2010 April 25 Sunday
Inevitable Bankruptcy Seen For Los Angeles

California politicians see the public pension system as unsustainable. A couple of generations of politicians were bought by the public sector unions and signed union contracts that are going to bankrupt some California governments.

"The single biggest threat to our fiscal health and California's future is our public pension system," Schwarzenegger said at a Capitol news conference, declaring the growing costs a "crisis."

"Here in Sacramento, pension reform must be our No. 1 priority," he said.

Earlier in the day, Villaraigosa declared in Los Angeles that the city's "pension system is no longer sustainable.''

Retirement benefit costs will consume 19% of the city's general fund budget in the coming fiscal year, he said.

Former Mayor Richard Riordan says bankruptcy for Los Angeles is inevitable.

Mayor Antonio Villaraigosa and the City Council have said repeatedly that, come what may, declaring Los Angeles bankrupt is not an option.

But with city leaders avoiding the tough decisions to mend L.A.'s financial health - opting instead for easy fixes that allow the city to limp along for another month or two - some are saying bankruptcy is just the ticket.

For one thing, it could lead to speedier reform of the pension system, which many economists and politicians say is necessary if the city is to prosper long term.

"I've suggested it since 2005," former Mayor Richard Riordan said. "The city, the way it is going, is unsustainable. If they don't do it this year, they are going to have to do it in the next four or five years."

That's Richard Riordan saying it. Wow.

Jerry Brown, former governor of California, former mayor of Oakland, current state Attorney General, and Democratic candidate to be the next governor says defined benefit pension plans should not be scaled back. He's beholden to the public employee unions.

Public pensions came up. The current system, reported by nearly all responsible officials and media, is either bankrupt or on the verge of bankruptcy because it promises specific amounts to retirees. That is a "defined benefit" plan. Brown stated that he “supports a defined benefit plan,” (which is the current system), but was quick to add that “pension spiking-we need to curb that.” "Pension spiking" is the practice of promoting a public employee at the end of his or her tenure or assigning more overtime in order to increase the amount of pension paid during that person's lifetime in retirement.

The problem goes much deeper than pension spiking.

Back in 1978 Jerry Brown signed the law that gave public employee unions the power they used to win the pension benefits that are helping to bankrupt state and local governments in California.

Crane traces the political takeover by the unions to the Dill Act signed by Governor Jerry Brown in 1978 giving the public unions collective bargaining. As the unions power over the legislature has grown the concern is reform on the pension front will be more and more difficult to accomplish.

California used to be the dream state. Somewhere alone the way it became the nightmare state.

Writing for the City Journal Steve Malanga explains just how beholden California governments have become to the unions.

Consider the California Teachers Association. Much of the CTA’s clout derives from the fact that, like all government unions, it can help elect the very politicians who negotiate and approve its members’ salaries and benefits. Soon after Proposition 13 became law, the union launched a coordinated statewide effort to support friendly candidates in school-board races, in which turnout is frequently low and special interests can have a disproportionate influence. In often bitter campaigns, union-backed candidates began sweeping out independent board members. By 1987, even conservative-leaning Orange County saw 83 percent of board seats up for grabs going to union-backed candidates. The resulting change in school-board composition made the boards close allies of the CTA.

But with union dues somewhere north of $1,000 per member and 340,000 members, the CTA can afford to be a player not just in local elections but in Sacramento, too (and in Washington, for that matter, where it’s the National Education Association’s most powerful affiliate). The CTA entered the big time in 1988, when it almost single-handedly led a statewide push to pass Proposition 98, an initiative—opposed by taxpayer groups and Governor George Deukmejian—that required 40 percent of the state’s budget to fund local education. To drum up sympathy, the CTA ran controversial ads featuring students; in one, a first-grader stares somberly into the camera and says, “Pay attention—today’s lesson is about the school funding initiative.” Victory brought local schools some $450 million a year in new funding, much of it discretionary. Unsurprisingly, the union-backed school boards often used the extra cash to fatten teachers’ salaries—one reason that California’s teachers are the country’s highest-paid, even though the state’s total spending per student is only slightly higher than the national average. “The problem is that there is no organized constituency for parents and students in California,” says Lanny Ebenstein, a former member of the Santa Barbara Board of Education and an economics professor at the University of California at Santa Barbara. “No one says to a board of education, ‘We want more of that money to go for classrooms, for equipment.’ ”

Government bankruptcies. They'll start out local, move up to the state level, and eventually the US government will face a sovereign debt crisis. What I want to know: Will the feds use inflation to do a de facto default on US sovereign debt? How will the US government respond when world oil production goes into permanent decline and pulls economies down with it?

Update: See this Barrons chart of state credit ratings and pension funding. California has the lowest credit rating followed by Illinois. If you are thinking of moving consider states that have high credit ratings and no income taxes. Florida, Tennessee, South Dakota, and Washington state are all candidates. In the Barrons table the column for percent funded is misleading. The states all have unrealistically high assumptions for the rates of returns on their pension investments. Best to choose a state that provides low public employee retirement benefits. I'd like to know the details on that issue.

Share |      By Randall Parker at 2010 April 25 12:00 AM  Economics Sovereign Crises


Comments
Black Death said at April 25, 2010 12:48 PM:

At this time of fiscal stringency, it's especially comforting to note that Mayor Villaraigosa is doing his part. From LA Weekly:

La Opinion staffer Isaias Alvarado reports that, despite the office taking a 10 percent hit this fiscal year in the name of belt-tightening, Villaraigosa's City Hall operations spend nearly $8 million a year -- $1.8 million more than predecessor Jim Hahn, and $1.4 million more than Mayor Richard Riordan before him. In early February Villaraigosa seemed quick to make a dubious order to cut 1,000 workers from the city's payroll, a move he might not have authority to make. But his own budget has been somewhat of a sacred cow.

Alvarado used California Public Records Act requests to find out that the mayor spent a whopping $9 million on his office, staff and salaries in 2008-2009 fiscal year. The mayor's office, according to the report, employs 173 workers. Hahn had 121. Riordan had 114.

Villaraigosa's operations employ 12 deputy mayors (who have once assistant each#, 10 financial advisers, eight communication advisers, seven energy-and-environment advisers, six transportation advisers and three international-trade advisers. The biggest divisions inside the office include neighborhood community services, with 25 employees, executive services, with 23, and legislative and intergovernmental relations, with 19.

#So if you can't get a local pothole filled because no one at the mayor's office is responding, you should be consoled by the fact that Villaraigosa has eight people working on "communications").

Villaraigosa notes the 10 percent reduction this fiscal year for his office's budget, and he says he's taken a 16 percent salary cut (his pay is $232,425) in the last two years. "We must all make the same sacrifices," he said.

Indeed.


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