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San Bernardino eligible for bankruptcy. CalPERS has hissy fit

hissy-fit

Federal bankruptcy laws trump California state law requiring municipalities to pay public pension obligations, ruled a federal judge. California public pension giant CalPERS tried to block the bankruptcy as it means they are no longer first in line for repayment. San Bernardino stopped paying CalPERS when it filed bankruptcy. This is a major big deal and paves the way for other municipalities to do the same.

CalPERS has accused the city of filing for bankruptcy as a delay tactic, failing to provide reliable financial information and having no clear picture for how it will repay its creditors.

In reply, Paul Glassman, the city’s bankruptcy attorney, read aloud a note from City Attorney Jim Penman that called bankruptcy “an extremely painful process” for the city.

“It is an emergency room, not a health spa,” Glassman said, reading the note. “To suggest that any city would subject itself to the process unless it had to is simply disingenuous.”

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Stockton California to be largest city to file bankruptcy

On Tuesday, Stockton California said talks with creditors had failed and prepared to file Chapter 9 bankruptcy. They will be the largest American city ever to do so and the results will be closely watched by other struggling municipalities, public employees, Wall Street, hedge funds, and bondholders alike. If Stockton is able to structure their debt and pension obligations, then other cities will be emboldened to do the same.

Imagine if you will, that you are a retired public employee of Stockton, like John Skaff who requires knee replacement surgery and is being told his retirement medical benefits will be so deeply slashed that he may not be able to afford the surgery. Some say pension benefits were bloated, but there’s a human side of the story here too

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California cities face massive budget cuts, default, bankruptcy

Stockton is preparing to default. Santa Ana is outsourcing its fire department. They are not alone. Other California cities, like Bakersfield, are similarly in peril. Much of the problem is due to debt taken on during the real estate bubble and overwhelming public pension liabilities.

Probably the only way out for most of these cities is filing bankruptcy then renegotiating contracts and debt terms.

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California cities facing major revenue shortfalls, rising pension costs

Vallejo is the poster child for what’s ailing California cities. It filed for bankruptcy in 2008, a victim of the real estate crash, losing a major employer in the process, and facing pension costs it cannot possibly meet.

Its police department was cut by one-third, and no longer has the resources to focus on low-level crimes like prostitution. Nor does the city have any regulations about medical marijuana dispensary. The result, rather obviously, is a huge increase in prostitution and marijuana sales.

“You know the only businesses in town making money? Pot and prostitution — that’s it,” says the operator of a dispensary who says his business is one of the few bringing foot traffic downtown.

Of course, legal marijuana and fewer cops tend to attract prostitutes, drug dealers, and their customers. This is becoming a major problem in the downtown area. Property values have plunged. Residents increasingly feel unsafe.

Neighborhood watch groups are trying to fill the gap as are other organizations. As city governments increasingly hollow out, they will be replaced by resilient communities, citizens banding together to do things. And indeed, in heartening news, it appears the people of Vallejo are doing just that. In the midst of a crisis, they’re saying, ‘We’re not leaving, Vallejo is worth saving.’

John Robb blogs about resilient communities extensively at Global Guerrillas, should you want to know more. At some point, we can no longer rely on the government and have to do things ourselves. That’s the primary point, and this may become less and less theoretical as cities fail to provide expected services. The alternative to such efforts is abandoned no-man’s-land-like parts of Detroit that effectively have no city services or protection.

Things aren’t as dire in other California cities (yet.) But even in Orange County, the home of fiscal conservatism, municipalities are getting devastated by vastly less revenue and the increasing awareness that they can no longer afford the public pension liabilities they’ve taken on.

The Orange County Register details the depth of the problems. In 2009-2010, twenty-three Orange County cities outspent their general fund revenues. This means they have to go into reserves, maybe borrow, and cut services. Many cities have already slashed budgets, but the worst may be yet to come.

The biggest problem for all of them is the cost of public safety, primarily escalating pension and health care liabilities, much of which are unfunded. That means they have no idea where the money will come from. Orange County cities and county agencies have an aggregate total of $8.75 billion in such unfunded liabilities. CalPERS handles most of the pensions and bills the cities for it, some of whom are borrowing to pay for it. Obviously, this is not sustainable or financially sound, even if the interest rates are lower than what CalPERS charges. Further, while cities can choose to pay off all their unfunded liabilities, few do. This means they fall a little further behind each year.

Interestingly, the cities in Orange County that are fiscally sound are those like Laguna Niguel, which outsources practically everything and has little pension debt and six times that debt in reserve. While outsourcing is certainly controversial, it does allow a city to be run on a tight, lean basis, with pension liabilities off-loaded onto someone else.

Like it or not, outsourcing could be a future model for California cities.

(Crossposted from CAIVN)

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Rhode Island city bankruptcy a warning sign for California


(My latest for CAIVN)

Central Falls, a densely populated and impoverished city of nearly 20,000 in Rhode Island, filed for Chapter 9 bankruptcy on August 1, citing unaffordable pension and retiree health care liabilities. The city said it had no choice after retirees refused to accept any cuts. A retired state Supreme Court judge now oversees their finances, and the city is asking him to impose “a prudent plan” which would lower what pensioners are paid.

The California city of Vallejo is just now emerging out of bankruptcy, which it filed in 2008. Part of its plan includes lowering what it pays to banks for interest and reducing benefits to retirees. Clearly, there are two powerful forces that do not want municipalities to file for bankruptcy: bondholders and public worker unions. The usual rules no longer apply when a city files. For example, Central Falls has now voided all public worker contracts and said retirees must immediately pay 20% of their medical coverage. Vallejo is now allowed to pay less interest on the bonds iy sold. In the parlance of finance, this is known as taking a haircut, and bondholders hate haircuts as much as public workers hate it when told their pensions are in jeopardy.

Sure, Vallejo’s finances cratered when the housing market did and Central Falls has been an “economic basket case” for years. But they are not isolated instances. Cities across the country, including many in California (as well as the state itself), have public pension and health care obligations they are struggling to meet. The problem nationwide is getting worse and more obvious. Years of neglect and hiding public pension problems are increasingly and painfully obvious.

At this point it doesn’t really matter how it happened or who was responsible. Public pension reform is coming and it will prove painful for many. Is it fair? No. If you paid into your pension fund for decades, retired, then learned the benefits will be slashed, well, it could be catastrophic. Sure, there are a few who get big cushy pensions and are the targets of rage. But many pensioners are just getting by. A cut in their benefits might mean they’ll need to start checking the price of cat food or take their meds every other day instead of once a day.

Ordinarily, cities in such a predicament could call on the state or federal government to help them out financially. But given the current recession, budget reductions, and stock market correction, no one has much in the way of extra money. They can’t borrow either, because no one will lend to them, except perhaps at steep rates. That’s no solution at all.

The State of California has massive unfunded public pension liabilities. Even worse, from a financial standpoint, the public pension by law can force the state to make up any funding shortfall they may have. So while such liabilities are not actually carried on the balance sheet of California, it is still ultimately responsible for them. This kind of financial shifting of liabilities can certainly make a balance sheet seem far healthier than it actually is.

There will be more municipal bankruptcies triggered by pension liabilities. How will we handle them?

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