The city of Stockton, California, is Bankrupt. It has stopped making bond payments and will become the largest city in the US to seek protection via US bankruptcy law.

The bankruptcy was inevitable.

California law requires blame to be assessed. To be sure there is plenty of blame to go around.

Here are a few paragraphs from the LA Times that explain the setup.

How Stockton found itself so mired in debt can be seen everywhere in the city’s core. There is a sparkling marina, high-rise hotel and promenade financed by credit in the mid-2000s, mere blocks from where mothers won’t let their children play in the yard because of violence.

During the economic boom, this working-class city with pockets of entrenched poverty tried to reinvent itself as a draw to Bay Area refugees and a popular site for conventions. It offered generous city employee pension plans and benefits.

When the bust came, few places fell as hard as Stockton. The city has the second-highest rate of foreclosures in the country and the second-highest rate of violent crime in the state.

The city made $90 million in drastic cuts from the general fund in the last three years, including reducing the Police Department by 25%, the Fire Department by 30%, and cutting pay and benefits to all employees. There is a state investigation into whether Stockton’s financial devastation was entirely due to shortsighted optimism or if there was corruption. The state mediation law requires assigning blame.

Public Union Pensions, a Death Trap for Cities

I added emphasis to the two sentences that explain what really happened and where the blame will be placed. Sure, Stockton politicians made gross errors in its budget. Yet, that is not what did Stockton in.

The thing Stockton could not  correct over time is ever-escalating pension promises and public union salaries. Union pensions wrecked Stockton. The only way to escape the death-grip of inane pension promises is bankruptcy.

Things like parks and marinas are one-time foolishness that can be corrected over time.

Ever-escalating public union wages and pension costs cannot be corrected over time (Indeed they are 100% guaranteed to get worse). Prevailing wage laws that force cities to overpay for every city project cannot be undone over time either.

Both have to be fixed big-bang. The former by bankruptcy, the latter by brute political force, preferably at the national level.

Scapegoating Short-Sighted Optimism

Blame will not be placed where it most belongs. Here is the key sentence: “There is a state investigation into whether Stockton’s financial devastation was entirely due to shortsighted optimism or if there was corruption.

Note the two choices.

Political pandering by politicians to unions is not on the list. Nor are pension plans. Nor are public unions salaries.

$51.71-an-Hour Summer Job Program

Let’s turn our focus to New York for a second, but the problem described by the New York Post applies to California, New York, and every prevailing wage state. If federal funds are involved, it applies to every state.

Please consider NY’s $51.71-an-Hour Summer Job Program

The small Hudson Valley city of Poughkeepsie is now home to some of the best-paying summer jobs ever: $51.71 an hour.

That’s right: $51.71 an hour.

The project started off as perfectly sensible. The work involves restoring Fallkill Creek, damaged in last summer’s post-Hurricane Irene flooding. To get the job done and put up to 150 unemployed young people to work, the state Labor Department tapped a federal storm-cleanup grant.

Clearing debris and lifting heavy objects isn’t easy, but why pay temporary manual laborers the same hourly rate as a skilled employee in a $100,000-a-year full-time job?

The ultimate source of funding for the Fallkill cleanup is a federal National Emergency Grant, whose terms require paying wages at the highest of the federal, state or local minimum wage or at the comparable rates of pay for individuals employed in similar occupations by the same employer.

The state Labor Department decided that this meant the prevailing wage for public-works projects. But “prevailing wage” is a term of art that actually means a pay rate based on collective-bargaining agreements between labor unions and private employers.

For the Mid-Hudson region, the prevailing hourly rate for laborers comes to $51.71 — $30.71 in wages plus $21 in benefits. But the temporary workers on the Fallkill won’t be union members, so they’ll get the entire amount as a wage, the Labor Department ruled.

If not for the prevailing wage, the Fallkill grant could’ve provided seasonal employment for 1,000 young people at the minimum-wage rate of $7.25 an hour — which might have gotten the job done sooner, to boot.

Or the state might have employed the same number of people, paid them $10 an hour and saved taxpayers $219,000 a week.

The project illustrates how government all too often works — that is, as wastefully as possible. It also stands as a testament to the power of unions in dictating government wage rates.

Who Benefits From This?

Bear in mind, that government spending adds to GDP, by definition. It does not matter how little product is actually produced, or even if the results are negative.

Fixing 1 bridge instead of 10 adds as much GDP if the amount spent is the same.

Want to create 1,000 jobs for the summer or 140? If you are one of the politically well-connected the answer is 140.

Want to bet who got those jobs? I bet is sons and daughters of the politically well-connected. I would like to see a report.

Let’s return our focus to California.

University of California Faces Mounting Pension Costs

Here is an interesting article that came my way a few days ago: University of California faces mounting pension costs.

The cost of pensions and retiree health benefits are soaring at the University of California, increasing pressure to raise tuition and cut academic programs at one of the nation’s leading public college systems.

The 10-campus system is confronting mounting bills for employee retirement benefits even as it grapples with unprecedented cuts in state funding that have led to sharp tuition hikes, staff reductions and angry student protests.

The UC system, including medical centers and national laboratories, is scrambling to shore up its pension fund as it prepares for a wave of retirements and tackles a roughly $10 billion unfunded liability.

“The regents made a serious error and the Legislature made a serious error by not putting money aside for 19 years while accumulating this obligation,” said Robert Anderson, a UC Berkeley economist who chairs the system’s Academic Senate. “Now we have to pay for it.”

Notice the self-serving attitude and blame-placing by Robert Anderson, essentially whining that taxpayers did not dole out enough money to give him his expected benefits.

What benefits are we discussing? The article explains.

The UC system faces spiraling pension costs for 56,000 current retirees and another 116,000 employees nearing retirement.

As of May, there were 2,129 UC retirees drawing annual pensions of more than $100,000, 57 with pensions exceeding $200,000 and three with pensions greater than $300,000, according to data obtained by The Associated Press through a state Public Records Act request.

The number of UC retirees collecting six-figure pensions has increased by 30 percent over the past two years, according to Californians for Fiscal Responsibility, an advocacy group that has analyzed UC pension data.

Topping the list is Marcus Marvin, a retired professor of dentistry and public health at UCLA, who receives an annual pension of $337,000.

If UC President Mark Yudof, 67, serves for seven years, he would receive an annual pension of $350,000 — in addition to regular benefits he accrues through the UC Retirement Plan, according to university documents.

The university caps employee pensions at the IRS limit of $250,000, but that ceiling does not apply to the “supplemental retirement benefits” promised to Yudof.

With inane pension benefits like that, is it any wonder the system went unfunded?

Those benefits cannot and will not be paid. The system is bankrupt. Sadly, young kids graduating from college tens or hundreds of thousands of dollars in debt are bankrupt as well. However, student loans cannot be discharged in bankruptcy.

Students are the one who have paid the highest price for our corrupt education system. Nothing is done “for the kids”. It is all done for grossly overpaid administrators and public union employees.

School tuition has to be ridiculously high to support $350,000 a year pension plans for life.

What’s the Solution?

  1. The immediate solution is bankruptcy. Expect to see more cities file. However, longer-term structural problems must also be addressed.
  2. Untenable pension contracts need to be tossed out by the courts and benefits reduced. Every taxpayer not on the public dole should cheer bankruptcy, not resist it.
  3. End defined benefit pension plans for public union workers.
  4. End collective bargaining for public union workers. Governor Scott Walker in Wisconsin has proven that can be done.
  5. Scrap Davis-Bacon and all state prevailing wage laws.
  6. Institute national right-to-work laws.
  7. Merit pay for teachers
  8. More competition from accredited online schools to drive education costs way down
  9. Scrap student loan programs that only benefit administrators and educators, not the kids.

It’s time to stop overpaying for all government-sponsored services including but not limited to police, fire, prison-workers, and education. The vicious, self-serving grip unions and their political supporters have on this nation has to end. Governor Walker partially paved the way in Wisconsin. Other states must follow through. At the national level, we desperately need right-to-work laws while ending prevailing wages.

About the author: Mike “Mish” Shedlock is a registered investment advisor representative for Sitka Pacific Capital Management. His top-rated global economics blog Mish’s Global Economic Trend Analysis offers insightful commentary every day of the week. He is also a contributing “professor” on Minyanville, a community site focused on economic and financial education. Every Thursday he does a podcast on HoweStreet and on an ad hoc basis he contributes to many other websites, including UnionWatch.

12 Responses to Stockton CA Files Bankruptcy, Largest City Ever

  1. boprn says:

    Shedlock puts on full display here why he can’t be taken seriously. Anyone with even the slightest bit of knowledge would know that a combination of falling tax revenue (due to the housing crisis), crime (in the form of large gangs), unnecessary public works projects (in the cost of hundreds of millions), the promise of lifetime medical for working all of 6 months, not funding the pension system as required by law, AND pension costs created the problem seen in Stockton. Some of this was brought on by incompetent Democrats, some of it was brought on by dishonest Republicans. Lucky for us, Shedlock brings both incompetence & dishonestly together in one nice little package.

  2. john moore says:

    Like Vallejo, Stockton is not even requesting relief from its’ massive pension obligations. Per its’ city manager, it is too expensive. But it will sink Stockton, bankruptcy or not. This is a classic conflict of interest. Staff, including the city manager, hopes against hope that they will magically receive their million dollar pensions. Forget it. This bankruptcy is a waste of time.

  3. Tom Farrell says:

    boprn,

    You must be either a democrat or a public union memeber or both. Mich speaks the truth and is spot on in this article. The housing crisis, crime and unnecessary public works projects are parts of the problem. The bulk of the problem for Stockton is the over generous pensions and lifetime medical benefits that politicians promised that they did not fund. Who has been in charge of Stockton and Califorina for the last 30 years? That’s right the Dems… The democrats and their unions have used Collective barganing, Davis-Bacon, and state prevailing wage laws to drive up the cost of Goverment and taxpayers are not getting their monies worth. So boprn, you must be a benefactor of Collective barganing, Davis-Bacon, and prevailing wage laws for you to be dishonest in your comment to Mich.

  4. boprn says:

    Tom Farce –

    It is good of you to mention that: “The housing crisis, crime and unnecessary public works projects are parts of the problem.” And go on to mention “…generous pensions and lifetime medical benefits that politicians promised that they did not fund.”

    Isn’t it odd that is what I posted?

    It us just not a pension issue, as Sedlock would have people believe, per this article. It is a number of bad decisions/economic problems coming together.

    Rather than argue the issue, you bash Democrats, and say I benefited from collective bargaining. You are so far off it isn’t even funny. Libertarian here, and have zero to do with any union. You also fail to mention that Swarzfailure got us into (at the state level) a lot of the problems we are now facing. He was a Republican, so its hard to blame the Democrats for everything. But Swarzfailure is another topic…

    Keep up that partisan attitude – it will get you far in life!!! Oh, be sure to tune into Fuax News for your daily dose of propaganda!!!

  5. Tough Love says:

    Mike ….. I couldn’t agree more .

    Well Stated !

  6. SeeSaw says:

    Without the housing crisis, we wouldn’t even be here. But, its appears true that the Stockton officials were into giving away the store. Lifetime health care after six months of employment is crazy! I was a public employee and had to be employed full-time for 25 years to receive payment of my ABC medical insurance premium, which was capped and turned into a small stipend after only two years in retirement. It now takes 34% of my CalPERS pension check to fund the medical insurance premiums for me and my spouse–that is in addition to my “lifetime” stipend. Active employees do not even think about retirement until they are in their 20th year–they are too busy working to pay the bills–they do not deserve the blame you heap on them. Try viewing the film, “Inside Job”.

  7. Tough Love says:

    You’re right about that SeeSaw, the actives don’t really deserve the blame. The “blame” primarily belongs to our elected representatives who in return for campaign contributions and election support betrayed Taxpayers and favorably vote for these grossly excessive pensions and benefits. Of course the Unions deserve a share of that blame for their extraordinary greed.

    But …… the “promises” have been made and since our elected representatives certainly can’t foot the cost of their betrayal, and the betrayed Taxpayers shouldn’t (and WON’T) pay for it, that leaves reneging on a large portion of these fraudulently obtained promises.

    That’s where you are I always seem to disagree. You, as a Public Sector retiree want want you were “promised”, and I, as a betrayed Taxpayer do no want to pay for it. One thing for sure, the battle is going to get real ugly.

  8. Tom Farrell says:

    boprn,

    Libertarian???? I don’t think so. In your first post not only do you call Mish dishonest and Republicans dishonest. You minimize what the Democrats have done by calling them only incompetent as if this is expected of them. If anything the Democrats who have been in control are the dishonest ones by not funding the promised benefits and expecting the next generation to pay for this fraud. And not only that the Democrats have pushed Collective bargaining, Davis-Bacon, and prevailing wage laws which have raised the cost of government including these Union Pensions and medical benefits. And who do the Unions support? Republicans I don’t think so

    I do acknowledge that Republicans are are not blameless either. I blame the moderate Republicans who cross the isle and the RINO’s who vote for this garbage. I also acknowledge the Arnold was not really a conservative and wished that Tom McClintlock would have been elected Governor instead.

    To rephrase what I meant to say I do acknowledge that the housing crisis, crime and unnecessary public works projects are “Factors” but the 800 pound gorilla in the room are the over generous pensions and lifetime medical benefits. I myself have voted Libertarian the last 3 Presidential elections but will now have no choice but to vote Republican at least in the next election.

    If you are a true Libertarian would you agree with me that these Collective bargaining, Davis-Bacon, and prevailing wage laws pushed by Democrats are nothing more than fraud perpetrated upon the taxpayers? I would agree that some Republicans are dishonest for not being conservative but as a true Libertarian I put the majority of the blame on the Democrats, the party of corruption. IF you are a true Libertarian I appologize calling you a union member or Democrat but to call Mish dishonest you are way off the reservation. Would you not agree that Mish’s solutions above would not solve these problems? Or do you think we need more Government programs? What is your solution then boprn?

  9. boprn says:

    I stand by my original post. The author, like all Republicans, says that people who took a job at a pay rate predetermined by schedule are at fault for the demise of Stockton. SOMEONE had to take each of those jobs. To blame people who went to work, and did an honest job USED to be a Republican value, some would say – an American value. Today the Republicans attack people who simply applied for and took a job. The attacks are daily on government employees. The attacks are NOT daily on welfare queens, illegals, workman comp fraudsters, or banksters – just honest people who took a job and played within the rules.

    That is why I say the Republicans are dishonest. The Democrats are incompetent. The difference is that I expect Democrats to be incompetent, but I don’t expect Republicans to be dishonest. This national trend started with Schwarzfailure (R), who made the state worker the scapegoat for all things wrong in the state. Other politicians saw that it worked, and did the same. Now, the govt employee is treated by the vast majority of society like the Jew in Germany during the Nazi times. The general public has bought off on it, to the point it is not even a question IF the public employees are evil, seal clubbing, Satan worshiping sorts – it is KNOWN that they are. Nobody knows exactly why, it is just so.

    As for pensions being the biggest problem. I don’t know each individual city and county in the state of California. I do know the situation at the state level, and pensions are definitely not the biggest problem. Illegals cost 10 times the money (at the state level) than pensions do. The inmate medical fiasco in the prisons (100% the doing of Swarzfailue) costs more than the entire yearly allotment for pensions. The furlough fiasco Swarzfailure made (and Brown is doing now) is simply kicking pay down the road, and will crash future budgets. There are more examples but you get my drift.

    Libertarian – Rob Paul all the way. If you know who Peter Schiff is, then you know my financial philosophy. If you don’t know who he is, look him up on YouTube. He is a great guy who owns EuroPacific Capital, and you might even get into a prolonged email discussion with him regarding national finances if your interested.

    Lastly – I do believe that the people who have played fair, within the rules and worked for the state have their pension coming. Its what they worked for all those years.

  10. Tough Love says:

    Quoting BOPRM …”Lastly – I do believe that the people who have played fair, within the rules and worked for the state have their pension coming. Its what they worked for all those years.”

    So, then you believe that the Taxpayers, who were betrayed by their elected officials (via the quid-pro-quot of favorable votes on pay, pensions and benefits in exchange for Union campaign contributions and election support) should pay for public sector pensions, the Taxpayer paid-for share of which, is ROUTINELY 2, 4, even 6 times (for safety workers) greater in value at retirement than what comparable Private Sector workers typically get from their employers when retiring at the SAME age, with the SAME pay, and with the SAME years of service …. and all while (per the US Gov’t BLS) Public Sector cash pay (even after adjusting for education) is no less than Private Sector cash pay in similar jobs.

    Please explain why you think that is appropriate and fair to Taxpayers, 80-90% of whom are NOT Public Sector workers.

  11. boprn says:

    TL –

    I really have nothing to say to you. You have a history of making stats up (see your above post), and you are generally just an evil person. Let’s not have a discussion.

    • Tough Love says:

      Good answer …. when you really have no good response.

      And evil ? Why, because I object to the excesses afforded Public Sector workers at taxpayers expense? I should be applauded for that stance.

      Too bad out gutless (paid-off) politicians haven’t the stomach to appropriately address the need for MATERIAL pension reform.

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