Vallejo could be a harbinger of more California city bankruptcies

In 2008, the California city of Vallejo took the unprecedented step of filing for bankruptcy. A combination of falling revenues caused by the collapse of the real estate bubble and rising public pension costs cratered their finances. Other California cities and counties are watching how Vallejo manages, and may well follow suit.

Indeed, former Los Angeles Mayor Richard Riordan recently said the City of Los Angeles will likely declare bankruptcy by 2014, with excessive pensions being the primary reason why, and that the current administration is ignoring the approaching fiscal tsunami. A primary problem, he says, is the utterly unrealistic assumption that Los Angeles public pension funds will return 8% a year. A steady return of 8% is difficult even in good times, and nearly impossible in rough economic periods like we are facing now. Such rose-colored glasses estimates were also made by state public pension funds like CalPERS, and resulted in equally disastrous results. Rather than making money, the pensions have been losing money. This means state and municipality pension funding now must make up a serious shortfall. Riordan concludes that for Los Angeles to survive it must slash pensions, raise the retirement age, make employees pay more, and eliminate Cadillac pension benefits.

Vallejo appears to have been the poster child for excessive pension benefits and public worker salaries. A report by the Cato Institute released last year said 74% of Vallejo’s budget went for police and firefighter salaries and pension benefits. Regular public employees can retire at age 55 with at 81% of their final year’s pay. Police and fire employees have it even better, retirement at 50 at 90% pay. This certainly seems real cushy as well as financially unsustainable to me.

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