The Motley Fool Discussion Boards
Investment Analysis Clubs / Macro Economic Trends and Risks
|Subject: San Bernardino: How it went bankrupt||Date: 11/13/2012 8:21 PM|
|Author: yodaorange||Number: 408413 of 477863|
Reuters just published a very lengthy article about the history and causes of San Bernardino’s bankruptcy this year.  Reuters lays most of the blame on the police and fire unions. According the Reuters, the unions were able to “capture” the city council and get lucrative salary and pension benefits in their contracts.
A few excerpts from the story:
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.
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.
Unions poured money into city council elections, and the city council poured money into union pay and pensions. 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. Meanwhile, state law made it impossible to raise local property taxes and difficult to boost any other kind.
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.
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. Forty-six retired city employees receive over $100,000 a year in pensions.
Almost 75 percent 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.
San Bernardino's biggest creditor, by far, is Calpers, the public-employee pension fund. 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.
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. The total pension-related debts are more than double the $92 million owed to the city's next 18 largest creditors combined.
. . .
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. Called "2.5 at 55," it calculated annual pensions at 2.5 percentage points of final salary for each year worked - 75 percent for 30 years.
It wasn't nearly as good a deal as the one police and firefighters enjoyed - a "3 percent 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. Regardless, "2.5 at 55" was what union negotiators had asked for, and the council was poised to rubber-stamp it.
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. 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.
Meanwhile, San Bernardino continued to boost wages along with benefits. 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.
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. Efforts to amend the charter were strongly opposed by the safety unions and voted down by the council earlier this year.
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.
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.
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. Come retirement, 50 percent 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.
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.
POTHOLES AND EMPTY LOTS
Taack's 2009 income was nearly double that of the city's entire street-sweeping department. In 2011, overtime pay alone for the police department - $2,766,175 - exceeded the total payroll of 12 other San Bernardino city departments, according to the Reuters analysis of payroll data. Taack didn't respond to requests for comment.
. . .
The police and fire unions fiercely dispute the charge that large salaries and pensions are to blame for the predicament. They point to the housing crash, which left the city with the fourth-worst foreclosure rate in the country.
Scott Moss, head of the firefighters union, said 20 positions had already been cut from the fire department, leaving about 120 people.
Moss, 46, a fire paramedic, said he might retire at 53. Payroll records show a base pay of $94,500, and total 2011 wages, with overtime, of about $147,000. Moss confirmed the base figure but didn't comment on the overtime number.
SICK OF THE BLAME
Moss said he is sick of people blaming pensions. "You go to bankruptcy, you got to blame somebody. So they say it's the benefits, it's the overtime - it's everybody but them," Moss said. "But what have they been doing these last six years?"
. . .
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.
Led by a board of directors who are all themselves members of the pension plan, Calpers has for decades pushed to sweeten benefits for retirees.
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. 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.
. . .
Yet even in bankruptcy, reducing pension costs by cutting benefits is not an option - at least according to Calpers.
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 argument has never been tested in court: 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.
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. San Bernardino, in an unprecedented move, has already stopped making payments to Calpers.
Those figures, however, exclude the city's $46 million in pension-bond debt plus its unfunded debt to Calpers. 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.
. . .
Charles McNeely, who served three years as San Bernardino's city manager after 13 years in the same post in Reno, Nevada, quit last March, citing the "toxic" atmosphere on the council. He had warned repeatedly that without change, the city faced ruin. In a presentation to the city council in August 2010, he said spending was far outpacing revenue and predicted a budget deficit of $40 million for this fiscal year.
"I don't know how you could come out of that meeting not understanding we had a serious problem," McNeely said in an interview. "I told them, 'You're headed for trouble, it's a train wreck. You can't keep doing business this way.'"
The lengthy article is REQUIRED READING IMO if you are interested in California muni bonds. There is more to report about California, but it needs a separate post. . .
NOTE: Yoda is NOT expressing an opinion about the rightness or wrongness of the union positions. All opinions are from the Reuters team.
 Reuters Special Report: How a vicious circle of self-interest sank a California city
|Copyright 1996-2015 trademark and the "Fool" logo is a trademark of The Motley Fool, Inc. Contact Us|