Innumeracy precedes insolvency: Part 1, Those who can’t count, overspend

December 4, 2012 | Bankruptcy, California, CalPERS, Cities, Local issues, Proposition 13, Public employee unions, Real estate taxes, San Bernardino, Subprime

By:David A. Smith

 

As California cities one by one drop into bankruptcy like leaves falling from a decayed tree, each fluttering filing reveals, like a vinous nervous system, another tale of malfeasance, chicanery, and connivance to deceive the public, such as poor poor pitiful San Bernardino, whose slide to fiscal doom was lubricated by none other the Calpers, as revealed but not condemned in this Reuters (November 13, 2012) story:

 

Not the beginning of the end … but the end of the beginning

 

Special Report: How a vicious circle of self-interest sank a California city

 

Actually, to call it ‘self-interest’ is an insult to self-interest; San Bernardino was done in by special interests, namely its elected officials (always interested in boosting re-election by improving public employee benefits), its public employees (always interested in boosting their benefits), and its state-monopoly pension fund manager (always interested in boosting public employee benefits) – and for that to work required suborning arithmetic, or at least suborning the arithmeticians:

 

(Reuters) – When this sun-drenched exurb east of Los Angeles filed for bankruptcy protection in August, the city attorney suggested fraudulent accounting was the root of the problem.

 

Whatever the causes, San Bernardino is dying:

School buses drive past an idle building site in San Bernardino.

 

Darn – who knew that fraudulent accounting might be a problem?

 

Your falsified financial statements, sir

 

The mayor blamed a dysfunctional city council and greedy police and fire unions. The unions blamed the mayor.

 

The equal-time provision requires me to report the unions’ claim; my editorial commitment to accuracy requires me to strike through it, as the claim is patently false.  Says Reuters:

 

Yet on close examination, the city’s decades-long journey from prosperous, middle-class community to bankrupt, crime-ridden, foreclosure-blighted basket case is straightforward — and alarmingly similar to the path traveled by many municipalities around America’s largest state.

 

San Bernardino succumbed to a vicious circle of self-interests among city workers, local politicians and state pension overseers.

 

To me, the revelation is in the third conspirator.

 

No one knew I was an agent for the other side … until I defected

 

Calpers’ culpability is on the level of a drug pusher masquerading as a doctor.

 

No really, I am a doctor, and this is what I wear

 

Little by little, over many years, the salaries and retirement benefits of San Bernardino’s city workers — and especially its police and firemen — grew richer and richer, even as the city lost its major employers and gradually got poorer and poorer.

 

You’d think somebody would have noticed – except that many folks (guess who) were working assiduously to prevent anyone from noticing.

 

Unions poured money into city council elections, and the city council poured money into union pay and pensions.

 

With all that pouring in, where was money pouring out?

 

Out of the public trough?

 

Oh, right, out of the city’s finances.

 

The California Public Employees’ Retirement System (Calpers), which manages pension plans for San Bernardino and many other cities, encouraged ever-sweeter benefits. Investment bankers sold clever bond deals to pay for them.

 

Years ago, based on an acidic Spengler column, I wrote about the global asset bubble having arisen in large part because pension funds were starving for yield.  Now we know that this yield hunger was driven, in part, by the desperate need to find assumptions, however implausible, that could conceal the massive deficits being incurred by these sequentially generous raises – exactly the sort of financial horseplay with homeowners’ money that Proposition 13 was designed – however badly – to stop:

 

Meanwhile, state law made it impossible to raise local property taxes and difficult to boost any other kind.

 

In fact, hindsight makes clear that Proposition 13 was enacted at the worst possible moment – the absolute top of California’s economic rise, and the beginning of three and a half decades’ worth of long slow decline.

 

No single deal or decision involving benefits and wages over the years killed the city. But cumulatively, they built a pension-fueled financial time-bomb that finally exploded.

 

Not a bomb that exploded, an overloaded fiscal bridge that collapsed.

 

Too much load collapses the bridge

 

In bankrupt San Bernardino, a third of the city’s 210,000 people live below the poverty line, making it the poorest city of its size in California. But a police lieutenant can retire in his 50s and take home $230,000 in one-time payouts on his last day, before settling in with a guaranteed $128,000-a-year pension.

 

Sounds like Camden – which has laid off its entire police force in favor of contract security.

 

Forty-six retired city employees receive over $100,000 a year in pensions.

 

Almost as bad as dirty rotten Vernon.

 

Almost 75% of the city’s general fund is now spent solely on the police and fire departments, according to a Reuters analysis of city bankruptcy documents – most of that on wages and pension costs.

 

Who’s  hogging the pie?  “Public safety”

 

Aside from being disgraceful, it’s unsustainable – and bankruptcy is the means of relieving the unsustainable.

 

Who has been over-fed at the public trough?

 

San Bernardino’s biggest creditor, by far, is Calpers, the public-employee pension fund.

 

Later in the story we’ll come to the evil role Calpers, whose activities are akin a liposuction surgeon opening a Cinnabon right in its office.

 

Want a donut while I do this?

 

The city says it owes Calpers $143 million –

 

Calpers is a creditor because Calpers is the entity responsible for providing these excessive benefits to the public employees. 

 

Cast in stone, and politically connected

 

– using a different calculation, Calpers says the city would have to pay $320 million if it left the plan immediately.

 

Good luck with that.

 

Second on the city’s list of creditors are holders of $46 million worth of pension bonds – money borrowed in 2005 to pay off Calpers.

 

Selling long-term bonds to pay immediate unfundable public obligations should be illegal; every time it has been used, it’s been a short-term leading indicator of fiscal catastrophe dead ahead, and it’s made the catastrophe worse.

 

On the other hand, who was foolish enough to buy the bonds?  Probably more yield-starved investors.

 

Vote for foolishness!

 

The total pension-related debts are more than double the $92 million owed to the city’s next 18 largest creditors combined.

 

Can there be any doubt who’s to blame?

 

Complicating matters were obscure budgeting procedures that left residents in the dark.

 

Had they known, they might have objected.

 

 

“I’ve been asking for years for the pension costs,” said Tobin Brinker.  “I still don’t know the number.”

 

Mr. Brinker emerges as one of the very few patriots in this story – and he suffers the patriot’s fate:

 

Brinker cares where the silver skates to

 

[He is] a former council member and pension-reform advocate, who lost his seat last year to a challenger backed by nearly $100,000 in contributions from the fire and police unions.

 

Just once I’d like to read a story about municipal bankruptcy that didn’t involve overly generous public employee pensions and union political and legal challenges to last-ditch reform efforts.  It becomes evident that either the unions were completely innumerate, or they just didn’t believe, or didn’t care, that their demands were bankrupting the city.

 

Recently hired city finance officers say they have found evidence of terrible accounting and record-keeping.

 

Whether by accident, incompetence, or design, innumeracy always precedes insolvency – because if you cannot track your finances, you always overspend.

 

Let’s go buy expensive things we don’t need with other people’s money

 

[Continued tomorrow in Part 2.]

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