CLT UPDATE
Wednesday, May 28, 2008
Megatons being added to
“Ticking Time Bomb”
payload
Massachusetts lawmakers are proposing bigger pensions
for state and municipal employees that could cost $6 billion or more,
according to some estimates, triggering a chorus of complaints from
fiscal watchdogs and local leaders who say the money is not there to pay
for it.
The union-friendly, election-year maneuvers by the House and Senate
would increase the annual cost-of-living adjustments that retirees
receive as part of their pensions....
Over the next several weeks, the provisions will be the subject of
negotiations in House-Senate budget conference committee meetings, which
largely takes place behind closed doors.
The state is considering the new spending as it is already raiding its
rainy-day fund, raising some taxes, and looking for cuts to balance the
budget while repairing crumbling roads and bridges. It also comes as
pension payments are being pared back by corporations across the
nation....
"It's $10 a damn month; that's all it is," said Ralph White, president
of the Retired State, County and Municipal Employees Association of
Massachusetts....
The pension increase for state employees alone would cost between $3.8
billion and $8 billion over 20 years, according to the Pioneer
Institute, an independent nonpartisan think tank. A separate Senate
amendment allowing municipal retirees to opt in would cost cities and
towns at least $2 billion, according to the Massachusetts Municipal
Association....
Public employee pension and healthcare costs have been at the center of
debate over Proposition 2˝ tax override votes in communities across the
state. But Senator Marian Walsh, a Democrat from West Roxbury who led
passage of the legislation in the Senate, said that "this has been a
very open, transparent discussion." ...
Because the average pension for state retirees is about $22,000, the
shift would mean almost every employee gets the maximum increase. To pay
for the pension boosts, state lawmakers are using an approach that State
Treasurer Timothy P. Cahill called risky for state credit ratings....
"It's the wrong thing to do," said Cahill, who supports the pension
increases but fears that the Legislature's approach will put the state's
credit rating in jeopardy.
He has urged lawmakers to fund the increases through state budgets,
which would add at least $110 million to each of the next three state
budgets, rather than pushing the payments off.
The Boston Globe
Wednesday, May 28, 2008
Bigger pensions drawing protests
Lawmakers' initiative could cost $6b or more
It didn't get much attention on the East Coast, but in late
February the town of Vallejo, California, came within an eyelash of becoming the
first city since Bridgeport, Connecticut, back in 1991 to declare bankruptcy.
This San Francisco Bay suburb of 120,000 residents was threatening to take this
radical step because it can no longer afford to pay the extravagant salary and
retirement benefits of its public employees. Just a few hours before the city
council was to file for bankruptcy, the unions caved in and granted wage
concessions to keep the city operational.
There are several other cities in California that are contemplating the
bankruptcy option thanks to multi-billion-dollar public employee pension and
health care obligations that have become effectively unpayable. "Vallejo's
fiscal problems aren't unique. They're just the tip of the debt iceberg here in
California," says Keith Richman, a former state legislator and now president of
the California Foundation for Fiscal Responsibility (CFFR). The California
Public Employees' Retirement System has $26 billion of unfunded liabilities. The
teachers' retirement system is $20 billion in the red--health benefits add
another $48 billion to its shortfall.
Welcome to the next great financial bubble in America--a fiscal time bomb that
could cause your local and state tax bills to double or even triple in years to
come....
As California taxpayers wake up to the enormous future tax increases they and
their children face to pay for expansive promises to city, county, and state
workers, they're wondering, says Frates, "how did they get these sweet deals?"
There lies the real scandal. For years, even decades, the only people who've
cared much about public employee salaries are the public employee unions. The
politicians who sit across the table and negotiate with the union bosses have
little if any incentive to drive a tough bargain. The costs won't be visible
until the politicians who negotiated them are long gone....
Nationally, public employees now receive $39.50 an hour in wages and benefits.
That's a 50 percent premium over the $26.09 average salary and benefits for
private sector workers, according to 2007 Bureau of Labor Statistics data.
The Weekly Standard
March 24, 2008
The Unions Go to Town...
...and bankrupt America's cities
By Stephen Moore
Experts say Vallejo, Calif.'s decision to file for bankruptcy
protection will result in long, hard negotiations between the city and its
creditors - including bondholders.
And the market should pay close attention because the U.S. will probably see
more municipal bankruptcies in the years ahead, as local governments deal with
the mountain of pension and retiree health care benefits they've promised but
never funded.
The Bond Buyer
The Daily Newspaper of Public Finance
Friday, May 9, 2008
Vallejo: Poster Child of a New Era?
Chip Ford's CLT Commentary
As the "Ticking
Time Bomb" counts down to the inevitable fiscal explosion, "The Best
Legislature Money Can Buy" whistles past the graveyard piling on
weight to an already impossible burden. Public employee salaries
and benefits even now greatly exceed those of the private sector --
nationally by 50 percent according to the U.S. Bureau of Labor
Statistics. But instead of reining in the inequities, trying to
avoid a smoking fiscal crater, Beacon Hill politicians are instead
expanding ground zero.
Though "the provisions will be the subject of
negotiations in House-Senate budget conference committee meetings, which
largely takes place behind closed doors," according to the Boston Globe,
Sen. Marian Walsh (D-West Roxbury) called it "a very open, transparent
discussion." This is an example of Beacon Hill's disconnect from
reality.
"Welcome to the next great financial bubble in
America," Wall Street Journal senior economics writer Stephen Moore
wrote, "a fiscal time bomb that could cause your local and state tax
bills to double or even triple in years to come."
Not to worry, the president of the Retired State,
County and Municipal Employees Association of Massachusetts shrugs:
"It's $10 a damn month; that's all it is."
What a coincidence: That's merely the
proverbial cost of "a cup of coffee a week, a slice of pizza" we
taxpayers are told to sacrifice when government wants more of our money.
Surely public employees past and present, especially the early-retired
younger ones collecting pensions while working second careers, can join us in collective
sacrifice.
If an additional "$10 a damn month" is so
insignificant, then why is The Bond Buyer -- "The Daily Newspaper of
Public Finance" -- warning: "[T]he market should pay close
attention because the U.S. will probably see more municipal bankruptcies
in the years ahead, as local governments deal with the mountain of
pension and retiree health care benefits they've promised but never
funded"?
Stephen Moore summed up the problem succinctly:
"For years, even decades, the only people who've cared much about public
employee salaries are the public employee unions. The politicians who
sit across the table and negotiate with the union bosses have little if
any incentive to drive a tough bargain. The costs won't be visible until
the politicians who negotiated them are long gone."
We taxpayers they're sticking with the bill should be
so fortunate.
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|
Chip Ford |
The Boston Globe
Wednesday, May 28, 2008
Bigger pensions drawing protests
Lawmakers' initiative could cost $6b or more;
Critics say state, towns can't afford increase
By Matt Viser
Massachusetts lawmakers are proposing bigger pensions for state and
municipal employees that could cost $6 billion or more, according to
some estimates, triggering a chorus of complaints from fiscal watchdogs
and local leaders who say the money is not there to pay for it.
The union-friendly, election-year maneuvers by the House and Senate
would increase the annual cost-of-living adjustments that retirees
receive as part of their pensions.
The individual numbers are seemingly small, a boost of about $120 a year
more for every retiree, which advocates say is well-deserved. But
multiplied by over 100,000 former teachers and state workers in the
state's pension system as proposed by the House and by 86,000 municipal
retirees as envisioned in a Senate amendment, it would add up fast, say
critics.
"It's a tremendous gesture, but the money doesn't exist," said Mayor
Scott W. Lang of New Bedford, who says he would have to lay off six
current employees to make it work for the city's 1,721 retirees. "I have
absolutely no qualms whatsoever of bumping that to meet the inflationary
needs, but there's no funding. Without the funding it's illusory."
Over the next several weeks, the provisions will be the subject of
negotiations in House-Senate budget conference committee meetings, which
largely takes place behind closed doors.
The state is considering the new spending as it is already raiding its
rainy-day fund, raising some taxes, and looking for cuts to balance the
budget while repairing crumbling roads and bridges. It also comes as
pension payments are being pared back by corporations across the nation.
But advocates and lawmakers who drafted the legislation say
Massachusetts' public retirees deserve to have their pensions updated.
"They should receive a cost of living that more adequately reflects
inflation," said Representative Frank Hynes, a Democrat from Marshfield
and chief advocate of the House legislation.
"It's $10 a damn month; that's all it is," said Ralph White, president
of the Retired State, County and Municipal Employees Association of
Massachusetts.
The legislation, which was added as amendments to the budget, would
still have to be approved by all members of the House and Senate, who
are running for reelection this year.
If it passes, it would present a major test for Governor Deval Patrick.
Patrick campaigned in 2006 against passing laws for special-interest
groups but also counts unions among his key supporters. Patrick, through
his spokesman, said the issue is in conference committee and has yet to
come to his desk.
The pension increase for state employees alone would cost between $3.8
billion and $8 billion over 20 years, according to the Pioneer
Institute, an independent nonpartisan think tank. A separate Senate
amendment allowing municipal retirees to opt in would cost cities and
towns at least $2 billion, according to the Massachusetts Municipal
Association.
Proponents said those numbers were inflated, although they did not have
firm estimates of their own. White said the increase from the pension
increases would be as little as $1 billion.
Several outsiders criticized state lawmakers for adopting the changes as
part of budget deliberations but without an in-depth analysis or
hearings.
"This should not even be discussed until there's an understanding of the
cost and a complete exploration of how this will be paid for," said
Geoff Beckwith, executive director of the Massachusetts Municipal
Association, which represents cities and towns and is mobilizing local
officials to oppose the measure. "This is not a cart before a horse;
this is the freight train before the process."
Public employee pension and healthcare costs have been at the center of
debate over Proposition 2˝ tax override
votes in communities across the state. But Senator Marian Walsh, a
Democrat from West Roxbury who led passage of the legislation in the
Senate, said that "this has been a very open, transparent discussion."
Cities and town officials, she stressed, would have to vote before the
pension increases took effect for municipal employees.
State pensions in Massachusetts are adjusted nearly every year by the
Legislature, which controls the state pension system. Local officials
control municipal pension systems, although changes are limited without
state approval.
The Legislature designates a flat dollar amount to use in calculating
annual pension increases; since 1997 the dollar amount has been the
first $12,000 of a pension.
Since 2000, the Legislature has granted a 3 percent increase each year,
calculated on that $12,000 base. The result has been a flat $360 boost
every year for every retiree with a pension of more than $12,000.
The budget amendments, which cleared the House and Senate this month by
unanimous votes, would raise the base amount to $16,000. With the same 3
percent bump on that new base amount, the flat fee for every retiree
would rise to $480, a 33 percent increase.
Because the average pension for state retirees is about $22,000, the
shift would mean almost every employee gets the maximum increase. To pay
for the pension boosts, state lawmakers are using an approach that State
Treasurer Timothy P. Cahill called risky for state credit ratings.
The state is currently on track to fully fund its pension system -
meaning that if everyone retired at the same time, the state could
afford to pay everyone's retirement - by 2023. To pay for the pension
boosts, legislators want to stretch that goal to 2026, which lawmakers
say would give them longer to pay off the added expense.
"It's the wrong thing to do," said Cahill, who supports the pension
increases but fears that the Legislature's approach will put the state's
credit rating in jeopardy.
He has urged lawmakers to fund the increases through state budgets,
which would add at least $110 million to each of the next three state
budgets, rather than pushing the payments off.
The Weekly Standard
March 24, 2008, Volume 13, Issue 27
The Unions Go to Town...
...and bankrupt America's cities
by Stephen Moore
It didn't get much attention on the East Coast, but in late February the
town of Vallejo, California, came within an eyelash of becoming the
first city since Bridgeport, Connecticut, back in 1991 to declare
bankruptcy. This San Francisco Bay suburb of 120,000 residents was
threatening to take this radical step because it can no longer afford to
pay the extravagant salary and retirement benefits of its public
employees. Just a few hours before the city council was to file for
bankruptcy, the unions caved in and granted wage concessions to keep the
city operational.
There are several other cities in California that are contemplating the
bankruptcy option thanks to multi-billion-dollar public employee pension
and health care obligations that have become effectively unpayable.
"Vallejo's fiscal problems aren't unique. They're just the tip of the
debt iceberg here in California," says Keith Richman, a former state
legislator and now president of the California Foundation for Fiscal
Responsibility (CFFR). The California Public Employees' Retirement
System has $26 billion of unfunded liabilities. The teachers' retirement
system is $20 billion in the red--health benefits add another $48
billion to its shortfall.
Welcome to the next great financial bubble in America--a fiscal time
bomb that could cause your local and state tax bills to double or even
triple in years to come.
Vallejo's story of financial woe raises eyebrows because it is not a
desperately poor or dilapidated city like Newark or Detroit. It is
quintessential middle-class America, with an average family income of
about $57,000.
When the city announced it wouldn't be able to meet $6 million of unpaid
bills starting in April, no one was as surprised as the residents
themselves. Part of the problem is that the real estate crisis is
especially pronounced in California and, as housing values fall, so do
city property tax collections. The city projects a $20 million budget
shortfall this year and next, which is a big bucket of red ink out of an
annual budget of $80 million. City officials saw bankruptcy as the only
legal option to void its unsustainable wage and retirement labor
contracts and their $135 million of unfunded liabilities.
These contracts are so exorbitant that some of the richest residents of
Vallejo are the police and firemen. Ten firemen earned more than
$200,000 last year with overtime--a salary nearly four times higher than
what the average family in Vallejo earns. Incredibly, 80 percent of the
city's budget is consumed by labor and pension costs. "No city or
private person wants to declare bankruptcy," says Councilwoman Stephanie
Gomes, "but if you're facing insolvency, you have no choice but to seek
protection."
Soaring public employee pension costs are crunching municipal budgets
and causing service cuts or tax hikes across the state. In the Los
Angeles County school system, health, pension, and workers compensation
liabilities are so mountainous that an estimated one of every three
dollars budgeted for the L.A. schools goes to teacher retirement costs.
"The three Rs in the L.A. County school system are now reading, writing,
and retirement," moans Richman.
There are other horror stories. The CFFR found that many cities have a 3
percent rule which allows a worker to accrue a pension benefit of 3
percent of his final salary for each year worked. So an employee who
started on the job at age 22 can retire at age 52 with a lifetime
pension benefit of 90 percent of the final salary. Most California towns
also allow city employees to "spike" their pensions. This is a popular
scam that allows workers to pad their final salary--and so their
pension--by as much as 50 percent through bonuses, overtime, accrued
vacation, and other add-ons. These pensions also come with an annual
cost of living adjustment and lifetime health care.
"Pensions are the second biggest line item in most municipal budgets
today behind law enforcement," says Steven Frates, a professor at
Claremont McKenna College and an expert on California's pensions system.
He adds that "the annuity value for many public employee pensions in
this state is $1.5 million." Some of the highest paid state workers are
walking away with lifetime annual pension and health benefits of
$300,000 a year. With hundreds of thousands of public employees in
California, you have the potential for catastrophic long-term financial
distress.
Plenty of cities outside California are facing a similar tsunami of debt
thanks to years of super-generous labor agreements. The ten largest
Chicago-area cities face a combined $18.7 billion in unfunded pension
liabilities, according to a new report by the Chicago Civic Federation.
The city of Chicago has less than 50 percent of the money it needs to
pay the benefits promised to Chicago police and firemen. Philadelphia
was forced to issue a $4.5 billion bond in February to cover unfunded
pension liabilities for 33,000 retirees. The total cost to states for
paying for all teacher retirement health and pension obligations is now
estimated at $3 trillion, and growing each year.
As California taxpayers wake up to the enormous future tax increases
they and their children face to pay for expansive promises to city,
county, and state workers, they're wondering, says Frates, "how did they
get these sweet deals?" There lies the real scandal. For years, even
decades, the only people who've cared much about public employee
salaries are the public employee unions. The politicians who sit across
the table and negotiate with the union bosses have little if any
incentive to drive a tough bargain. The costs won't be visible until the
politicians who negotiated them are long gone.
Donna Arduin, a former California budget director, explains another
reason deals that border on swindles keep getting done: "The public
employee unions are far and away the most powerful special interest in
the state. They run the state and virtually no politician will stand up
to them." She remembers being physically threatened one year when the
state was broke and she tried to trim a $400 million bonus in the
pensions for corrections officers: "I had to fear for my life."
Nationally, public employees now receive $39.50 an hour in wages and
benefits. That's a 50 percent premium over the $26.09 average salary and
benefits for private sector workers, according to 2007 Bureau of Labor
Statistics data. The gap keeps widening each year. It's true that public
employees are more likely to be in white-collar occupations, which
receive higher pay, but it's also true that government workers receive a
benefit that almost no one in the private sector gets: near 100 percent
lifetime job security thanks to arrangements like teacher tenure and
government no-fire rules.
In California, taxpayer watchdog groups like the Howard Jarvis
Foundation are starting to fight back against the public employee
unions. These groups are mobilizing to put an initiative on the ballot
called "Proposition 13 for Pensions." It would simply require public
employees to work until the age of 65 before they can receive retirement
benefits. That's standard fare in the private sector, and the reform
would save the state of California and its localities an estimated $500
billion through 2030. No surprise that the unions have pledged to spend
millions of dollars to defeat the measure.
The more sensible long-term solution is for cities to immediately
abolish these anachronistic guaranteed "defined benefit" pension systems
and convert public employees to portable and cost-constrained
401(k)-type pensions. "In the private sector, defined benefit pension
structures are rapidly becoming extinct," says financial analyst Dan
Clifton of Strategas, a Wall Street advisory firm. "Pretty much only the
government still offers them."
But the unions have plenty of political firepower to preserve their
pension empire. This year public employee unions are expected to spend
$50 to $100 million on political campaigns--as they've been doing for
years. No wonder that many politicians behave like fully owned
subsidiaries of the unions. So the luxurious benefits of public
employees grow more unaffordable each year while the states and cities
keep edging closer to the fiscal cliff. Bankruptcy may be their only
recourse. Just ask the folks in Vallejo, California.
Stephen Moore is senior economics writer for the Wall Street Journal
editorial page.
The Bond Buyer
The Daily Newspaper of Public Finance
Friday, May 9, 2008
Vallejo: Poster Child of a New Era?
By Andrew Ward
SAN FRANCISCO - Experts say Vallejo, Calif.'s decision to file for
bankruptcy protection will result in long, hard negotiations between the
city and its creditors - including bondholders.
And the market should pay close attention because the U.S. will probably
see more municipal bankruptcies in the years ahead, as local governments
deal with the mountain of pension and retiree health care benefits
they've promised but never funded.
City officials said Tuesday night that they planned to file for Chapter
9 bankruptcy protection sometime next week.
No one knows right now how the bankruptcy court would treat owners of
Vallejo's roughly $200 million of debt. But it is in the city's
long-term interest to try and avoid defaulting on its bonds, according
to one expert.
"If you want to successfully come out of bankruptcy, you have to pay
your bondholders," said James Spiotto, a lawyer at Chapman & Cutler
LLP in Chicago. He's worked on municipal bankruptcies and the Washington
Public Power Supply System's landmark 1983 bond default. "You need
municipal debt to function as a governmental body."
Spiotto and other bankruptcy lawyers say they can't predict the precise
outcome of the Vallejo case because municipal bankruptcy is so uncommon
that there is limited precedent to guide the judge and lawyers in the
case. Municipal bankruptcies are further complicated by the
Constitution's protections of states' rights, which takes away many of
the powers a bankruptcy court has in a corporate or personal bankruptcy.
"The municipality has more cards in its hands than the creditors, as
compared to a regular Chapter 11 [corporate] proceeding," said Paul
Glassman, a lawyer with Greenberg Traurig LLP in Los Angeles. "A city
can't be forced to liquidate. You can't sell off City Hall."
The biggest municipal bankruptcy case ever was filed in 1994 in Southern
California's Orange County. Glassman, who represented Orange County
cities for five and a half years during the case, said municipal
bankruptcies differ from the more common Chapter 11 corporate
bankruptcies in several other key respects.
The court can't appoint an independent trustee to take over Vallejo's
business affairs. The City Council will remain in charge at City Hall.
Though creditors have a right to negotiate, they can't propose a plan of
reorganization to the court.
What bankruptcy offers is a court-supervised forum for renegotiating the
city's obligations. Since 1937 there have been 557 municipal
bankruptcies - not including Vallejo - most in small special districts,
Spiotto said.
"It costs. It is a dangerous and risky solution," said John Moorlach,
president of the Orange County Board of Supervisors, who was appointed
treasurer of the county after its filing. "The world hasn't forgotten
about it."
Vallejo is the biggest California city to declare bankruptcy. But its
financial problems differ from Orange County's, which resulted from
ill-fated investments. Vallejo is trying to get out of labor contracts
that it agreed to but now says it cannot afford. Lawyers for the
working-class city 30 miles northeast of San Francisco said it would
seek to do as little harm as possible to bondholders during the process.
But they may not have control over how the court decides to handle the
outstanding debt.
Officials in Vallejo are fully aware that bankruptcy will mean continued
negotiations with the labor unions. At times, they sound as though they
are simply trying to raise the pressure on the policemen and
firefighters to whom they promised 21% pay raises over three years of
relatively flat revenue growth.
"We can pull the plug on bankruptcy at any time," said Councilwoman
Joanne Schivley at the council's Tuesday night meeting. "This isn't a
life sentence."
The problem for bondholders is that bankruptcy experts disagree over
whether a bankrupt city can pick and choose whom it wants to pay.
Governments usually want to pay bondholders so that they can maintain
access to the municipal market in the future, but public employee unions
are not going to want to go to the back of the line for payments.
"There's some question as to whether payments can be made voluntarily or
not" to unsecured creditors like bondholders, according to Glassman.
"It's an issue of some controversy."
The city's bankruptcy lawyers and bankruptcy lawyers who aren't involved
in the Vallejo case agreed that bondholders with liens on specific
revenue streams should be safe.
Vallejo has just over $200 million of bonds and certificates of
participation outstanding. The city's general fund-supported debt is
unrated.
Standard & Poor's this week downgraded two city bond issues with
dedicated revenue streams over uncertainty about the sanctity of the
dedicated revenue streams. The agency downgraded the Vallejo Public
Financing Authority's Vallejo-Glen Cove Community Assessment District
revenue bonds to B from A-minus and cut COPs issued in 1999 and secured
by Vallejo's share of California motor vehicle license fees to B from A.
Investors in secondary market trading yesterday appeared to be reacting
to the planned bankruptcy. Vallejo water revenue refunding bonds
maturing in May 2012 and insured by MBIA Insurance Corp. with a 5%
coupon traded as low as 96.21, yielding 6.09%, according to the
Securities Industry and Financial Markets Association's Web site
InvestinginBonds.com. That's down from a price of 106.79 with a 3.2%
yield a week ago.
Standard & Poor's analyst Gabe Petek said he doesn't think Vallejo's
bankruptcy is a sign of things to come, saying most of the local
governments the agency rates are nowhere near the condition of Vallejo.
Moody's Investors Service, which does not rate Vallejo debt, issued a
special comment this week saying Vallejo appears to be a "unique case"
among California cities.
"While fiscal challenges are on the horizon for all California
municipalities, they are not of the same magnitude, or even necessarily
of the same cause, as those experienced by the state and the city of
Vallejo," according to Moody's.
Others disagreed, saying Vallejo's filing could signal something new and
different because it's a direct effort to get out of the city's
obligations to labor. Most other municipal bankruptcies have been the
result of one-time events like lawsuits or Orange County's bad bets in
the derivatives market.
If Vallejo teaches other governments that they can escape labor
obligations, such as unfunded pension and retiree health care benefits
liabilities, it could be a sign of things to come, Spiotto said.
"This is the tip of the iceberg," said Orange County's Moorlach, using
the same phrase Spiotto used to describe the situation.
"If you can actually undo employee bargaining unit agreements that
enhance pension benefits, that might be a great strategy, but if it
doesn't work, you've spent a boatload of money to drive your car into a
cul-de-sac," Moorlach said. "Everybody's going to line up to file for
Chapter 9 in California."
Moorlach said Orange County won't be heading that way again. He said the
county negotiated a deal to cut its unfunded employee health care
benefits to $400 million from $1.4 billion.
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