Thursday, January 26, 2012

Many local governments will face bankruptcy

San Francisco Examiner/John Seiler, 1/25/12. "Bankruptcy is the boogeyman haunting governments across America. It’s not a question of whether more cities will file for bankruptcy, but how many.  The culprit is a decade of over-spending by governments, especially on pension guarantees, and an economic slowdown that refused to flip into a robust recovery. The money just isn’t there. And it’s not going to be there even if local governments raise taxes while cutting employees and services to the bone.  

No coin, all paper, huh?
Things are just going to get worse for municipal finance. Most states, counties, cities and school districts have spent their cash reserves down to the legal minimum. And they have not  made contingency plans for another 15 percent decline in revenue in the next year. Consequently, there is the potential for thousands of defaults in the 50,000 municipal bond issuers in the United States. Most cities can cut spending, but they cannot cut principal and interest payments without default and bankruptcy.

Unlike many cities facing bankruptcy, San Jose is well-off. It’s part of the prosperous, high-tech Silicon Valley. But San Jose officials have discussed bankruptcy as a possible option to over-spending. Its prosperity turned out to be its undoing. In the November issue of Vanity Fair magazine, financial writer Michael Lewis wrote, “The city owes so much more money to its employees than it can afford to pay that it could cut its debts in half and still wind up broke.”

One city that did declare bankruptcy was Vallejo, in 2008. Unfortunately, the city missed a grand opportunity to pull itself from fiscal disaster. Government-worker unions made some concessions, such as higher payments by retirees for their health care insurance. However, pension plans for retirees and current city employees, including one that allows police officers to retire at age 50 with as much as 90 percent of their pay, remained untouched.

San Diego still bills itself as “America’s Finest City.” But the city’s pension payments are skyrocketing, from $229 million in 2010 to a projected $318 million in 2015 — 40 percent in just five years. By 2025, the number will be $512 million, a whopping 124 percent increase in 15 years. No wonder City Councilman Carl DeMaio in September turned in 145,000 signatures to put a pension-reform measure on the ballot this year. Instead of pensions, it would enroll most new city employees in 401(k) programs for retirement. It would save the city $1.2 billion through 2040.

What’s dawning on officials is that there’s no panacea to budget problems. As budget realities have started to hit home, most cities now realize that just making tweaks in pension formulas for future hires won’t solve their problems — the mushrooming retirement obligations are just too large.  John Seiler is managing editor of Calwatchdog and a former editorial writer for the Orange County Register."

Submitted by Jim Alex 

Posted by Kathy Meeh


Anonymous said...

I can see this happening to Pacifica unless they drastically cut wages, health coverage and pensions.

Why should our cops retire at 50? Is the job really that hard? Come on. And health coverage for life? We don't get that.

Civil servants should not be making more money than the people who pay them.

Anonymous said...

Uninformed comment. Please do some research.

Anonymous said...

^ City worker ^

Anonymous said...

Wait till this NIMBY has a life threatening issue and the Sheriff Dept. is over worked and understaffed. YOU ARE TOAST.

Anonymous said...

Spoken like a true believer. The day is coming when we'll be lucky to have the sheriff's department on duty in Pacifica. We can only ignore the fiscal realities for so long.

helena said...

Far too often, people file for bankruptcy unaware of what may happen and how bankruptcy will affect their debts and assets. Don’t fall into that trap.
california bankruptcy

Hutch said...

"most cities now realize that just making tweaks in pension formulas for future hires won’t solve their problems — the mushrooming retirement obligations are just too large."

This is something the public unions, cities and the state won't admit (yet). The sooner they start adjusting CURRENT workers unsustainable pensions to reflect what we in the private sector get, the less painful it's going to be for everyone.

Anonymous said...

Helen, they are talking about cities filing bankruptcy. Namely Pacifica if we don't reign in labor costs including pensions. For every worker we will soon be paying 2 retirees.