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?
- The immediate solution is bankruptcy. Expect to see more cities file. However, longer-term structural problems must also be addressed.
- 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.
- End defined benefit pension plans for public union workers.
- End collective bargaining for public union workers. Governor Scott Walker in Wisconsin has proven that can be done.
- Scrap Davis-Bacon and all state prevailing wage laws.
- Institute national right-to-work laws.
- Merit pay for teachers
- More competition from accredited online schools to drive education costs way down
- 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.