http://globaleconomicanalysis.blogspot.com/2012/08/zombified-cities-roundup-detroit.html
Detroit Becomes Dumping Ground for the Dead
The Associated Press writes Vacant Detroit Becomes Dumping Ground for the Dead.
Bloomberg reports Police Chief’s $204,000 Pension Shows How Cities Crashed
Notice the complete ineptitude of San Bernardino City Councilwoman Wendy McCammack. She was willing to bankrupt San Bernardino by making untenable pension promises to "attract and retain" police officers. Did it work?
Pension Time Bomb Explodes in Oakland
The San Francisco Chronicle reports Oakland's financial time bomb: pensions
As stupid as the decision was by San Bernardino City Councilwoman (and it was incredibly stupid), the position of Oakland Councilwoman Pat Kernighan is much worse. Kernighan learned nothing from Stockton, San Bernardino, Miami, or Detroit.
Nor did Kernighan even learn anything from prior history in Oakland. Borrowing has already wrecked Oakland and this complete dunce wants to do more of it.
The only solution that has a chance is for Oakland to declare bankruptcy. Instead Kernighan voted to kick the can down the road one more time.
Oakland Headed for Bankruptcy
Oakland will not be in a better position in a few years. I confidently predict bankruptcy.
Bankruptcy is the only method cities can use to correct absurd pension promises made to police, fire, and teachers' unions.
Advice to Unions
My beef is not with those lowest on the totem pole and their small $15,000 pensions.
Instead, I propose those with the largest pensions should take the bulk of the hit.
Police Chief Tom Morris lasted 8 months and will now receive a $204,000 annual pension. Morris deserves nothing, zero.
My advice to unions is to negotiate with cities in advance of bankruptcy or some judge will come along and do something like slash pensions across the board by 50% as happened in Rhode Island.
Across the board compromises give those like Morris far more than they deserve at the expense of hundreds of workers getting pensions barely enough to live on.
http://www.weeklystandard.com/print/articles/california-dreaming_648834.html?page=1
( LA pension shortfall is ten billion while assets are just 10 billion... )
Sunday, August 05, 2012 11:52 AM
Zombified Cities Roundup: Detroit Becomes Dumping Ground for the Dead; Financial Urgency in Miami; Oakland Pension Time Bomb; How Pensions Crashed Stockton and San Bernardino
Space does not permit a complete discussion of zombified cities. Such a list would be in the many hundreds. Rather this post is about four cities in recent news that are among the walking dead. One is even a dumping ground for the dead.
Fourth Financial Urgency in Miami in Four years
The Huffington Post reports Miami Declares Financial Urgency For Fourth Year In A Row
Fourth Financial Urgency in Miami in Four years
The Huffington Post reports Miami Declares Financial Urgency For Fourth Year In A Row
Miami City Manager Johnny Martinez declared a state of financial urgency Friday for the fourth year in a row.
The move gives the city commission authority to restructure its existing contracts with police, general employee, and fire unions.
City commissioners agreed to not hike taxes in a budget meeting Thursday night, but instead will look to close a budget gap of tens of millions through union concessions. The $485 million budget must be balanced by September.Click on link for a video.
"The unions are not cooperating with the process," Mayor Tomas Regalado told the Miami Herald. "We need to have a balanced budget."
Martinez said in a statement that the city will be contacting union representatives to start up two weeks of negotiations. The declaration of urgency has likely incensed police and fire officials; according to Reuters, the latter group argued before city officials Thursday night that their pay has been cut 35 percent in the last 3 years already.
Detroit Becomes Dumping Ground for the Dead
The Associated Press writes Vacant Detroit Becomes Dumping Ground for the Dead.
From the street, the two decomposing bodies were nearly invisible, concealed in an overgrown lot alongside worn-out car tires and a moldy sofa. The teenagers had been shot, stripped to their underwear and left on a deserted block.
They were just the latest victims of foul play whose remains went undiscovered for days after being hidden deep inside Detroit's vast urban wilderness - a crumbling wasteland rarely visited by outsiders and infrequently patrolled by police.How Pensions Crashed Stockton, San Bernardino
Abandoned and neglected parts of the city are quickly becoming dumping grounds for the dead - at least a dozen bodies in 12 months' time. And authorities acknowledge there's little they can do.
The bodies have been purposely hidden or discarded in alleys, fields, vacant houses, abandoned garages and even a canal. Seven of the victims are believed to have been slain outside Detroit and then dumped within the city.
"Detroit is a dumping ground for a lot of stuff," said Margaret Dewar, professor of urban and regional planning at the University of Michigan. "There is no one to watch. There is no capacity to enforce laws about dumping. There is a perception you can dump and no one will report it."
Bloomberg reports Police Chief’s $204,000 Pension Shows How Cities Crashed
Stockton, California, Police Chief Tom Morris was supposed to bring stability to law enforcement when he was appointed to the job four years ago.
He lasted eight months and left the now-bankrupt city at age 52 with an annual pension that pays more than $204,000 -- the third of four chiefs who stayed in the position for less than three years and retired with an average of 92 percent of their final salaries.
San Bernardino, a city of 209,000 about 60 miles (100 kilometers) east of Los Angeles, is typical of the phenomenon. Its city council voted July 18 to approve an emergency bankruptcy filing, about six years after the panel unanimously lowered the retirement age for public-safety workers to 50 from 55.
The council acted in August 2006 even though Aon Plc, the city’s risk-management consultant, had warned it that such a change would add millions of dollars to San Bernardino’s long- term pension costs. In the fiscal year that ended in June, pensions consumed 13 percent of the city’s general fund, up from 9 percent in fiscal 2007.
“I knew it was going to be costly in the long run,” San Bernardino City Councilwoman Wendy McCammack said of the lower retirement age. “However, this city is one of the toughest to police. In order to attract and retain the kind of officers that it takes to police a city like this, that was a benefit that we had to negotiate.”
Notice the complete ineptitude of San Bernardino City Councilwoman Wendy McCammack. She was willing to bankrupt San Bernardino by making untenable pension promises to "attract and retain" police officers. Did it work?
Pension Time Bomb Explodes in Oakland
The San Francisco Chronicle reports Oakland's financial time bomb: pensions
It was 1976 when the city of Oakland realized it had a major problem on its hands: A pension created 25 years earlier to benefit police officers, firefighters and their widows was proving too costly to afford.
So the city closed the plan to new employees and later passed a parcel tax to pay for the pension. Yet today, that pension remains the source of one of Oakland's biggest headaches.
It's a generous plan that awards its retirees and widows - who now number 1,086 - raises to match up to two-thirds of the pay of the current-day workforce. But the city's costs ballooned because it never adequately contributed to the pension fund, relied on borrowing for years to give itself holidays from pension payments and watched investments go south. The result of the borrowing is that the pension, known as the Police and Fire Retirement System, has cost Oakland taxpayers hundreds of millions of dollars more than it should have. In 2010, City Auditor Courtney Ruby found Oakland spent $250 million more on the pension than it would have if the city had simply paid into the pension - and that was just for one of its bond deals.
Last month, the majority of the Oakland City Council, at the urging of Mayor Jean Quan's administration, voted to borrow money once again to cover the pension bill - $210 million in new pension bonds that will cost another $105 million in interest over the next 14 years. But the loan will allow the city to avoid paying for the pension from its general fund for four years. If the city hadn't borrowed the money, it would have been forced to take $38.5 million from its roughly $400 million general fund to pay for the pension this year. Such a move would have required deep cuts to city services, which already have taken a hit due to the slumping economy, state budget cuts and redevelopment shutdown.Complete Idiocy by Councilwoman Pat Kernighan
Wipe out parks, libraries
"If we had to pay this money this year and the next couple of years, the cuts would imperil our Police Department as well as completely wipe out our libraries and parks," said Councilwoman Pat Kernighan. "In a few years, we're going to be in a better position to make the payments."
As stupid as the decision was by San Bernardino City Councilwoman (and it was incredibly stupid), the position of Oakland Councilwoman Pat Kernighan is much worse. Kernighan learned nothing from Stockton, San Bernardino, Miami, or Detroit.
Nor did Kernighan even learn anything from prior history in Oakland. Borrowing has already wrecked Oakland and this complete dunce wants to do more of it.
The only solution that has a chance is for Oakland to declare bankruptcy. Instead Kernighan voted to kick the can down the road one more time.
Oakland Headed for Bankruptcy
Oakland will not be in a better position in a few years. I confidently predict bankruptcy.
Bankruptcy is the only method cities can use to correct absurd pension promises made to police, fire, and teachers' unions.
Advice to Unions
My beef is not with those lowest on the totem pole and their small $15,000 pensions.
Instead, I propose those with the largest pensions should take the bulk of the hit.
Police Chief Tom Morris lasted 8 months and will now receive a $204,000 annual pension. Morris deserves nothing, zero.
My advice to unions is to negotiate with cities in advance of bankruptcy or some judge will come along and do something like slash pensions across the board by 50% as happened in Rhode Island.
Across the board compromises give those like Morris far more than they deserve at the expense of hundreds of workers getting pensions barely enough to live on.
and........
( LA pension shortfall is ten billion while assets are just 10 billion... )
California Dreaming
One percent a year returns won’t be enough to pay state pensions.
Mark Hemingway
July 30 - August 6, 2012, Vol. 17, No. 43
Last week, California taxpayers, already accustomed to economic doom and gloom, received an astonishing piece of bad news. The California Public Employees’ Retirement System (CalPERS) had posted a 1 percent return on its investments over the previous year. The California State Teachers’ Retirement System (CalSTRS) didn’t fare much better, with a 1.8 percent return. CalPERS and CalSTRS currently have a combined $383.5 billion in assets, making them the largest public pension system in the country.
That’s a lot of money, but thanks to California’s legendarily generous and corrupt pension programs, the two funds are on the hook for a lot more than they’ll be capable of paying out. It’s long been known that unfunded state pension liabilities were an acute financial problem, but there’s been a raging debate over exactly how big it is—the Pew Center on the States estimates the shortfall nationwide is $757 billion, while a recent report from State Budget Solutions says states are a whopping $4.6 trillion short of covering their obligations.
However, the lower-end estimates, such as Pew’s, rely on the states’ own assumptions about the likely rate of return on their pension fund investments. For years now, state projections have been divorced from reality. Most states assume a 7.5 percent to 8.25 percent annual return on their investments. By comparison, the S&P index grew at 5 percent a year over the last decade, and many pension fund assets are tied up in more conservative investments than that broad stock market index.
CalPERS’ performance is a blow to defenders of states’ rosy assumptions. Most states are still loath to admit that the new normal is substantially less than they were betting on—CalPERS, for one, lowered its expectations from 7.75 percent all the way down to 7.5 percent in March (ignoring the advice of its own actuary, who suggested lowering it to 7.25 percent). When New York City’s actuary considered a similarly trivial adjustment downwards, Mayor Michael Bloomberg (who actually knows something about this subject) was less than impressed. “The actuary is supposedly going to lower the assumed reinvestment rate from an absolutely hysterical, laughable 8 percent to a totally indefensible 7 or 7.5 percent,” he told the New York Times. “If I can give you one piece of financial advice: If somebody offers you a guaranteed 7 percent on your money for the rest of your life, you take it and just make sure the guy’s name is not Madoff.”
The good news is that it looks like states won’t be able to get away with this fantasy accounting for much longer. The Governmental Accounting Standards Board (GASB)—a non-governmental organization that has authority from the Securities and Exchange Commission to set rules for state and local government accounting—is on the verge of adopting new transparency rules for state pensions.
GASB will force inadequately funded pension systems to assume a far lower rate of return. State pension systems that are funded at satisfactory levels could continue using their own investment projections. This would have huge ramifications.
The proposed GASB rules don’t go far enough for Wall Street, however. “I have been saying if there was going to be discipline imposed on the states, it would be through the market, not a regulator,” Robert Novy-Marx, professor of finance at the University of Rochester, recently told Chicago business magazine Crain’s. “I don’t care how long they drag their feet—the market will drag them along.”
In its most recent estimate of public pension debt, ratings agency Moody’s applied a 5.5 percent annual return to all state pension funds and calculated state pension shortfalls to be $2.2 trillion. Under the agency’s calculus, in Illinois, whose pension system is one of the nation’s worst, the funding shortfall would jump from $83 billion to $135 billion.
Moody’s also published a report last week noting that pension burdens are major contributors to the recent spate of city bankruptcies, which Moody’s sees as part of an alarming trend of “distressed municipalities . . . view[ing] debt service as a discretionary item in their budget.” As such, unsustainable pensions are a major threat to the $3.7 trillion municipal bond market. Unfortunately, state pension problems are often the result of intractable state politics that won’t easily be fixed. Once again, California is the exemplar: In 1998, Phil Angelides was elected state treasurer and began an aggressive campaign to use the fiscal might of California’s pension funds to push all sorts of liberal ideas related to corporate governance and socially responsible investing.
“To this day, the California funds instigate a dizzying number of proxy fights at the companies in which they invest, focusing not just on governance-related issues like executive pay but on everything from carbon taxes to divestment from companies that do business with Sudan,” observed Jon Entine of George Mason University in an article in Reason magazine. This politically motivated investment strategy has not worked out well. Entine noted one example among many: In 2003, “CalPERS rejected a recommendation from its financial adviser, Wilshire Associates, to invest in the equity markets of four Asian nations—Thailand, Malaysia, India, and Sri Lanka—based on their alleged misdeeds.” That decision cost state retirees $400 million.
That’s a lot of money, but thanks to California’s legendarily generous and corrupt pension programs, the two funds are on the hook for a lot more than they’ll be capable of paying out. It’s long been known that unfunded state pension liabilities were an acute financial problem, but there’s been a raging debate over exactly how big it is—the Pew Center on the States estimates the shortfall nationwide is $757 billion, while a recent report from State Budget Solutions says states are a whopping $4.6 trillion short of covering their obligations.
However, the lower-end estimates, such as Pew’s, rely on the states’ own assumptions about the likely rate of return on their pension fund investments. For years now, state projections have been divorced from reality. Most states assume a 7.5 percent to 8.25 percent annual return on their investments. By comparison, the S&P index grew at 5 percent a year over the last decade, and many pension fund assets are tied up in more conservative investments than that broad stock market index.
CalPERS’ performance is a blow to defenders of states’ rosy assumptions. Most states are still loath to admit that the new normal is substantially less than they were betting on—CalPERS, for one, lowered its expectations from 7.75 percent all the way down to 7.5 percent in March (ignoring the advice of its own actuary, who suggested lowering it to 7.25 percent). When New York City’s actuary considered a similarly trivial adjustment downwards, Mayor Michael Bloomberg (who actually knows something about this subject) was less than impressed. “The actuary is supposedly going to lower the assumed reinvestment rate from an absolutely hysterical, laughable 8 percent to a totally indefensible 7 or 7.5 percent,” he told the New York Times. “If I can give you one piece of financial advice: If somebody offers you a guaranteed 7 percent on your money for the rest of your life, you take it and just make sure the guy’s name is not Madoff.”
The good news is that it looks like states won’t be able to get away with this fantasy accounting for much longer. The Governmental Accounting Standards Board (GASB)—a non-governmental organization that has authority from the Securities and Exchange Commission to set rules for state and local government accounting—is on the verge of adopting new transparency rules for state pensions.
GASB will force inadequately funded pension systems to assume a far lower rate of return. State pension systems that are funded at satisfactory levels could continue using their own investment projections. This would have huge ramifications.
The proposed GASB rules don’t go far enough for Wall Street, however. “I have been saying if there was going to be discipline imposed on the states, it would be through the market, not a regulator,” Robert Novy-Marx, professor of finance at the University of Rochester, recently told Chicago business magazine Crain’s. “I don’t care how long they drag their feet—the market will drag them along.”
In its most recent estimate of public pension debt, ratings agency Moody’s applied a 5.5 percent annual return to all state pension funds and calculated state pension shortfalls to be $2.2 trillion. Under the agency’s calculus, in Illinois, whose pension system is one of the nation’s worst, the funding shortfall would jump from $83 billion to $135 billion.
Moody’s also published a report last week noting that pension burdens are major contributors to the recent spate of city bankruptcies, which Moody’s sees as part of an alarming trend of “distressed municipalities . . . view[ing] debt service as a discretionary item in their budget.” As such, unsustainable pensions are a major threat to the $3.7 trillion municipal bond market. Unfortunately, state pension problems are often the result of intractable state politics that won’t easily be fixed. Once again, California is the exemplar: In 1998, Phil Angelides was elected state treasurer and began an aggressive campaign to use the fiscal might of California’s pension funds to push all sorts of liberal ideas related to corporate governance and socially responsible investing.
“To this day, the California funds instigate a dizzying number of proxy fights at the companies in which they invest, focusing not just on governance-related issues like executive pay but on everything from carbon taxes to divestment from companies that do business with Sudan,” observed Jon Entine of George Mason University in an article in Reason magazine. This politically motivated investment strategy has not worked out well. Entine noted one example among many: In 2003, “CalPERS rejected a recommendation from its financial adviser, Wilshire Associates, to invest in the equity markets of four Asian nations—Thailand, Malaysia, India, and Sri Lanka—based on their alleged misdeeds.” That decision cost state retirees $400 million.
Angelides left his job as state treasurer in 2007 and launched an unsuccessful bid to unseat Arnold Schwarzenegger as governor. That same year, the Los Angeles Times reported that CalSTRS had ousted investment banker David Crane—“a close friend” of Schwarzenegger—from its board for repeatedly questioning whether the pension fund was irresponsible to assume an 8 percent annual return. In 2009, President Obama appointed Angelides to head the Financial Crisis Inquiry Commission, which was tasked with writing a report detailing the causes of the 2008 financial crisis. Looking at the wreckage of California’s pension plans—which were heavily invested in AIG, Citigroup, Lehman Brothers, and other major players in the meltdown—one might say that Angelides’s chief qualification for investigating fiscal crises is instigating one.
The recession does appear to have been something of a wake-up call, and states are slowly starting to address the pension problem. Between 2009 and 2011, 43 states cut benefits, increased employee contributions to pension funds, or did both. In 2010 and 2011, 18 pension plans in 14 states lowered their return assumptions. Still, most pension reforms have been piecemeal and inadequate.
Further complicating states’ pension woes is the related problem of retiree health costs. While the numbers aren’t as big, the actuarial problem is even more acute—in 2010, state retiree health care liabilities were $660 billion, but “states had assets to pay $33.1 billion, leaving a $627 billion hole,” according to Pew. Only 7 states have funded more than 25 percent of their retiree health care obligations.
Along with Wall Street, angry taxpayers might help get state pension funds under control, as they slowly realize they are on the hook for astronomical sums. There are already signs that this is happening: In addition to Scott Walker’s recall election triumph and union reform success in Wisconsin, San Jose and San Diego residents have specifically voted to rein in public employee retirement packages this year.
But things are likely to get worse before they get better. Following the announcement of California’s dismal returns last week, Fitch released a report saying that the ratings agency “expects numerous systems to report similarly disappointing returns.”
Mark Hemingway is a senior writer at The Weekly Standard.
The recession does appear to have been something of a wake-up call, and states are slowly starting to address the pension problem. Between 2009 and 2011, 43 states cut benefits, increased employee contributions to pension funds, or did both. In 2010 and 2011, 18 pension plans in 14 states lowered their return assumptions. Still, most pension reforms have been piecemeal and inadequate.
Further complicating states’ pension woes is the related problem of retiree health costs. While the numbers aren’t as big, the actuarial problem is even more acute—in 2010, state retiree health care liabilities were $660 billion, but “states had assets to pay $33.1 billion, leaving a $627 billion hole,” according to Pew. Only 7 states have funded more than 25 percent of their retiree health care obligations.
Along with Wall Street, angry taxpayers might help get state pension funds under control, as they slowly realize they are on the hook for astronomical sums. There are already signs that this is happening: In addition to Scott Walker’s recall election triumph and union reform success in Wisconsin, San Jose and San Diego residents have specifically voted to rein in public employee retirement packages this year.
But things are likely to get worse before they get better. Following the announcement of California’s dismal returns last week, Fitch released a report saying that the ratings agency “expects numerous systems to report similarly disappointing returns.”
Mark Hemingway is a senior writer at The Weekly Standard.
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