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Townhall
Finance...
Stockton
Bankrupt; Unions Pension Death Trap for Cities to Blame
by Mike
Shedlock
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 (even deficit spending, no matter how
ill-advised), adds to GDP by definition. It does not matter how little
product
is actually produced, or even if the results are negative.
In terms of
deficit spending, spending power is stolen from consumers and investors
because
government never allocates resources wisely.
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? My 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 that 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.
Read this and
other articles at Townhall Finance
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