Innumeracy precedes insolvency: Part 4, those who obstruct, expire

December 7, 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 3 and the preceding Part 1 and Part 2.]

 

Now, after three parts, we come to the piece’s true villain, as the material already presented from an extensive story in Reuters (November 13, 2012) has established that elected innumeracy led to public-employee overpayment, which led to evisceration of other city services, and corrosive political paralysis. 

 

Duped, hoodwinked and misguided

 

But behind it all lurks a Dark Lord who operates principally through all-too-willing minions.

 

I’m from the government and I’m here to help you

 

More than half of all US municipal bankruptcies are in California, and the state itself is a poster child for fiscal recklessness.  Is there something, unique to California and common to all, one entity to rule them all and in the pensions bind them?

 

That’s “Calpers” in Elvish

 

There is:

 

A key facilitator of San Bernardino’s generous retirement packages was Calpers, which manages pensions both for state workers and for many city and county employees across California.

 

Built with taxpayer dollars: Calpers headquarters

 

In point of fact, if I understand it correctly – and this point is not mentioned in the Reuters article – Calpers’ business model is more nefarious than mere pension management.  For Calpers cities, Calpers undertakes to pay the city’s pension obligations when these come due, provided that the city makes annual payments to Calpers in amounts that Calpers determines annually will be sufficient to address the looming annuity requirements.

 

Unless you restructure them in bankruptcy, that is

 

Calpers, in other words, is an insurance agency, and pension obligations are the cities’ death benefits.  So when Calpers pushes higher pension benefits, it is simply selling insurance that it claims cities are obligated to pay for, come hell, high water, legislation or litigation.

 

Look what bounty Calpers has provided to Los Angeles!

Los Angeles has unfunded liabilities totaling $27.2 billion

 

Moreover, Calpers’ calculations of cities’ current obligations are predicated on Calpers’ estimations of what it will be able to earn as yield on the money under its stewardship.  If Calpers is wrong, however, the agency isn’t at risk, the city is at risk. 

 

So this is fantastic, in multiple sense of the word.  Promise your employees the moon, and we’ll promise to earn you the moon.

 

It’s Rumpelstiltskin all over again.

 

Deja vu all over again

 

Led by a board of directors who are all themselves members of the pension plan

 

In short, a board of foxes guarding the henhouse.

 

– Calpers has for decades pushed to sweeten benefits for retirees.

 

That’s not all Capers did over the decades; it also used its massive investment portfolio, and huge stock holdings in virtually every major US corporation, to demand and get seats on corporate boards, and to push those boards to adopt policies Calpers liked.  Similar pressure was brought to bear on state politicians.  Clout was concentrated, then used as a club.

 

Save Me from your Clout

 

A 1999 law championed by Calpers, known as SB 400, cut the retirement age five years and increased benefits for state workers, all on the premise that a rising stock market meant benefits could be juiced up at little or no cost.

 

You see the evil here? 

 

Many cities and counties, though not required to go along, were happy to heed Calpers’ analysis. About half – including San Bernardino — adopted the richer benefit formula.

 

Get ‘em hooked on retirement benefits, really build up the addiction, then hammer ‘em with inescapable premium hikes. 

 

When the stock market tumbled in 2000, cities and towns suddenly had to ramp up payments to Calpers to make up for the hit to their fund balances, which were heavily invested in shares.

 

This is criminally immoral.

 

You have no idea of the power of the dark side of the fund

 

San Bernardino is in bankruptcy today because:

 

The city says it owes Calpers $143 million.  Using a different calculation, Calpers says the city would have to pay $320 million if it left the plan immediately.

 

Once the cities are addicted to yield, they become easy victims for the next drug – toxic investments.

 

Fee-hungry investment bankers stepped into the breach.

 

Even high-risk investments were not enough; Calpers told its city addicts customers to sell their furniture and remortgage their houses to feed their habit.

 

Led by the now-defunct Lehman Brothers, they persuaded many cities – including San Bernardino and Stockton, which is also in bankruptcy – that the best way to satisfy growing obligations to Calpers was to borrow the money via so-called pension obligation bonds.

 

By the time it comes to this …

 

… City Hall looks like this

 

The addicts, either in the political thrall to rapacious unions or merely innumerate and desperate, did so.

 

San Bernardino raised $50 million in 2005 by issuing these notes. Between 1999 and 2009, 26 California cities sold about $1.7 billion of debt to fund their pensions, including bond issues that were used to pay off earlier debt.

 

Yet even in bankruptcy, reducing pension costs by cutting benefits is not an option – at least according to Calpers.

 

Naturally, the devil will never relinquish his claim on your immortal tax base.

 

The pension agency says the benefits are carved in stone, arguing that from the day a worker is hired, the pension plan in place on that day for that person can never be reduced in value under any circumstances, including municipal bankruptcy.

 

That’s a bully’s argument – and Calpers has unquestionably been a bully.

 

I’m not representing the 800-pound gorilla

 

“Calpers is the 800-pound gorilla in the room,” said Michael Sweet, a bankruptcy attorney at Fox Rothschild, which is not representing any parties in the San Bernardino bankruptcy. “No one has yet taken on Calpers.”

 

When the Bay Area city of Vallejo went bankrupt in 2008, it declined to challenge the pension payments to Calpers, in part because of the daunting legal costs involved.

 

Vallejo was the first California city to file bankruptcy, and it took all of Vallejo’s gumption, and the misguided scorn of those who ought to have known better, to enter a bankruptcy that we now know was absolutely the right thing to do.

 

But the pension-bond insurers who are now on the hook for defaulted bonds in both Stockton and San Bernardino have signaled their intention to do battle with Calpers in bankruptcy court.

 

Yes, they should.

 

 San Bernardino, in an unprecedented move, has already stopped making payments to Calpers.

 

Excellent.  Here it comes. 

 

“This is going to be a huge fight,” said Sweet, “and it’s going to be Calpers versus Wall Street.”

 

It used to be that nobody tackled Calpers – just as no one challenged Fannie Mae.

 

Calpers says it wasn’t responsible for the decisions made in San Bernardino.

 

I’m just the dealer, I’m not responsible for what you put in your arm.

 

 

Alan Milligan, chief actuary at Calpers, said the 1999 legislation “provided options to cities and agencies to change their retirement benefits, but it did not encourage or force them” to do so. “Calpers does not give advice about how an agency should pay for their retirement benefits.”

 

Deceit.

 

Brad Pacheco, a spokesman for Calpers, said San Bernardino lost major employers in recent years and was one of the U.S. cities hardest hit by the foreclosure crisis. He said San Bernardino’s annual pension costs account for just 10% of the total city budget.

 

Those figures, however, exclude the city’s $46 million in pension-bond debt plus its unfunded debt to Calpers.

 

Deceit.

 

The city in its bankruptcy filing says it is $143 million in the hole to Calpers. Calpers says that if San Bernardino pulled out of the plan, it would owe $320 million to cover its current and future obligations.

 

Deceit.

 

San Bernardino and Stockton are hardly alone. A handful of other small California cities, including Atwater, Hercules and Compton, are teetering near bankruptcy.

 

You are now leaving a bankrupt city

 

Drug dealers eventually kill their customers; Calpers may be killing its political friends.

 

In Los Angeles, Mayor Antonio Villaraigosa, a former labor organizer, led a push to raise the retirement age and cut pensions for new, non-safety city staff. He exempted police and fire employees.

 

A ballot measure sponsored by former Mayor Richard Riordan aims to include them in the cuts, too.

 

Enough of these stories and the taxpayer outrage will shake even California.

 

“Are we really bankrupt?” yelled this woman to Mayor Morris

 

“It’s total political chaos,” said John Husing, a former San Bernardino resident and regional economist. “There is no solution. They’ll never fix anything.”

 

That’s what bankruptcy is for.

 

Graffiti in memory of 21-year-old Angel Cortez is seen on the real estate sign in front of the home in which he was murdered in San Bernardino.

 

No regulatory or law-enforcement agency has announced any criminal probe.

 

Write it down now: Calpers will eventually be sued by the California attorney general.  And Calpers will go bankrupt.

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