue, and the fat times would roll on and on).

      These people are going to end in the same place as all the rest of the baby-boomers (who have saved no money, they have equity in their homes!), in elderly semi-poverty as a giant voting block protecting their government money until the federal government finally goes bankrupt, the country is destroyed, and children are in chains.

      Then they’ll fucking die.

      1. Then they’ll fucking die.

        that part can’t come soon enough

      2. the baby-boomers (who have saved no money, they have equity in their homes!)

        Hard to blame people who were in their 30’s during the Carter administration to put money into an asset rather than cash, cash was quickly losing its value and real estate wasn’t. 30 years later, it’s the opposite.

        The problem of course is that people put far too much trust in government. The low percentage of boomer who assumed the government was going to screw them are the ones who were able to change and keep their finances in order. And government is still going to go after their wealth. Bottom line: you gotta keep moving the stash house.

    2. These people better save their money, because the gravy train is about to run dry.
      reply to this

      The nerve of those people, planning their lives around a contract made with their employer, foregoing higher wages in the world of profit-seeking so they could work to make the world a better place in the halls of public service. They deserve better than having people who wouldn’t know public spirit if it crawled into their anus, lodged itself in their upper intestine, and started siphoning off vitamin B-12, cackling over their lives being thrown into ruins.

      1. Their employer is the government, who, unlike a corporation, can just raise taxes to fulfill their contract. Corporation have mostly gotten rid of defined benefit plans because they are Ponzi schemes that shove risk onto people who never agreed to the plans in the first place.

        World a better place? Because people who work in private industry don’t? People who work in industry actually have to do something that pleases people enough that people are willing to pay for it. A lot of government jobs would never survive in the private sector since the jobs don’t benefit anyone (a lot of TSA workers come to mind).

  2. I think the honest, hard-working Vallejo municpal employess should get an INCREASE in their pension benefits for being forced to work for a bankrupt city.

    Now what?

    1. Me too!

    2. Who’s forcing them?

  3. “But I don’t think they will. I think we are going to see wave after wave of municipal bankruptcies and all of these pensions radically reduced over the next ten years.”
    wrong,
    We won’t cut the pensions…this is a wonderful crisis that we won’t want to waste.

    First we will try austerity….this will become the word of the decade.

    Cut the existing municipal payrolls, teachers first, then snowplowing, then the the most useful public employees, then firemen, then police. Water and sewer bills going through the roof.Class sizes growing to 25-30-35-40 kids per class. Then we will mount pressure for higher taxes.

    1. I don’t think so. I think the marks are getting wise.

    2. Amen. First of all, the “crisis” is not really a crisis.

      “Austerity” (which makes me laugh every time I read about Greece) will be the buzzword elsewhere. We will just keep on borrowing and taxing.

      Defined-benefit plans are here to stay. Defined-contribution plans are for private sector employees who enjoy greater job security. Oh, wait.

  4. “And violent crime rates have shot up dramatically as a result of reductions in its police force from 158 to 104 officers.”

    that’s a leap.

    1. How dramatically shot they? If anybody has good Vallejo crime stats, please don’t keep ’em to yourself. Can’t get anything off Vallejo PD’s site, except that there were 433 crimes in the first week of February and 458 the first week of March. (Their crimefinder DB doesn’t even go back a year.)

      Stossel may have described it on his show, but I find when I listen to TV somebody could say “The crime rate soared, from only 433 a week to more than four hundred fifty a week,” and I’ll just say, “Jesus sucking Zeus that’s one soaring crime rate!”

      1. Those 17 people were feeling a little skittish until then.

  5. So, what’s the solution?

    They made a contract with those people to pay the pensions, to which I assume the employees contributed.

    1. The solution is tough shit. The contract can’t be fulfilled. They should have thought about that when they were letting their union leaders demand pensions that couldn’t possibly be paid.

      1. I look forward seeing that attitude applied to others.

        1. Its called bankrupcy. You tell your creditors, sorry, we can’t pay you, we are broke.

    2. So, what’s the solution?

      Bankruptcy, that’s what. Where everyone, including the pensioners, gets crammed down.

      Their current plan is to gut the bondholders (meaning they will lose access to the credit markets in the future) and render their little burg close to unliveable. That’ll do wonders for the tax base that is supposed to feeding the pension fund.

      1. And that cannot go on forever. People will not tolerate a city when it becomes unlivable. Even New York eventually turned around its crime problem when it became too bad. As these cities try to cut services and raise taxes and default on bonds to avoid cutting pensions, voters will get wise and put a stop to it. It will take a while, but it will happen. Once it starts there will be no stopping it. When the city in the next county has lower taxes and better services because they crammed down their pension obligations, the pressure to do the same will be overwhelming.

        1. After they vote with their feet, provided they have the means.

      2. And I wonder how many municipal and state pension funds own bond from other jurisdictions? I will bet anything they are screwing each other. “Bond Holders” are not just evil capitalists with handlebar mustaches, tophats and monocles. They are often pension funds.

      3. So when the Feds take over instead of going to court, will they award 50% ownership of the municipality to the unions like they did with GM?

    3. Worse comes to worst, they could disincorporate the city and the residents could re-incorporate as a separate town.

    4. Any contributions made by the employees would be protected in a bankruptcy. For the most part, these pensions are not contributory.

  6. I think this will resolve itself over time. Eventually, the only ones with a lot of money will be the retired publice service employees. That will make them more attractive to violent criminals, more of which will be on the streets due to police shortages. Eventually the retirees will be murdered and robbed out of existence.

    1. However, the retirees usually move to Nevada or Florida or other low-tax states with their pension loot. No point in hanging around and having to pay taxes for other people’s state pensions!

      1. And this is why statist types hate the fact that people have freedom of movement and wish to restrict borders.

    2. Here’s an idea…anyone who works for a local government long enough to retire would be required by law to live in that city/county/state to continue drawing their pension.
      If they don’t like it, they can go get one of those PHAT private-sector jobs they’re always yammering on about.

  7. Adding to the problem is the fact that in many states with a state income tax pensions are not taxable.

  8. Poor Matt, those evil teachers are a bigger source of privilege than the entitlement laden lenders on Wall Street. I bet you’re passive aggressive too.

      1. My mistake Matt, carry on.

    1. Yeah but those Wall St. types made huge amounts of money for stockbrokers, er, stockholders before driving their companies into the ground – so they still deserve the multi-million dollar rewards they got.

    2. So, which cities and states are going bankrupt because Wall Street forced them to sign contracts under the threat of striking and shutting down schools, law enforcement, fire stations, busses, etc.?

      1. Are you as loose with the women as you are with the word “force.” But i understand, it takes a lot of mental effort to argue protections for Wallstreet corporate lenders versus the rest of us slobs who work in other unglamorous occupations.

        1. Thank the Democrats, that party of Corporat Welfare for giving my money to Wall Street. I asked them not to, but they gave me the middle finger and did it anyway. And why did they give the money to Wall Street? Because their public sector pensions were at stake…

          1. Guess Who?

            Hint: TEH SLAVERY

      2. PapayaSF, you might want to keep your TEH UNION porn to yourself, ok.

        1. That’s porn I’d like to see. Your fetish for reactionary public employee union porn, not so much.

          I know obscenity when I see it.

    3. Do yourself a favor and peruse the archives for a bazillion articles railing against TARP and the various bailouts. It’s too late to keep yourself from looking like a dumbass, but hey, make lemonade and all that.

  9. 120000 residents. $53 million in debt, $84 million in pension obligations.

    SUCK IT UP. IT IS LESS THAN $1100 EACH, YOU BABIES. Oh noes, that means you might have to cut back on your cheap Chinese shit habit for a few months, or keep driving your gas-guzzling SUV for another year before trading it in. Cry me a god damned river. Pay your bills and quit whining.

    1. Hey Chad, what do you think of How I Met Your Mother? It’s pretty hackneyed in my opinion, though it occasionally has a funny moment. I think I’m going to stop watching it.

      1. LOL. Contrived as it is, I kinda enjoy HIMYM. Barney has some good lines…

      2. Who’s up for pie?

    2. Uh, Chad, magnanimous as it is of you to give up your daily chai latte to help keep your local municipal employees in the style to which they are accustomed, not everybody has $1100 lying around. Baby.

      1. The wealthiest top 10% own 80% of the assets in this country. Surely they can pick up the slack.

        1. If they are as powerful as you claim they are, then why would they “pick up the slack” when they can just move elsewhere to avoid the taxes?

        2. Wealth envy solves nothing, Tony.

      2. If you don’t have $1100 lying around, you are doing something seriously wrong, and should get off your lazy heiney and do something about it.

        1. What’s the point of saving money? If I do, I’ll become one of the evil “rich”, and people like Chad will want to steal all my money away.

        2. The unemployment rate is HOW high, again?

        3. Don’t be afraid to show your true colors, Chad.

          Prick.

        4. Chad, I don’t have $11 to my name, because I’ve been out of work for fourteen months now. Still want me to pony up?

    3. Residents are supposed to pony up $1100 in addition to what they already pay so public employees can continue living like kings? Fuck that and fuck you. Public employees can take a haircut just like so many of us non-parasites already have.

      1. Meanwhile there are the banksters who got million dollar bonuses and really do live like kings. But let’s not dare touch their bonuses. Sanctity of contract! or something.

        1. Yeah nobody here was against giving them taxpayer money. Nope, nobody.

          1. I texted to SUXXOR which gave $10 to Jamie Dimon.

          2. Whether or not you apposed given money to wall street is besides the point. I doubt you support paying civil-servant high-salaries. But once the salaries have been given, its not hypocritical to then say that they should be payed less, is it?

            Obviously the point is that its inconstant to say broker’s contracts are unbreakable, no matter how much they have received from tax payers (whether its a good idea is a different matter), but public sector employees can and should have their contracts abridged in exactly the same way. Its just another example of libertarians worshiping money and the super-men who have it.

            1. Okay, then. How about me and you sign a contract? I’ll give you $2million and in return you will turn around and give me $1million. Sweet, we are now both millionaires. Does it matter that I don’t have even $1000 let alone $2million? Not to you, we have a contract and therefore are both millionaires.

              Now let’s go out and buy some flat-screens!

    4. Did you guys really respond to “hanging” Chad?

      You know, Chad – the one who believes that taxes are “bills” and that taxpayers should just pony up their cash at his whim? And that a one-time snapshot payment toward the ridiculously lengthy pension mess will solve everything?

      Don’t worry, I won’t let him out of the gimp box again.

      1. Air conditioning comes with a bill. Roads, police, fire, law and order are what? Freebies?

        1. Nice try moron.

          Air conditioning comes with a bill because I ordered it.

          I never asked for extravagant civil servent pensions. What about a 401(k)?

          And while we’re at it. Police, Fire and roads should be usage-based services. If my house burns down, my insurance pays. If I need to use the roads, gas tax pays.

          But pensions… wow. That needs to come out of the recipient’s wages. Not everybody elses.

    5. What is a “Chinese shit habit?” Sounds racist to me.

    6. Let the taxpayers eat cake, eh?

  10. Why can’t taxes be raised to pay for the stuff which is owed?

    1. Oh they can be raised at will, my precious.

    2. Of course they can. But, they shouldn’t. People shouldn’t be forced to keep promises made by others — especially when those promises were extravagant and made in order to buy votes.

      1. So hypothetically, let’s say you won the lottery. You’d be kosher with the government saying, “We have the ability to pay you, but you won an extravagant amount so we choose not to.”

        1. “So hypothetically, let’s say you won the lottery. You’d be kosher with the government saying, ‘We have the ability to pay you, but you won an extravagant amount so we choose not to.'”

          Your hypothetical is incorrect because the lottery payout system is more akin to a defined contribution plan than it is to a defined benefit plan (like public sector pensions). In other words, the size of the lottery payout is based on the amount of tickets purchased. This allows the state lottery to be sustainable.

    3. When you sign a contract, one of the risks you assume is that the other party won’t be able to pay. If taxpayers refuse to approve a tax hike and the pensions can’t be provided without it, then the government is unable to pay. Taxes are already out of control; lower spending or take a haircut. Simple.

    4. They can be, but when you raise the taxes, people begin moving away which destroys your tax base.

  11. So, wait, you’re saying that America has been lumping huge unsustainable debt onto future generations for YEARS? No way! This is too hilarious for words.

  12. Was that $84 million or billion? I’m guessing million and that last sentence was in error. Still a lot of debt for a community of 120,000.

  13. I think this article only focuses on the tip of the iceberg. It is a sad fact that many communities are experiencing this same problem across the country. One of the reasons they are struggling and not re-structuring their pension systems is because these people are voters and they would never tolerate a change in the system. It is the same at the Federal level. If we were asked to attend one of those “come hear what we have to say meetings on how to make money” and it was on Social Security, we would immediately recognize it as a pyramid scheme. As long as the base is wide enough, the people at the top will get paid. However, today the pyramid is inverting with more people receiving money with fewer people paying those dollars into the system. No one wants to clean up this mess and believe it or not social security was not supposed to be a retirement account for everyone, but over time it has become an “entitlement” so that people would continue to contribute. However, I think the time is coming when the United States will have a financial collapse. Where will it start? At the Federal level. Here are some statistics from the National Inflation Association (NIA). These are the facts people…

    “The U.S. government this week reported a record monthly budget deficit for February 2010 of $220.9 billion. Total tax receipts for the month were only $107.5 billion compared to outlays of $328.4 billion. The total U.S. deficit for the first five months of fiscal year 2010 was $651.6 billion, with tax receipts of $800.5 billion and outlays of $1.45 trillion. The deficit was up 10.5% for the first five months of fiscal year 2010 over the same period in fiscal year 2009.

    We are now at a point where if the U.S. government taxed Americans 100% of their income, the tax receipts generated would not be enough to balance the budget. Likewise, if the U.S. government cut 100% of its spending including defense, but kept paying Social Security, Medicare and Medicaid, we would still have a budget deficit. NIA believes it will be impossible for the U.S. to have a balanced budget ever again.”

    People continue to lose their jobs and we continue to spend money we do not have to put new programs in place, to expand the federal government and contract the private sector jobs – more federal government means more taxes to pay the salaries of employees and to provide funding for new programs.

    We have Obama pleading for National Health Care which will restrict any access to real medical help and force individuals to pay more for their care as the government has never had an incentive to run anything within budget. They (the employees and leadership) are more interested in creating power areas for themselves at the expense of tax dollars. This means more red tape and more processes people will have to deal with and more people to administer the processes. As for the care, there are not enough doctors now and if health care becomes a reality, there will fewer of them to cover more people. There is also no incentive for the individual to stay at home and use some old fashioned remedies to cure his cold. Everyone will run to the doctor more and the emergency room more because it is free. Nothing in this world is free.

    Again, there is no reason or incentive for the government to hold down costs. The government itself is a welfare system employing those who cannot or could not get a job in the private sector (Please note there are many employees who do contribute in the federal government, but there are an awful lot who sit and do little or just enough to get by or worse manipulate the system.) The cost National Health Care is too much without any incentives and you allow government agents to dictate to you what you can have or not have. This is unconstitutional.

    The financial reality is we are on the slippery slope now and as more Obama programs are enacted requiring additional funding, we will slide further down that slope. With National Health Care, the catastrophe will be upon us before we know it.

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