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Municipal Bankruptcy in the United States
August 5, 2012 9:28 AM   Subscribe

Over the last few months, a few cities around the United States have experienced their own, unique, fiscal crisis: bankruptcy.

Municipalities can enter Chapter Nine bankruptcy, which gives them the ability to change lease agreements, contracts, and interest rates, but not public law.
A few of these cities are in California: Stockton, San Bernardino and most recently, Mammoth Lakes. The combination of high structural costs,
depression in land values, and economic crisis has led to other cities coming to the brink of receivership or legal action, though in at least one case criminal activity may be related. Scranton, PA is at the brink.

Many in the media blame spiraling pension costs and poor returns on the long-term debt these cities bear. Retirees face the brunt of the cuts. Can cost cutting or re-development save them?

The City of Vallejo may provide a model, or a warning, of what is to come.

previously on MetaFilter: LOOTING MAIN STREET
posted by the man of twists and turns (74 comments total) 19 users marked this as a favorite

 
Starving the monster. This is the intended end result of that particular ideology. Decades of frozen or reduced tax revenues are driving cities into this position.

It's trendy to blame the pensions (once again, teh evil unions and govt workers!!!)...But had cities funded the pensions as they were required by law, that wouldn't have been an issue. Now, they're staring in the face of huge unfunded pension liabilities and acting all surprised and victimized.
posted by Thorzdad at 9:44 AM on August 5, 2012 [45 favorites]


Many in the media blame spiraling pension costs and poor returns on the long-term debt these cities bear.

Funny how seldom tax cuts and conservative "starve the beast" mentality is blamed for problems such as these.

Ultimately, the goal of these types is to cut taxes until it becomes no longer tenable to do any of the programs which were introduced during the New Deal, or which were instated to try to provide any sort of government-run net of infrastructure or social welfare for citizens.

Bankruptcy is the ultimate goal of Grover Norquist followers, with the final result being to drown the government in a bathtub.

Once that is accomplished, there will be nothing standing in the way of pure capitalism, which will then be able to run rampant across the environment and citizenry in its endless vampiric drive for increased profits, damn all else.
posted by hippybear at 9:45 AM on August 5, 2012 [49 favorites]


Perspective: since the beginning of 2011 there have been 21 cities that have declared bankruptcy, out of over 30,000 in the US (this number is a bit confusing due to "metropolitan areas"). But, all in all, that's a pretty small percentage.
posted by HuronBob at 9:46 AM on August 5, 2012


But, all in all, that's a pretty small percentage.
What's the percentage of, say, Canadian cities to have declared bankruptcy during the same period? German cities? Japanese?

A city declaring bankruptcy simply shouldn't happen. Ever. If you're experiencing multiple bankruptcies in a single year, there are some serious problems with your economic system.
posted by Thorzdad at 9:58 AM on August 5, 2012 [37 favorites]


The Funding Status of Independent Public Employee Pension Systems in California: "The unfunded liability for all (local) independent systems is $175 billion". That was about two years ago.

I don't have a link to back this up, but part of the problem in Stockton is rapidly increasing medical costs for guaranteed health insurance for public employee retirees. Healthcare reform is part of the problem, or the solution.

The whole status of public pensions in California seems crazy to me. We have a population who, by and large, has no guaranteed retirement or healthcare. They are the tax base that then funds retirement and healthcare for a smaller set of Californians, public employees. How is that going to work out? I wish I understood the numbers better.

Also somewhat related: cities can file bankruptcy, but states can't. A recent test of that just had a judgement Judge Says Pension Fund Can't Seek Bankruptcy Protection. (That's the Marianas, which in many ways is like a state. More background.)
posted by Nelson at 10:00 AM on August 5, 2012


California in general, and Stockton and San Bernardino in particular, are hardly bastions of "starve the beast" conservatives. To the contrary, their governance has been strongly influenced by public employee unions, who have pushed as hard as possible to increase spending and taxes, with even more on the way on the ballot in November.
posted by MattD at 10:00 AM on August 5, 2012 [5 favorites]


I think it's important to also look at some of the things we've been expecting or requiring states to pay for - such as having bare minimums for Medicaid and "safety net" services. Education services are expected to be spread around and not solely supported by property tax. States are unable to fund cities, and they're feeling the pinch.

Pensions are also a problem - not because they were inadequately funded, but because people are living way longer than they were at the time when the contracts were negotiated. And consuming way more medical care.

I would also be really interested in seeing numbers on how costs changed when the law was passed requiring hospitals to see anyone who came in, regardless of whether they had health insurance or could pay.
posted by corb at 10:02 AM on August 5, 2012


California in general, and Stockton and San Bernardino in particular, are hardly bastions of "starve the beast" conservatives.

It's weird how there are all these states in America filled with liberals, which you might think would have the same problems, but the one where the cities are going bankrupt is the one where property taxes are constitutionally capped.

(That said, it's not like I have any particularly good idea for how California municipalities are supposed to pay back the people they've loaned money to.)
posted by escabeche at 10:12 AM on August 5, 2012 [5 favorites]


MattD, California Income taxes (and spending) per $100 of income are lower now than when Reagan was Governor.

California's problem is its ridiculous ballot initiatives, which are more often than not fully funded and promoted by corporate interests, and voted in by a clueless populace who wants everything the government provides, but without the responsibility of paying for it (naturally).

Part of why the legislature gets such a bad rap is because they are essentially powerless in the face of such an easily manipulated ballot initiative structure.

Read: Proposition 13
posted by steamynachos at 10:13 AM on August 5, 2012 [23 favorites]


Could anyone of a libertarian/conservative leaning please explain how in the world a private contract agreement to pay a pension is somehow to blame? Is it the fact that the promise is long-term? How is this any different than someone buying options in the stock market?

Is it a misunderstanding that these were, in fact, promises to pay certain amounts of money? Why in the world are these seen as giveaways any more than some hedge fund "giving away" money when an option is called back after 10 years?
posted by odinsdream at 10:18 AM on August 5, 2012 [12 favorites]


If you look at what the problem in most of these municipalities is - like actually bother to look at the historic P&L and Balance Sheet, you'll see the problem wasn't really about cutting taxes, but rather funding capital programs through fees related to housing development rather than through raising taxes. Once the housing fees went away you still had the costs and the double whammy of a distressed tax base you couldn't layer more fees on.

And Mammoth Lakes has a very idiosyncratic reason why its filing - it basically lost a huge courtcase.

Thorzdad to your point about other countries with municipal finance issues take a look at Spain. They did basically the same exact thing Stockton and San Bernardino did, but on an even crazier level.
posted by JPD at 10:21 AM on August 5, 2012 [7 favorites]


It's funny (in a Satan is going to eat your children sort of way) how the same douche bags who hate government are preparing for a fantasy heroic role playing game WROL.
posted by mondo dentro at 10:21 AM on August 5, 2012 [2 favorites]


Could anyone of a libertarian/conservative leaning please explain how in the world a private contract agreement to pay a pension is somehow to blame?

I'm a libertarian, I'll take a stab at the heart of your question.

The idea is basically; private contracts (like pensions) should be respected, but that companies should not be pushed by law into being required to deal with unions if they don't want to. So the libertarian answer would be: Everyone who's already retired needs to be taken care of, but it's okay to fire a lot of people in order to ensure that no new people reach retirement, or to radically alter incoming contracts on new hires. If the union is negatively impacting your bottom line, it should be okay to fire everyone who belongs to a union and say that you will not deal with collective bargaining efforts.
posted by corb at 10:26 AM on August 5, 2012


Could anyone of a libertarian/conservative leaning please explain how in the world a private contract agreement to pay a pension is somehow to blame? Is it the fact that the promise is long-term? How is this any different than someone buying options in the stock market?

I'm not a libertarian and I'm only a conservative in the context of MetaFilter, but historically the reason why pensions become problematic is because politicians lack the will to fund them properly as the liability is incurred assuming that revenues will always keep growing so there is no advantage to pre-funding the liability. The other issue is that pensions are the ultimate in "kick the can" obligations. Better to keep the civil service happy today by giving them great pension benefits, but don't deal with the associated costs because meeting them requires increasing taxes and/or cutting spending - something that voters don't like.

Why in the world are these seen as giveaways any more than some hedge fund "giving away" money when an option is called back after 10 years?

If you mean the problem is the underperformance of the pension assets - this is actually a minor issue. The underfunding has been a big issue. Also we are sort of in a perfect storm of shitty actuarial inputs used to calculate pension liabilities - rates are low so the liability is discounted at a lower rate and asset returns have by historic levels and in real terms been low, so they are using lower than normal inputs to gauge how the assets will perform. So underfunding is a problem, but the way we try to account for those future liabilties is such that it is right now exacerbating the problem.
posted by JPD at 10:28 AM on August 5, 2012 [6 favorites]


Could anyone of a libertarian/conservative leaning please explain how in the world a private contract agreement to pay a pension is somehow to blame?

Ooh! Ooh! Let me try!

See, it's only the Parasitic underclasses who have to abide by their contracts and pay the price for bad business decisions. The Galtian Overlords are above such petty concerns, as they take their responsibility to heroically create Great Things very seriously.
posted by mondo dentro at 10:30 AM on August 5, 2012 [19 favorites]


If you look at what the problem in most of these municipalities is - like actually bother to look at the historic P&L and Balance Sheet, you'll see the problem wasn't really about cutting taxes, but rather funding capital programs through fees related to housing development rather than through raising taxes. Once the housing fees went away you still had the costs and the double whammy of a distressed tax base you couldn't layer more fees on.
Exactly. Although there may be some issues with bad governance, the root cause is still the ongoing banking crisis. Once the housing bubble popped and scattered toxic debt everywhere, it was only a matter of time before it starting causing collapse in the public sector.
posted by Jehan at 10:31 AM on August 5, 2012 [2 favorites]


...how in the world a private contract agreement to pay a pension is somehow to blame?

It isn't the pension agreement per-se. It's the fact that municipalities tend to ignore the contractual requirement to fund the pension funds as time passes. Or, as sometimes happens, they borrow from the funds and never re-pay it. What then happens is they get caught short (because of deliberate underfunding) and then point the finger at the greedy pensioners.

Or, what JPD said.
posted by Thorzdad at 10:32 AM on August 5, 2012 [9 favorites]


"California in general, and Stockton and San Bernardino in particular, are hardly bastions of "starve the beast" conservatives. To the contrary, their governance has been strongly influenced by public employee unions, who have pushed as hard as possible to increase spending and taxes, with even more on the way on the ballot in November."

While it's true that they aren't bastions of conservative anything, you don't have to be to be under the sway of the 'starve the beast' philosophy, which is now firmly in the center of American politics. The problem isn't with unions, either, except perhaps the public safety unions, firemen and police, who have ruthlessly elbowed others out at the public trough.

There are a number of problems in California:

1. Property taxes collected by counties are remitted to the State, then redistributed back to the counties. The State keeps a greater and greater share for itself every year.

2. Property taxes are assessed when a property changes hands, and are not increased again - ever. This is probably appropriate for residential properties, the owners might retire on a fixed income; and the revenue is only held until the property changes hands again, at most fifty years except in extreme cases. However, this is also true cor commercial real estate, which can be held in perpetuity by the same corporation. You can buy and sell the corporation and all its holdings, and the property never changes hands. The taxes do not increase on commercial properties - but you can be sure that the rents and revenues generated by those properties go up with the market.

3. There is always an increasing number of demands on the State to provide services. In theory, a government with no increase in staffing expenses should not require percentage based tax increases. However, this isn't the case. Federal laws such as ADA and NPDES have increased the burden on local planning, building and safety and inspection staff - something I am personally familiar with, and am certain those are just two tip of the iceberg examples. These aren't classic "unfunded mandates" but they are turning out to be massively complex and burdensome on everyone involved - requiring educated staff.

4. Governments tend to get larger as revenues increase, but they don't plan for revenue decreases. This is just flat out poor governance, and its related to item 3, above. Most municipalities are understaffed pretty much all the time, period. I used to work for a company that supplied a broad range of consultant services to cities. The problem isn't political; it's human nature, and the issue is that a government that is cutting staff at a time of recession should be striving as hard as possible to maintain a stable revenue output - without raising taxes. This means putting money away during boom times and not just spending it. It's the nature of our political system to reward short sighted behavior, though, and city councils everywhere hire staff and do construction when revenues are up.

5. Pension obligations are frequently conflated with "greedy unions", but the real issue is that cities just don't plan the funding of those obligations. Nobody does, not the private sector, not anyone. Paradoxically, the only pension program in the U.S. that is solvent and always has been, is the one run by the federal government that Grover Norquist wants to '"drown in a bathtub". Again, it's short sighted - there is no incentive to manage pension obligations when you can spend the money here, now. Come tough times, just declare bankruptcy - it's become the standard m.o. for large corporations - Delta, GM - who blame union pensions for their troubles. But they never managed to properly fund the pensions to begin with, and there's a good case they never intended to.

I could go on and on. It is entirely possible to manage union benefits and pensions in a responsible way. It just doesn't happen, and it's not the unions to blame.
posted by Xoebe at 10:43 AM on August 5, 2012 [48 favorites]


One of the big problems with pensions is that some people decided that they could decrease the funding, and then put the pension money in to the stock (and other investment vehicle) markets, where higher returns will make up for lower funding. This was done without changing pension obligations.

'I'm telling you Dad, stock don't go down!' - Jason Fox.

The enormous state employee pension funds are some of the largest shareholders of public corporations, and they present a significant obstacle to shareholder initiatives and governance changes. But that is another story...
posted by the man of twists and turns at 11:04 AM on August 5, 2012 [4 favorites]


it's okay to fire a lot of people in order to ensure that no new people reach retirement

Why is it that right-wing ideologies always boil down to "fuck the people whose efforts actually drive and provide for society"?
posted by Pope Guilty at 11:08 AM on August 5, 2012 [25 favorites]


One of the big problems with pensions is that some people decided that they could decrease the funding, and then put the pension money in to the stock (and other investment vehicle) markets, where higher returns will make up for lower funding. This was done without changing pension obligations.

Not really. If you have a 40-50 year obligation it should be invested in stocks. Its rather trivial to figure out the mix of liquidity and risk to target given you have a pretty good sense of what your cash flow obligations will be.

The problem has always been the funding.
posted by JPD at 11:09 AM on August 5, 2012 [1 favorite]


"The enormous state employee pension funds are some of the largest shareholders of public corporations, and they present a significant obstacle to shareholder initiatives and governance changes. But that is another story..."

And that's a feature, not bug!
posted by drydiggins at 11:10 AM on August 5, 2012 [2 favorites]


Its also not really true. CALPERS is one of the biggest corporate governance activists out there. As a group are the muncipal plans as aggressive on governance as they ought to be? no. But they aren't actively working against. Really the problem is that they outsource their governance programs to third parties like riskmetrics who are naturally risk averse.
posted by JPD at 11:14 AM on August 5, 2012


Why is it that right-wing ideologies always boil down to "fuck the people whose efforts actually drive and provide for society"?

Because at the end of the day it's about maintaining class hierarchy and dominance by whoever the ruling class happens to be. All of the various arguments in their favor--be they moral, economic, or invoking "the natural order"--are just justifications after the fact that can be conveniently used to bamboozle the populace.
posted by mondo dentro at 11:14 AM on August 5, 2012 [18 favorites]


2. Property taxes are assessed when a property changes hands, and are not increased again - ever. This is probably appropriate for residential properties, the owners might retire on a fixed income; and the revenue is only held until the property changes hands again, at most fifty years except in extreme cases. However, this is also true cor commercial real estate, which can be held in perpetuity by the same corporation. You can buy and sell the corporation and all its holdings, and the property never changes hands. The taxes do not increase on commercial properties - but you can be sure that the rents and revenues generated by those properties go up with the market.
I’ve not thought about this aspect of Prop 13, thank you. What a disaster.
posted by migurski at 11:16 AM on August 5, 2012 [3 favorites]


Here in Illinois the pension funds were not only borrowed against, but spread out to over 100 different investment firms, who over the past 5 years ( If I recall) have under performed by several percentage points all while raking up nearly 1 billion in fees.
posted by Max Power at 11:17 AM on August 5, 2012 [3 favorites]


This comes down, once again, to monetary policy, as so many malfunctions in the current economy do.

One of the biggest reasons these cities are going bankrupt is because their pensions are woefully underfunded. And the reason they're underfunded is because interest rates are being held artificially low by the Federal Reserve. The Fed is injecting however much liquidity is required to hold interest rates where at the 'correct' level, declared by a banking Politburo. At the moment, the 'correct' interest rate is just about zero. It was very low for most of a decade, and now it's barely there at all.

So, for the last ten to fifteen years, these cities have been taking in cash revenue from taxes, and trying to save that money, and use it to generate income to pay for their upcoming liabilities. But they're competing, with their limited supplies of cash, against unlimited amounts of the same stuff for free.

As one might imagine, municipalities have had a hell of a time getting decent returns, so they've either had to play very risky derivative games, and run the real risk of blowing up completely, or else slowly die of stagnation. The wealth the economy owes them is being sucked out by the Federal Reserve, and given to banks.

Meanwhile, of course, the banks are making unbelievable profits, at least on paper. But if the Federal Reserve raises interest rates, they will probably go negative very quickly.

We are in deep, deep shit, in the grip of profound monetary disorder, and it is only getting worse. If we leave interest rates low, most pension systems are eventually going to go bankrupt. If we raise interest rates, banks will probably implode again, and the economy might crash from high borrowing costs, because the overall systemic debt loads are so high.

There isn't enough wealth, and the reason there isn't enough wealth is because we've been hiding economic problems by printing money for much too long. Nothing is really getting fixed, and the economy has been steadily reorienting itself to serve the people printing the money, instead of the people generating the wealth. The amount of actual wealth is not growing very quickly, while claims on that wealth (dollar tokens) have been expanding at fairly ridiculous speeds. (There's a reason why the Fed stopped tracking M3 money a few years back, and I guarantee you, it wasn't for your benefit.) Entities closer to actual wealth generation, like towns, cities, and states, are suffering terribly, while the entities close to the money printing are doing very, very well.

Wall Street gets fat, while Main Street starves to death. You're seeing it happen, courtesy of our central bank.
posted by Malor at 11:22 AM on August 5, 2012 [21 favorites]


There's been some recent discussion of removing the commercial exemption for Prop 13. It's particularly problematic when properties never officially change hands because of shell companies retaining ownership. I wonder if rich people do that with their residences too?

A minor correction, property assessments can go up 2% per year under Prop 13. Well under the actual growth of property values, but not zero.

Another interesting bit of technocracy: the discount rate. Basically it's the future value of money (or the future liability of a pension fund) and in a rational world is tied to investment returns. Many pension plans use an assumption of 7–8% returns, which while historically motivated clearly hasn't applied in the last 15 years.
posted by Nelson at 11:23 AM on August 5, 2012 [3 favorites]


The idea is basically; private contracts (like pensions) should be respected, but that companies should not be pushed by law into being required to deal with unions if they don't want to.

I'm not sure you answered the question -- "explain how in the world a private contract agreement to pay a pension is somehow to blame" -- at all, and instead used it as an opportunity to take a shot at unions. If these pensions were owed to people that weren't in unions, THEN the right wing wouldn't have a problem with them? Doubtful.
posted by inigo2 at 11:24 AM on August 5, 2012 [3 favorites]


I live in Scranton. I grew up here, lived in Connecticut for 13 years, then recently moved back to the city to be close to my family and start my own business. The local politics surrounding the city's potential bankruptcy are ridiculous, mostly due to the city council and the mayor being completely at odds and refusing to work together.

It's disheartening, because the city has so much potential but the population needed to support it is being driven out by this continuing discord and disruption of public services. The schools are not great, and the chairman of the school board has only a GED. My sister and her husband have 3 small children, and recently bought a house outside of the city so they could send their children to better schools. There is no way we would buy a house in the city if we had children.

So there are regularly houses on our street for sale for less than $50,000. Many of the people that work in the city commute in from one of the suburbs and are very much against a commuter tax. It seems like an impossible problem to solve.
posted by elvissa at 11:24 AM on August 5, 2012 [2 favorites]


Here in Illinois the pension funds were not only borrowed against, but spread out to over 100 different investment firms, who over the past 5 years ( If I recall) have under performed by several percentage points all while raking up nearly 1 billion in fees.

Saying they paid 200 mil a year in fees out of context is misleading. Its 200 mil on 64 bil in AUM - that's like 32 basis points a year. You are paying more for your 401k. I would say 32 bps is probably too pricey, but not by an order of magnitude.

Another interesting bit of technocracy: the discount rate. Basically it's the future value of money (or the future liability of a pension fund) and in a rational world is tied to investment returns. Many pension plans use an assumption of 7–8% returns, which while historically motivated clearly hasn't applied in the last 15 years.

No - you are conflating a bunch of actuarial terms here. The discount rate is the number used to calculate the present value of the future benefit obligation. Right now our very low interest rates mean relative to history we are assuming a dollar 30 years from now is worth a greater proportion of a dollar today than we would using a more normal long-term rate. The number you are talking about - that 7%-8% number is the asset return assumption. Basically what the actuaries do is figure out the PV of the current obligation - which is a function of the age of the population of retirees and current employees and the pension payments they are owed discounted back by the aforementioned discount rate - which actually approximates the risk free rate. This is then compared to a calculation of the current assets + future cash flows the sponsor has agreed to pay into the plan going forward * the assumed return on plan assets.

So basically what you've got going on here is that we are both assuming a too high return on assets, but we are also discounting back the future cash flows at a far too low discount rate. If you actually do the math the too low discount rate has a much greater impact on the finances of the pension plans than does the overly optimistic return assumptions.

TL; DR - the actuarial assumptions today are actually overstating the size of the pension shortfalls, not understating them.
posted by JPD at 11:51 AM on August 5, 2012 [4 favorites]


There isn't enough wealth

Actually, there is plenty of wealth, but it is kept far away from the systems that may benefit from it.
posted by DreamerFi at 11:52 AM on August 5, 2012 [9 favorites]


This comes down, once again, to monetary policy, as so many malfunctions in the current economy do...

Malor, while I don't disagree with many of the technical points you make, the tone of this sort of analysis makes me want to scream and break things. I am in no way singling you out, and I apologize in advance if it appears that way. Much of what you say is very reasonable--mainstream, solid, conventional economic analysis. My problem is, the situation is not "reasonable" in terms of analyses such as these because their most fundamental premise is wrong.

This isn't the "malfunction" of a machine that, while otherwise well designed, simply "wore out" or had some failure mode brought on by changing environmental conditions, an unexpected external shock, or user error. On the contrary, this machine is working exactly as it was designed to work. It is a machine that has been set up by a very small group of insiders to transfer massive amounts of wealth from the middle class to the elites.

Financial capital does not manufacture anything of value to society, and it long ago stopped having as it's primary raison d'etre the financing of people who do. Instead, it seeks out assets that are being "undervalued" and "underutilized", and devises methods to extract those assets so that they can be used "more efficiently". I would submit that the entire middle class of the Western developed world came to be viewed as precisely the ultimate "underutilized" asset, one valued at trillions of dollars. Hence, for the Masters of the Universe, the issue has never EVER been about how to live up to pension obligations. It has been "how do we get that money out of there and into our pockets, where it can do some good?" Of course, the people who set up the game are the ones who get to define what "good" means.

For example, the attacks on pensions and Social Security are exactly this, and any talk that analyzes the situation merely in terms of their respective balance sheets is engaging in a fallacy with serious moral consequences. The point of the various "fixes" to "entitlements" is not to keep them solvent. It is to extract all of the wealth contained in them and transfer it elsewhere.

So, coming back around: I'll accept some idea of a "malfunction", but only at a system-wide, quasi-biological level. By the end of the 20th century, the extractive forces of Western colonialism had, finally, nowhere else to focus but on their own middle classes. In this view, this "malfunction" is a sort of fatal economic autoimmune disease.
posted by mondo dentro at 11:53 AM on August 5, 2012 [21 favorites]


It irritates me to no end that the whole set of bedrock tenets gets thrown out when the pension-hate is deployed.

First, pensions are a contractual obligation. I thought the right was all about honoring contracts.

Second, pensions are not some gift provided and paid for by the pension pixies. Most pensions are a form of deferred pay. Employees work, and pay into the pension, on the understanding that they will work for a little less today in exchange for a little more tomorrow.

Third, the argument that companies and cities are burdened by pension liabilities that no one saw coming is disingenuous, at best. Everyone knows what an actuary is, and no one enters into these kind of agreements without consulting some. The fact that "people are living longer, etc" is just not a legitimate excuse.

Fourth, if lowering taxes stresses your ability to cover your debts, and you lower taxes anyway, then you lose any legitimate argument with regard to why you can't pay your bills.
posted by Benny Andajetz at 11:54 AM on August 5, 2012 [25 favorites]


It irritates me to no end that the whole set of bedrock tenets of the right gets thrown out when the pension-hate is deployed.
posted by Benny Andajetz at 12:00 PM on August 5, 2012 [3 favorites]


Property taxes are assessed when a property changes hands, and are not increased again - ever. This is probably appropriate for residential properties, the owners might retire on a fixed income

This is wrong on a couple of levels. The major point that prop 13 is terrible is correct, but all the particulars are off.

First, property taxes still increase. The amount of increase is just capped at 2% per year no matter how much the value of the property appreciates. So even if the value of a property doubles the tax collected by the state does not increase much... but it does increase.

Secondly, you've bought into the same propaganda you think you're decrying. Who do you think pushed the pensioner bullshit? Capping the tax increase is absolutely not appropriate for residential properties. It is a massive wealth transfer from the poor, from the young, from the single, and from minorities to old, rich, white people. Oh you retired on a fixed income and your property is now worth a million dollars and you owe taxes on it? Boo hoo, you have a million dollar property. I feel so bad for you. So do all the young single minorities who didn't get in on the ground floor.

Prop 13 is a disaster but passing along the whole WONT SOMEONE THINK OF THE RICH WHITE PEOPLE PENSIONERS stuff isn't gonna help.
posted by Justinian at 12:09 PM on August 5, 2012 [3 favorites]


I think Buffett wrote an op-ed in the journal pointing out the insanity of his beachfront mansion in Orange County having a taxable value of 125k.
posted by JPD at 12:12 PM on August 5, 2012 [2 favorites]


I think its time to pull out whatever pennies are left in the TIAA-CREF account.
posted by infini at 12:16 PM on August 5, 2012


One thing about the pension negotiations when it comes to public sector employee unions - basically it's been a way to avoid bumping up pay. You see, if you negotiate a pay raise, you have to start paying it out pronto. So this is how those negotiations go:

Citizens (Chorus): Cut our taxes!

City Employers: "dear union employees, it's true we are not going to pay you as much as the private sector, and it's also true that while right now the economy is doing well, we can't raise your pay because your pay comes out of taxes and those immediately get cut in the "good times" by Republicans (as Bush did on the federal level to turn surpluses into deficits) - and of course also get cut during "bad times", so basically the ethos in the country is to cut taxes at all costs, never mind the economic environment. So low taxes means little money. That's why, we have a hard time raising your pay even if the economic times are good and you cast an envious eye on your private sector colleagues. Bottom line: we won't give you a decent pay raise because we would have to pay out immediately - it would be an immediate and ongoing expense - and there simply isn't the money".

Unions: "OK, so if we don't get pay raises to match private sector employees, what do we get?"

Citizens (Chorus): Cut our taxes!

City Employers: "well, what we can do instead is to sweeten the retirement pot!"

Unions: "OK, so we trade in gains now, for security later? Sacrifice now, like a good ant, to have a good retirement later?"

City Employers: "Yes, exactly!"

Citizens (Chorus): Cut our taxes!

Five - Ten - Twenty - Whatever - Years Later

Unions: "Hey, where's our retirement pensions?"

City Employers: "Sorry. Remember how we couldn't pay you more because of low tax revenue? Guess what - we couldn't fund your pensions because, you guessed it, the same problem low tax revenue."

Citizens (Chorus): Cut our taxes!

Unions: "Hey, that's cheating! We gave up early on and traded gains for security!"

City Employers: "No, we've moved into Hollywood accounting. The pension bumps you got were what's called "monkey points*" in the entertainment industry. You see in exchange for taking little money up front, you are promised a bigger cut of the profits at the back end. What happens is then that no matter how huge and profitable the film is, it never officially turns a profit from an accounting point of view, and since there is no profit, you end up with no share of the back end - you only end up with the little money up front. Welcome to entertainment accounting - and you know that the heart of entertainment is illusion and slight of hand, right?"

*monkey points: "Because of this, net points (a percentage of the net income (i.e. gross income minus expenses), as opposed to a percentage of the gross income) are sometimes referred to as "monkey points," a term attributed to Eddie Murphy, who is said to have also stated that only a fool would accept net points in his or her contract.[5][6]"

Citizens (Chorus): Cut our taxes!
Citizens (Chorus): Cut our taxes!
Citizens (Chorus): Cut our taxes!

A Republican gets elected on a platform of "cut taxes", because clearly government can't get their act together - look at the bad public services, the potholes, the bankruptcy. So what's the cure? CUT TAXES!
posted by VikingSword at 12:33 PM on August 5, 2012 [25 favorites]


First, property taxes still increase. The amount of increase is just capped at 2% per year no matter how much the value of the property appreciates. So even if the value of a property doubles the tax collected by the state does not increase much... but it does increase.

Since 1978, when Prop 13 took effect, California has averaged 3.9% inflation. Excluding changes in value when the property transfers, property taxes in real dollars have been declining, not increasing.

If someone owned the same property for the duration of prop 13, and they were hit with the maximum possible 2% tax increase every single year, they are now paying in real dollars 54% of the property tax they were when Prop 13 was passed.
posted by Homeboy Trouble at 12:49 PM on August 5, 2012 [3 favorites]


Nelson: "Also somewhat related: cities can file bankruptcy, but states can't. A recent test of that just had a judgement Judge Says Pension Fund Can't Seek Bankruptcy Protection. (That's the Marianas, which in many ways is like a state. More background.)"

Actually, the Retirement Fund filed under Chapter 11, and not Chapter 9, because the CNMI is absolutely not a "State" for Bankruptcy Code purposes. The District of Columbia and Puerto Rico are "States", but not the Marianas.
posted by lex mercatoria at 12:51 PM on August 5, 2012 [1 favorite]


Which is another way of saying that taxes still increase. They just increase way too slowly to keep up with inflation or the increase in property value.
posted by Justinian at 12:52 PM on August 5, 2012


Which is another way of saying that taxes still increase

When you measure them in absolute amounts of dollars.

It's a bit like saying that people in Zimbabwe are all astonishingly rich right now compared to, say, a decade ago.
posted by DreamerFi at 12:57 PM on August 5, 2012 [2 favorites]


Yeah, yeah, pedantic point made. We both know that wasn't the implication of the original post I was responding to.
posted by Justinian at 1:01 PM on August 5, 2012


Of course I do - that's why is it NOT a pedantic point, but pretty central to the whole discussion
posted by DreamerFi at 1:15 PM on August 5, 2012 [3 favorites]


A city declaring bankruptcy simply shouldn't happen. Ever.

That is just nonsense. It makes as much sense as saying a person dying in a car crash should simply never happen. Ever.

You could make a car that was absolutely safe but it would look like a tank, go no more than 20 MPH, get 4 miles per gallon and cost $200,000. That level of safety is wasteful of resources.

Likewise to guarantee that no city ever went bankrupt, cities would have to raise taxes to unnecessary levels and cut services to unnecessary levels just to make sure that no possible set of circumstances, no matter how unlikely, could affect their finances. They would have to run very high surpluses both in good times and bad and it would be a terrible waste of resources. It would be like requiring all workers to save 50% of their income, many of them dying with millions of useless unspent dollars, just to guarantee that not one of them ever died broke.

A few cities out of 30,000 going bankrupt during the worst financial crisis in the last 70 years does not indicate a problem. It indicates that cities are properly evaluating their risks and not being wastefully over cautious. If no city ever went bankrupt, it would be an indication of wasteful hoarding.
posted by JackFlash at 2:39 PM on August 5, 2012 [3 favorites]


Pensions are also a problem - not because they were inadequately funded, but because people are living way longer than they were at the time when the contracts were negotiated.

This is one of the right wing myths that will never die because it appeals to the numerically illiterate.

I'll talk about Social Security because that is the pension fund most often discussed. Conservatives always throw out a number like a 15-year increase in life expectancy since Social Security was started in 1936. However that is a misleading number. Most of that increase has been because of reduction of infant mortality. What matters for pensions is the life expectancy at retirement -- how many years of pension benefits, a completely different number.

In the 75 years of Social Security since 1936 life expectancy at age 65, the number of years of retirement, has increased by only 5 years. And for people in the lower half of income distribution, like city street workers, the increase has been only about 2.5 years. All this talk about longevity being the primary problem is a complete myth.

Further, people treat this increase as some error factor or surprise that must be adjusted for. This could not be farther from the truth. The actuaries back in the 1930s quite accurately predicted this increase in life expectancy because, despite all the innovations in medical care, the lifespan rate of increase has been boringly constant for over 100 years. The actuaries accurately accounted for the increase in lifespan more than 75 years ago. There was no longevity surprise.
posted by JackFlash at 3:10 PM on August 5, 2012 [30 favorites]


Pensions might not be *the* problem, but as a private-sector guy the thought of getting a 200k/yr pension from age 50 on seems nuts. Yes, being a police officer is hard. Yes, fireman work a lot of hours. But 200k/yr (and often times more) seems completely out of line. In fact, any pension at all seems like a pretty crazy idea.

Anecdotally, I know 3 people who are/were cops, all of them retired early 40's to a comfortable-but-not-extravagant lifestyle in the mountains skiing and riding bikes etc. So I dont think its purely a case of outlier cases of comp getting all the media attention.

Its too easy for city managers etc to just say yes to union demands - the bill is due way out in the future anyways.

I'm not sure what a lot of the posters upthread are really asking for in terms of increased revenues anyways - city income taxes? This is extremely rare and simply will not fly in most places.

Lastly a good number of cities are flat-out getting fucked by their incredibly poor financial management. Oakland is paying $4m/yr in interest rate default swap charges to offset a 5.875% *fixed* rate loan. If you have any idea what swaps are, that should make you seriously ask wtf. (they did a convert from floating to fixed, but still its just really really poor financial management).

I disagree with other posters upthread who say 'this should never happen' - I look at the nature of the finances, the volatility of revenues, the fact that they get the absolute shittiest people working their finances, and its amazing they made it this long.
posted by H. Roark at 5:12 PM on August 5, 2012


the thought of getting a 200k/yr pension from age 50 on seems nuts. Yes, being a police officer is hard. Yes, fireman work a lot of hours. But 200k/yr (and often times more) seems completely out of line.

It sounds completely out of line to me, too. Do you have any citations to base this $200K/year figure on?
posted by hippybear at 5:16 PM on August 5, 2012


It sounds completely out of line to me, too. Do you have any citations to base this $200K/year figure on?

Hint: your desire to believe that unions are all about corrupt workers making a lot of money for not working doesn't count.
posted by Pope Guilty at 5:37 PM on August 5, 2012 [1 favorite]


The unfunded liability for all (local) independent systems is $175 billion.

Protip: If you ever hear someone use the words "unfunded liability" followed by a big number, you can immediately write them off as a dishonest hack. They are trying to scare you with a meaningless number.

First, the unfunded liability can be almost anything you like. $10 billion, $100 billion, $1 trillion. The number is based on a discount rate and the length of time. 30 years not big enough, I can give you 50, 75, or 100 years. Or, like the odious Peter Peterson, billionaire enemy of Social Security, you can even use the infinite time horizon. The infinite horizon turns out not too much bigger than the 100 year horizon but when you are trying to scare people, every trillion helps. You can also triple or quadruple the number simply by changing the discount rate by a single percentage point and increasing the time horizon.

Second, the unfunded liability is meaningless without context. What if I were to tell you that the $175 billion dollar liability mentioned above could be paid out of a $1800 billion dollar budget? Now it doesn't seem quite so frightening.

For example if I were a financial adviser and told a new college graduate that they have an unfunded liability of $1 million in order to retire comfortably, they might give up in despair. But if I told them that they just needed to save 10% of their paycheck, it seems much more reasonable. Unfunded liability is a meaningless number without context. The only informative way to present it is as a percentage of income. Anyone who just gives you a big scary number is a fraud.
posted by JackFlash at 5:42 PM on August 5, 2012 [3 favorites]


Heres one from just a couple days ago. 8 months of service, 204k/yr pension.
posted by H. Roark at 5:43 PM on August 5, 2012


Hint: your desire to believe that unions are all about corrupt workers making a lot of money for not working doesn't count.

Um... I'm not sure why you singled me out for that. I've never stated any such thing about unions here on MetaFilter, in fact believe entirely the opposite if what you've implied I believe with your statement, and was asking for clarification from someone else about their statement about what seems like hugely inflated pension payments.

It turns out, this person has supplied a citation to back up their claims.

Frankly, I can't imagine why any organization, be it public or private, would sign a contract which obligates it to paying such a huge sum to someone after 8 months of work. But... I guess if you are fool enough to sign such a contract, you should be bound to honor it.

The lesson I draw from this particular exchange is, you're a fool if you're an organization who is making such agreements, and you're a fool if you're offered such a contract as a worker and you don't accept it.
posted by hippybear at 5:50 PM on August 5, 2012


Heres one from just a couple days ago. 8 months of service, 204k/yr pension.

That's a bit extravagant, yes. It's also cherry-picking. That dude was a police chief. Top-heavy reimbursement, just like in the private world.

Later in the article:

Amy Norris, a Calpers spokeswoman, said the average pension of someone in the Calpers system who retired in fiscal 2011 is $3,065 a month, or $36,780 annually.
posted by Benny Andajetz at 5:55 PM on August 5, 2012 [5 favorites]


Um... I'm not sure why you singled me out for that.

I'm sorry, that was unclear; I was addressing the guy with the Atlas Shrugged username.
posted by Pope Guilty at 5:57 PM on August 5, 2012


H. Roark, save the objectivist claptrap for people who don't understand statistics.

You found one ridiculous pension. Goody for you. Now tell me how many people with perfectly reasonable pensions are getting fucked out of them. And then let's talk about corporate executive compensation. And then we can finish up by talking about how many of these communities crashed and burned because their "shitty" financial people took the advice of "consultants" (geniuses all, I'm sure) who walked away from the wreckage with their Cayman Island accounts packed to the brim with cash.
posted by mondo dentro at 6:14 PM on August 5, 2012 [4 favorites]


You found one ridiculous pension. Goody for you.

I dunno, I often see what I would consider ridiculous pensions mentioned in the local fishwrap (The Oregonian, perhaps not a bastion of Randian thought?)

But closer to home, I have a neighbor who was a school principal, and when I first met her and her husband, I was surprised to learn how well they were able to live on her pension. Far better than I am able, with their regular 2-4 week cruises and Cadillac health care.

The husband recently died of a heart attack a year or so after his hip replacement, and the principal is in a nursing home with ALS, so it's not like the lottery retirement that I saw is untempered (and they were nice enough people in any case, although it didn't seem to bother them that their circumstances were vastly beyond what any of their younger neighbors could conceivably hope for).

So what's my point? Who knows? Some people have lucked out, and others who expected to luck out are finding that the luck has run out. And yet others, whom I don't know personally, have it all now and are doing a pretty good job of getting more.

Apropos of the possibly-apocryphal Chinese curse, we are living in interesting times. I find them to be more engaging than the other diversions on offer.
posted by spacewrench at 6:38 PM on August 5, 2012


I have a neighbor who was a school principal, and when I first met her and her husband, I was surprised to learn how well they were able to live on her pension

Jesus. And so the response for some people is to drag those with reasonable retirement packages down to pauper level. Just so they can feel better about themselves.

Talk about the need for class consciousness raising...
posted by mondo dentro at 7:44 PM on August 5, 2012 [4 favorites]


And Mammoth Lakes has a very idiosyncratic reason why its filing - it basically lost a huge courtcase.

Just wanted to underscore this. Dealing with some (expected, but still unwelcome) issues cropping up tonight, so I won't supply my usual wall o' text, but my family has been part of the Mammoth community since the mid/late 80's (long enough that I'm not quite sure what year). The quixotic quest to expand the local airport(near the protected Hot Creek), which gave rise to the lawsuit that triggered the filing, has been among the most durable and constant undercurrents of local politics the whole time.

I'm going up next weekend, which will be my first visit since the story broke. I'm looking forward to talking to our friends up there about it.
posted by snuffleupagus at 11:13 PM on August 5, 2012


But closer to home, I have a neighbor who was a school principal, and when I first met her and her husband, I was surprised to learn how well they were able to live on her pension. Far better than I am able, with their regular 2-4 week cruises and Cadillac health care.

Umm. A yearly vacation cruise (or even twice yearly, if you're careful with your money or have paid off the house) and top-grade healthcare are fairly solid markers of a middle-class lifestyle. If you can't afford that, the issue isn't that they're making too much money from their pension - it's that you are being ripped off as a worker.

Also, being a school principal requires an advanced degree, and if the work required a masters degree, at minimum, it should be competitive in compensation to private industry. This rarely happens - public servants get paid less, and even their benefits are shrinking - so they must be compensated in other ways. Her "fat pension" was earned fairly, and the city got a bargain out of the deal, if they had bothered to conservatively and prudently manage the pension fund instead of fritter it away. This is only recently an issue, and symptomatic of terrible ideas from the corporate world infiltrating public policy.
posted by Slap*Happy at 6:00 AM on August 6, 2012 [2 favorites]


Here's an article about the Mammoth Lakes lawsuit. Long story short, their plan to bring in commercial jets to the little airport there failed, the city walked on the deal, and the developer sued. (I landed a little plane at that airport a year or two ago, after it was rebuilt, and I couldn't figure out why there was newly paved 7000' runway in the middle of nowhere. Or why they were charging landing fees.)
posted by Nelson at 8:26 AM on August 6, 2012


Secondly, you've bought into the same propaganda you think you're decrying. Who do you think pushed the pensioner bullshit? Capping the tax increase is absolutely not appropriate for residential properties. It is a massive wealth transfer from the poor, from the young, from the single, and from minorities to old, rich, white people.

Prop 13 is a disaster but passing along the whole WONT SOMEONE THINK OF THE RICH WHITE PEOPLE PENSIONERS stuff isn't gonna help.


This is honestly part of the problem. It's not even so much conservatives clamoring that people with existing pensions, or existing stable property tax, are somehow wrong or bad or stealing from the government. It's the class-warriors who are up in arms about it, because they think that it's not fair that some people have property and others have none, or that some people have or had good jobs and others have none. It's "the bitter politics of envy" at its finest. Those guys have good healthcare? Damn them, let's take it away. Those guys have a nice house? Fuck them, I don't have one, let's take it away.

Veterans are experiencing that now, actually. Veteran pensions are actively being changed, because the federal government doesn't have to abide by its contracts, and because class-warriors and those that love them (like the Obama administration) think that it's not fair that servicemember retirees have good healthcare fairly inexpensively, while a lot of the country does not.

Again: if you want to stop the bleeding out of these benefits, the thing to do is not to cut the people who already have them, but to limit the new people receiving them until you can afford to do them again.
posted by corb at 9:50 AM on August 6, 2012


Again: if you want to stop the bleeding out of these benefits, the thing to do is not to cut the people who already have them, but to limit the new people receiving them until you can afford to do them again.

Wait... so old veterans are more deserving than new ones? That's maybe handy, given the current rate of disabling injury, which I imagine costs more than old age.

Precisely how are you going to limit the number of new veterans?

Realistically, the answer is to actually fund things, but the Republican party is definitely not into funding the VA, so I guess they're your dangerous 'class warriors'.
posted by hoyland at 11:33 AM on August 6, 2012 [2 favorites]


Precisely how are you going to limit the number of new veterans?

You lower the size of the standing army and stop going to godforsaken, unnecessary wars.
posted by corb at 11:42 AM on August 6, 2012 [2 favorites]


You lower the size of the standing army and stop going to godforsaken, unnecessary wars.

Sure, but good luck with that.

(In theory, shouldn't the size of the military be trending downwards due to increased automation and what not? Hasn't happened yet, though recruitment targets are down.*)

I got sidetracked into reading the pocket manual for recruiters, which I found on the Army's recruitment target website. Two most interesting things: eagle scouts and the Girl Scout version of eagle scouts get a free promotion and the army's desperate enough for Catholic priests that there's no upper age limit. Of course, everyone's got a priest shortage.
posted by hoyland at 12:46 PM on August 6, 2012 [1 favorite]


Sure, but good luck with that.

Hahah, yeah, I know, but doesn't mean a girl can't dream!

The military should be trending downward, but it is not. The only reason I can think of is that the military is a big, convenient bullet shield for war contractors to hide behind so that they can say they need all their money "for the troops." Well, that's the only reason I can think of that doesn't involve profanity, anyway.
posted by corb at 1:00 PM on August 6, 2012


Veterans are experiencing that now, actually. Veteran pensions are actively being changed, because the federal government doesn't have to abide by its contracts, and because class-warriors and those that love them (like the Obama administration) think that it's not fair that servicemember retirees have good healthcare fairly inexpensively, while a lot of the country does not.

This is a disingenuous talking point of the kind trotted out by the likes of Rick Santorum. Obama wants to improve conditions at the VA, help clear the claims backlog and EXPAND disability programs. He appointed Shinseki, who is the closest thing to a "soldiers general" we've had in generations. Obama wants to EXPAND the VA budget. Some cuts to pensions may be imposed, yes, just as austerity will touch many government workers, active and retired. How is that liberal "class warfare?" If anything, it looks more like a conservative small-government anti-tax hatchet job to me.
posted by snuffleupagus at 2:50 PM on August 6, 2012 [2 favorites]


A yearly vacation cruise (or even twice yearly, if you're careful with your money or have paid off the house) and top-grade healthcare are fairly solid markers of a middle-class lifestyle. If you can't afford that, the issue isn't that they're making too much money from their pension - it's that you are being ripped off as a worker.


THIS SO EFFING HARD!!!!!!

when will americans learn THIS IS WHAT CLASS CONSCIOUSNESS MEANS!!
posted by liza at 3:06 PM on August 6, 2012


Also, soldier's pension benefits, VA health-care benefits, and VA disability compensation are three different things--making the comment above even more misleading.
posted by snuffleupagus at 3:07 PM on August 6, 2012 [1 favorite]


Oh boy. I said pensions were being changed, not that the VA funding was being cut. And Obama's administration specifically pushed to raise TRICARE premiums by roughly 400%, and the reasons cited were that they wanted to bring it in line with private-sector healthcare costs. Despite the fact that when veterans retired, they were specifically promised no-cost health insurance and no-cost prescriptions.

So yeah, that's class warfare - screw those comfortable retired soldiers, because other people elsewhere don't have as nice benefits.
posted by corb at 3:08 PM on August 6, 2012


I guess that's one way to see it. Although I fail to see how this is "class warfare," which is the kind of rhetoric typically reserved for those with the temerity to suggest Romney should pay a higher tax rate.

But cutting pension benefits and raising insurance premiums is hardly the same thing as refusing to bear the human costs of war in service of "class warfare," which seemed to be the thrust of the comments above.
posted by snuffleupagus at 3:11 PM on August 6, 2012


City Journal: The Muni-Bond Bulls
Even as municipal bankruptcies continue, the bond market remains calm.

posted by the man of twists and turns at 2:45 PM on August 10, 2012


naked capitalism: Are the Mice Starting to Roar? Municipalities Turn Defiant with Wall Street
posted by the man of twists and turns at 2:13 PM on August 14, 2012


City Journal: The Problem and Promise of Charter Cities 'What bankrupt San Bernardino, Stockton, and Vallejo have in common'
posted by the man of twists and turns at 2:39 AM on August 18, 2012


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