California Busted?

October 3, 2011 12:22 PM

Michael Lewis' newest piece of financial disaster tourism came out a few days ago, relating his take on California's Bond problems. Some think that he didn't interview the right experts in the field and that the lesson of the city of Vallejo have already been internalized by city managers. Chapter 9 of the Bankruptcy code, governing municipal bankruptcies has been used less than 600 times since 1937. This means that the case law is still relatively undeveloped. Only in 2009 did it become clear that municipalities could void union contracts for public workers.

There is something like a half trillion unfunded pension liability in California as of 2010. Fix Pensions First believes that California's budget problems need to be solved by revamping the pension system.

California has a sad history of only solving problems under court order. AB109, a response to this court order, came into effect Oct 1st, 2011 and starts sending many prisoners to county facilities instead of prisons.

States, as opposed to municipalities, cannot file for bankruptcy. But some people would like them to be able to.

What's unclear is if a State could push down its liabilities to municipalities, allow them to fail, and allow them to petition for Chapter 9 relief. Such a plan may, effectively, be a State level bankruptcy.

One thing that is clear is that metafilter loves Michael Lewis.

posted by bswinburn (17 comments total)

There is something like a half trillion unfunded pension liability in California as of 2010.

And why in the name of holy would you do something as stupid as try to pay for everyone's retirement right now?

First: How much will it cost? You don't know how long they'll live, you don't know what inflation (and thus, COLA) will be like. How do you put that money away if you don't know how much to put away?

Second: If you did, it would still be stupid. It would be money sitting in a vault as inflation slowly ate it away.

This is one of my favorite lies. The reason that they are insisting that pensions are "underfunded" is so they can eliminate them. If you accept their arguments for privatized retirement plans -- all of which involve the economy always growing -- then you want a small buffer for bad years, and then you want to pay the rest as you go. It's a better use of your money, because you'll only pay what you needed that year, and the rest of the money can be used for other things, which will hopefully grow the economy even further.
posted by eriko at 12:35 PM on October 3, 2011 [6 favorites]

Oh, and having read the article?

It's all the union's fault. Not the fault of those who continually demanded that the taxes be reduced and the services increased. It's the union, of course.

Sigh. Nobody else is ever guilty when they say "me first", but unions are evil.

Fuck that noise.
posted by eriko at 12:44 PM on October 3, 2011 [7 favorites]

could void union contracts for public workers

Wouldn't that put the union in a legal strike position? I've seen what a garbage collector's strike looks like. It doesn't tend to boost the popularity of the mayor's office, all the more so in a case like this where it would be obvious to everyone that the city is not negotiating in good faith.

This would not be a smart budget cutting option for a city council, would it? Of course it might be considered ideologically correct.
posted by justsomebodythatyouusedtoknow at 12:46 PM on October 3, 2011 [1 favorite]

Maybe MetaFilter loves talking about Michael Lewis, but as far as his actual output I can only state that The Big Short unfairly received all the "here's how the U.S. financial crisis occurred" attention that should have gone to John Lanchester's I.O.U.
posted by psoas at 1:16 PM on October 3, 2011 [2 favorites]

And why in the name of holy would you do something as stupid as try to pay for everyone's retirement right now?

When CA signed for a certain pension, it started getting a benefit (labor) now, while incurring a cost (retirement payments) for later. It's two options are
1) Raise taxes at the same time it gets the benefit, using actuaries to make a good guess at the parameters you ask to figure out how much it needs. Put that money in an investment fund, whose composition needs to take into account the time when you'll need the money. With this strategy, you should not need to raise more taxes later to pay for the thing you got right now.

2) Do not raise taxes now, since investing appropriately is hard (maybe impossible), and keeping taxes lower now should improve economic growth. When the time comes that you need the money, you just raise taxes on your larger economy.

If you're GM replace "taxes" with "premium on sales" or "decreased dividends."

Option 2) is preferred by legislators, who might get kicked out of office if they raised taxes now. The problem with it is the raising taxes at the end. It's likely that the people who benefited from the services and low taxes are not the same cohort of people who will be paying. They may have left the state, or be dead. It may be impossible to credibly raise enough money without destabilizing the local economy. After all, the people who face the higher taxes can just leave your jurisdiction. As GM illustrates, the assumption that you will have more money coming in when you need it might not materialize. CA probably could raise $500B in revenue when it needs it, but it's not like it's going to be able to do that without impact on the well-being of the state.
posted by a robot made out of meat at 1:19 PM on October 3, 2011 [3 favorites]

This is what happens when you make it impossible to raise revenues by raising tax rates. Your government finances go to hell. Just what Grover et al. planned.
posted by Mental Wimp at 1:20 PM on October 3, 2011

one of the bigees in the online blogs of union bashing
sample:
http://globaleconomicanalysis.blogspot.com/2011/09/unions-sue-new-jersey-governor-christie.html
posted by robbyrobs at 1:23 PM on October 3, 2011

It's like Willie Sutton said. He robs banks because that's where the money is.
posted by dances_with_sneetches at 1:27 PM on October 3, 2011

AB109, a response to this court order, came into effect Oct 1st, 2011 and starts sending many prisoners to county facilities instead of prisons.

The Legislature claims, in the new Penal Code Section 17.5, subdivision (b) that, "[t]he provisions of this act are not intended to alleviate state prison overcrowding." Technically, they might be right in that AB109 passed on April 11, 2009, while the decision in Brown v. Plata (May 23, 2011) __ U.S. __, 131 S.Ct. 1910, 179 L.Ed.2d 969 came a little later.
posted by Hylas at 1:58 PM on October 3, 2011

I sit on one of my city's citizen advisory committees and was in a briefing about the 2012 budget a few months ago.* (For the city council's finance committee, IIRC.) Wow that was grim. Although as Bond Girl (!) says, "it would be difficult to argue that financial trouble catches officials off guard." The city manager (?) had a great deal of information, including being able to talk quite clearly about what options the city had for the next few years. FWIW, employee health insurance seems to be a huge issue. I think my marginalia on my copy of the agenda include "single payer now goddamn it."

And I don't know why nobody ever seems to mention Baumol's Cost Disease** in conversations about public employees.

In a range of businesses, such as the car manufacturing sector and the retail sector, workers are continually getting more productive due to technological innovations to their tools and equipment. In contrast, in some labor-intensive sectors that rely heavily on human interaction or activities, such as nursing, education, or the performing arts there is little or no growth in productivity over time. As with the string quartet example, it takes nurses the same amount of time to change a bandage, or college professors the same amount of time to mark an essay, in 2006 as it did in 1966.

It's telling IMHO that he ends the essay with musings by a firefighter on -- essentially -- trying to increase productivity.

* It was particularly disheartening after being in a prior meeting where the committee members were in agreement that many of our sidewalks are in dire shape. And really, the only reason we can add any at all is a specific tax voted in probably 10 years ago.

** Which I learned about from Confessions of a Community College Dean.
posted by epersonae at 2:11 PM on October 3, 2011 [3 favorites]

In California, it's not just conservatives that are for pension reform.
posted by gyc at 2:36 PM on October 3, 2011

And why in the name of holy would you do something as stupid as try to pay for everyone's retirement right now?

You could always go for option 3) Find a way to renege on the pension benefits you agreed to in the past while claiming financial hardship. Which is what "fixing" the pensions is all about.

And then you can point to corporate America, which has spent the last 30 years looting the pension system, and say that there is a disparity between public and private pensions.

Bunch of fuckers.
posted by ennui.bz at 2:41 PM on October 3, 2011 [2 favorites]

Do the accounting changes inGASB 45 have anything to do with the "discovery" of systemic benefits underfunding?

I recall reading this article when it was published: The Next Retirement Time Bomb and it seems prescient now.
posted by action man bow-tie at 3:00 PM on October 3, 2011

eriko: "Second: If you did, it would still be stupid. It would be money sitting in a vault as inflation slowly ate it away. "

I gather some portion of your comment was paraphrasing something else and not a point you agree with. But a number of people seem surprised at how pension funds invest. I was talking with a TIAA-CREF financial planner and I mentioned my older KPERS holdings. I had to explain to him that it's currently underfunded by a bit, and they assume a long haul return of 8 percent. Unsurprisingly, the Stanford study makes the same assumption that pension plans should not take on any risk, and that's where the large gap comes from. As a bonus, that's from 2010, and long term rates have been cut in half since then, making the "gap" even bigger.

It's an open question to me, why public employees would do a better job managing their money in a 403b vs hiring experts to run a pension plan for the whole group. Pension funds are in a much better position to assess lifetimes and cost of living adjustments, and better able to diversify cheaply. They're also able to hold investments in perpetuity, more like a university endowment, while individuals are told to follow a glide path away from stocks towards bonds as they age.

But yes, there's some additional value to having a market invested pension fund backed by the state and federal government. I find it wholly unsurprising though that so called "free-market" politicians offer no oversight to the management of the pension. Their real intent seems to be less about saving taxpayers money and more about helping Wall St. milk more and more retirement accounts.
posted by pwnguin at 3:21 PM on October 3, 2011 [1 favorite]

Mr. Lewis:

I really enjoy your books. Moreso Moneyball and The Blind Side. The financial stuff is really interesting, but it's just too damn depressing at the moment. Could you do another sports book? Maybe something about soccer. Or get a case of beer and a backpack and take off with John Krakauer for a month and learn about climbing, or Baptists. I'd read those too. But to come home from work and then read about how dire my financial future is just isn't cutting it for me for "entertainment."

kthx Marv.
posted by MarvinTheCat at 3:50 PM on October 3, 2011 [1 favorite]

Their real intent seems to be less about saving taxpayers money and more about helping Wall St.

I don't think it's that so much as many people who have 401(k)s figure, if they're at risk of having their retirement funds evaporate in the next market crash and have to live on cat food in their dotage, they don't want to have to live with the knowledge that someone in the public sector might possibly be doing better than them as a result of taxes they paid back in the day.

It's not quite "fuck you, got mine," but "if I can't have it, you damn well can't have it either."

And in general it's part of the American idea that if public sector employees are making more than starvation wages, taxes are probably too high and it's time to take those lazy fuckers down a notch.

That attitude underpins a whole lot of the discourse about public employees (whether teachers, firefighters, or clerks at the DMV), at least where I live, and frankly the public sector unions don't seem to really be doing a whole lot on the PR side of things to change it. Which, when you're paid out of the public purse of a democracy, strikes me as a strategic error.
posted by Kadin2048 at 4:55 PM on October 3, 2011 [1 favorite]

And I don't know why nobody ever seems to mention Baumol's Cost Disease** in conversations about public employees.

Well, public sector jobs are a very broad group. Some of them are subject to cost disease and some aren't. Education is a good example of one that is, but the army of clerical workers does take advantage of improvements in computers and automation. Police and fire can also be made more cost effective with technology. Health care is its own weird world of cost.
posted by a robot made out of meat at 5:38 PM on October 3, 2011