Innumeracy precedes insolvency: Part 2, those who overspend, obfuscate

December 5, 2012 | Bankruptcy, California, CalPERS, Cities, Local issues, Proposition 13, public employee unions, Real estate taxes, San Bernardino, Subprime

By:David A. Smith

 

[Continued from yesterday's Part 1.]

 

Yesterday’s post on the San Bernardino bankruptcy filing, using a thorough Reuters (November 13, 2012) story as source material, had reached the finding that innumeracy always precedes insolvency … and platforms us to dive deeply into the deceitful cabal (elected officials, public employee unions, and Calpers) who combined to put San Bernardino so deeply into it – and, unlike their clumsier California colleagues, all without actually breaking any current laws:

 

What part of these charts is hard to read?

 

But unlike in the small Southern California cities of Bell, where eight city officials face trial on allegations that they stole from the public, and Vernon, where three officials have been convicted of corruption, San Bernardino’s problems appear to be mainly the result of back-scratching on an epic scale.

 

Back-scratching or something even less defensible.

 

Let’s not start sucking each other’s popsicles just yet

 

Like me, Reuters clearly sees San Bernardino not as an isolated incident but as a scheme of addiction and exploitation so frequently replicated it might have come from a kit … designed by an evil kitmeister.

 

Easy enough to build when you have the kkit

 

It’s a pattern common throughout the Golden State – and while the particulars are quite different, it is akin to what happened in other states with severe financial crises, such as Illinois and Pennsylvania.

 

Thievery is a valid word for willfully plundering a city’s finances when it was as plain as the nose on an accountant’s face the higher expenditures could not be afforded:

 

Then we’ll cut off the accountant’s nose to spite his face

 

By the time San Bernardino’s council met behind closed doors on September 17, 2007, it was already clear the city was in trouble.

 

Remember, this is before the financial market crap splattered the blades.

 

Just six months earlier, a report by consulting firm Management Partners showed that spending was outpacing revenue, pension costs were escalating and the city was quickly accumulating unfunded retirement liabilities.

 

As we’ve seen previously, pension liabilities and bonds are two ways of expressing the identical financial obligation – sums of money to be paid out in the future.  But the bonds are represented as a debt, hence a visible liability on the balance sheet, whereas the unfunded pension obligations are treated as financially invisible, and therefore easier to plunder:

 

Exactly the same numbers, just expressed as two different sets of words

 

The word “pension” doesn’t appear once in [San Bernardino's] most recent 642-page budget, and retiree costs are buried in detailed departmental line items.

 

Last decade’s housing boom had papered over the deep economic problems stemming from the shutdowns of a huge steel mill in the 1980s and the Norton Air Force Base in the 1990s.

 

Norton thrived when B-52′s where the strategic weapon of choice

 

The housing boom, unfortunately, was built ever higher on the securitization and ratings-agency money machine.

 

Spread compression

 

Now the boom was over.

 

Yet on this day in 2007, the city was about to raise pension benefits again, in a deal allowing non-public-safety workers to retire at age 55 with a pension equal to three-quarters of their salary.

 

So let’s just pause right there. Would you expect to have your company pay you to work for 25 years, then agree to pay you 75% of that amount not to work for another 25 years?  Seventy-five percent of their last salary?

 

Called “2.5 at 55,” it calculated annual pensions at 2.5 percentage points of final salary for each year worked – 75% for 30 years.

 

Now, out of a perverse curiosity, I decided to estimate how much that retirement pledge represented, assuming it was funded like your friendly neighborhood 401(k) plan – that is, contemporaneous with employment. 

 

(This took some thinking to code – and I’m in the business!  So what are the odds the typical city councilor was doing the math, or having the bright young things on his staff do the math for him?)

 

Can any of you do math? Bueller?

 

I took our imagined 25-year-old San Bernardinan, gave him 3% annual raises, retired him at 55, and let him live until 75.  Depending on the discount rate (yield rate on investments), the retirement annuity he would be collecting was equivalent to somewhere between 16% of annual salary and 42% of annual salary.

 

Wow.

 

 

For those of you whose employers offer a 401(k) plan, have you ever heard of a plan in which the employer paid you a 16% annual contribution, with no commitment or matching investment from you?  The Section 401(k) safe harbor is 3%.

 

San Bernardino was proposing to give its public employees a retrofit funding of their Calpers-equivalent-401k of at least five times the normal rate – maybe even fourteen times a typical 401(k).

 

Massively unaffordable, wouldn’t you say?

 

It wasn’t nearly as good a deal as the one police and firefighters enjoyed – a “3% at 50″ plan passed a year earlier. That enabled the public-safety workers to retire at 50 with a pension of up to 90% of their final salary.

 

Even worse!  The hidden 401k was now up to 21% of annual salary (minimum) to 59% of annual salary (maximum) – somewhere between 7x and 20x private plans.

 

[Technically, to gain the full cumulative pension, one had to work for the city for many years continuously – the financial ruination would be incurred only to the longest-serving city employees.  But then, it's so hard to fire city employees, the likelihood of extended incumbency, employees serving long past their value and becoming struldbrug workers, is very high. – Ed.]

 

Regardless, “2.5 at 55″ was what union negotiators had asked for, and the council was poised to rubber-stamp it.

 

We say whatever you tell us to

 

But then something happened. And in a city which has a particularly toxic brand of politics, what transpired depends on who you talk to.

 

I talk to you, but I don’t work for you

 

According to four people present at the meeting, James Penman, the longtime city attorney [An elected office – Ed.] who critics say is closely aligned with the unions [And who naturally enough takes large campaign donations from unions – Ed.], brought a pregnant co-worker to the session.

 

By their account, Penman’s co-worker made an emotional case for an even more generous pension deal. Otherwise, she said, she would be forced to leave San Bernardino and seek work in a city with better benefits. She had her family to consider, she said.

 

And let me say this about that

 

Before approving a change, the city could have considered looking for peer cities to see whether in fact another city’s benefits were indeed better.  If that worker existed, that is.

 

Penman vehemently denies that any of this took place. “Welcome to San Bernardino politics,” he said.

 

Who cares why the vote happened?  It happened:

 

That afternoon, in public session, the council unanimously voted to award its non-safety workers 2.7% at 55 – more even than the union sought.

 

Innumeracy leads to foolishness.  Government by sob-story exception leads to safety nets that have become feather beds.

 

That tiny fraction could raise the pension on a $100,000 salary by $6,000 per year. Penman, in office since 1987, earned $164,799 last year, according to city payroll data.

 

“In hindsight I am not proud of this vote,” said Brinker, who was on the city council at the time. “The recession hit barely a year later. This was one more log on the pension bonfire.”

 

Vote for me because at least I have regrets

 

Then too, the city decided not only to boost pensions, but also to boost salaries:

 

Meanwhile, San Bernardino continued to boost wages along with benefits.

 

With the pension plan in place, a plan that employees made no contributions to, every dollar of salary meant an invisible third of a dollar or so of pension present-value cost.

 

The average salary for a full-time San Bernardino firefighter in 1997 was $75,610, adjusted for inflation into 2010 dollars. By 2010, it was nearly $147,000, according to a Reuters analysis of Census Bureau data.

 

That equates to 5.2% over and above the rate of inflation, each and every year.  So if inflation was 3%, you got 8.25%.  If inflation was 5%, you got 10.25%.

 

Ten and a quarter?

 

City wages were a runaway train, according to the Management Partners report. The city charter automatically calculated police and firefighter pay using a formula linked to wages offered by comparably sized cities – most of which were much wealthier than San Bernardino.

 

How’d that work out for Camden?

 

Not so well

 

Efforts to amend the charter were strongly opposed by the safety unions and voted down by the council earlier this year.

 

Public-employee unions oppose.  That is what they do.

 

Public-employee unions also finagle.

 

City workers took advantage of compensation rules, common among public employees in California, that made retirement deals even better. Key to this was boosting an employee’s eve-of-retirement wages, which form the basis of the pension calculations.

 

That last fillip means the retirement benefits (75% of salary until death do you part from it) mean the last raise has a true cost of 5x to 7x the stated amount. 

 

Mike Conrad, chief of the fire department from 2006 to 2012, said he saw managers negotiate a promotion in their final year, to boost their final salary. It was not uncommon for someone to move into a position with a $30,000 annual pay rise shortly before retirement, he said.

 

That is akin to a $225,000 retirement cookie – nice work if you once had it!

 

I’m ready to retire

 

Retiring employees are also able to extract big one-time “cash outs.” In San Bernardino, eight hours per month of unused sick time can be rolled over and saved year after year, without limit.

 

Oh, California has nothing to teach Massachusetts’s corrupt public officials like double-salaried ex-housing authority boss Michael McLaughlin.

 

Come retirement, 50% of the total can be taken in cash. The same goes for unused vacation time: up to 460 accrued hours of vacation – nearly three months of salary – can be cashed in at the fire department, Conrad said.

 

None of this is accounted for on the city’s books, either.

 

The police have a similar deal. In 2009, patrol lieutenant Richard Taack retired at the age of 59, after 37 years of service. He took home $389,727 that year, including $194,820 in unused sick time and $33,721 for unused vacation time, according to city payroll records.

 

Shortly after Taack retired – on an annual lifetime pension of $128,000 – he was hired part-time by Penman’s city attorney’s office, at $32 an hour.

 

Hoist a brew, Lieutenant Taack: you can afford it

 

As 32 an hour is $64,000 or less, Officer Taack was being paid roughly double his market value, and getting a 75%-of-double pension for the rest of his life.

 

This is beyond innumerate; it’s irresponsible.

 

But I like hamburgers!

 

[Continued tomorrow in Part 3.]

PDF Printer    Send article as PDF