The Gathering Pension Storm

[jamegumb]

This is a looooong Reason Foundation study from 2005 that I found while searching for more background on the financial crisis facing the city of Vallejo.

As background, Vallejo is a town in California facing bankruptcy -- city revenues are down due to a decaying downtown (some of which is arguably due to a poor business climate in the city) and the housing market collapse.

Meanwhile, public safety salaries and benefits cost 74% of the city's annual budget. "And in a city that recorded 17 homicides last year, the most since 1994, police are asking residents to be judicious when calling 911."

Here's a recent San Francisco Chronicle article on the situation:

http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2008/03/10/MNFKVEV4L.DTL

The Chronicle followed that up today with a hit piece on the firefighter union partying on the city's dime; this was a drop in the bucket but evidently the paper thought it warranted front page news (perhaps as evidence of mismanagement, but more likely the paper liked showcasing workers being paid to drink). However, a sidebar of the article online linked to a list of Vallejo city workers making over $100,000 in gross wages per year:

http://www.sfgate.com/webdb/vallejo/

292 workers topped that figure in the city -- a city with a general fund of $80 million. That's unreal.

At any rate, much of the hiked pay is due to overtime. And much of the overtime due to the fact that the city has a hiring freeze and won't hire new workers. And, from speculation, that last part is that due to the high benefits given existing workers (at sometimes, up to 80% of pay), it is cheaper to pay time-and-a-half than to hire more workers.

Anyway, Vallejo's a microcosm in the larger story that merits discussion. For every dollar in public safety wages, the city contributes over 28 cents to the employee's retirement. (See https://www.calpers.ca.gov/index.jsp?bc=/employer/actuarial-gasb/contrib-rates/rates/employer-results.xml&employer_code=0527 for rates -- 28.385%)

That's the city's contribution for the potential "3% at 50" retirement that some public safety employees in California can get -- though some have to wait until 55. Under that retirement, employees can get a yearly pension of 3% of their final salary for every year worked upon retirement at age 50.

This passed the California legislature in 1999 amid soaring stocks. It's not tenable, and was one of the highlights of the study, which I give the link to here:

http://www.reason.org/ps335.pdf

Here's the executive summary, though I think the whole study (while very lengthy) is well worth reading.

The Gathering Pension Storm:
How Government Pension Plans are Breaking the Bank and
Strategies for Reform
By George Passantino and Adam B. Summers

Executive Summary

An ominous storm cloud is gathering across the horizon as American governments try to pay for the
lucrative pension promises made to their employees. And these clouds are not just over a few skies.

They are virtually everywhere. Government employee pension systems across the nation are in crisis.

The city of San Diego is now embroiled in its worst financial crisis ever with more than $2 billion in
unfunded pensions and retiree healthcare costs. The financial mismanagement led TIME Magazine to name
Mayor Dick Murphy one of the nation’s three worst mayors, and eventually resulted in Murphy’s resignation
less than five months into his second term. In Illinois, taxpayers face a $35 billion pension deficit—the worst
in the nation. The state of West Virginia faces a $5.5 billion pension deficit and an additional $3.3 billion in
unfunded workers’ compensation liabilities—a deficit nearly three times the state’s annual $3.1 billion
general fund budget. And in California, where government pension funds have become synonymous with
investment activism, the California teachers’ retirement system faces a $24 billion shortfall and the state pays
more than $3 billion each year to keep its retirement funds afloat.

For each government pension system in crisis, another dozen could be listed, as this is clearly a national,
systemic problem. Combined, taxpayers are exposed to more than $350 billion in unfunded pension
liabilities.

The recent downturn in the stock market is often blamed for these shortfalls. After all, the market suffered a
sharp decline beginning in 2000. But is this a fair defense or is it an incomplete answer provided by
government officials hoping to rationalize the major run-up of government debt? This report will explore
that question.

While market losses certainly played a role, the declines only unveiled the weaknesses in government
pension systems—weaknesses previously masked by the historic investment gains of the late 1990s. The
fact that a retirement system could turn so quickly from investment nirvana to debt nightmares should give
taxpayers and lawmakers cause for major concern. Moreover, blaming the market ignores the many policy
decisions that have created the crisis.

At the heart of the pension crisis is a set of incentives that encourages policymakers to make decisions for
which they do not have to bear the consequences. Since corporate executives, lawmakers, and union
officials will not bear the costs of the benefit increases they preside over, there is no incentive for them to
show fiscal restraint.

The “defined-benefit” pension plan, also referred to as the “traditional” plan, guarantees employees a pre-set
benefit upon retirement that can easily be changed by lawmakers. The amount of the benefit is calculated by
multiplying a fixed percentage by the number of years that the employee worked for the firm or government
agency by the employee’s final compensation (or some average of the employee’s highest earnings). The
employer invests money to ensure that these promises can be kept. If the investment returns do not match up,
taxpayers are obligated to make up the difference. Alarmingly, once benefits are bestowed via a defined benefit
plan, the courts have ruled they cannot be taken away.

Because of this reality, taxpayers have been abused to promote political agendas that promise extravagant
retirement benefits to government workers—even as the taxpayers themselves must work longer to prepare
for their own retirement. Significant benefit increases, such as “3 percent at 50” plans, have proven
themselves unsustainable. These excessive benefit levels and a variety of government policies have
encouraged premature retirement and pension spiking, driving up costs even further. And as courts have
ruled, they cannot be rescinded.

The mistake of offering greater benefits that governments cannot afford is regularly compounded by poor
financial planning. The lack of long-term averaging of investment returns leaves governments susceptible to
volatile swings in pension contribution payments. The issuance of pension obligation bonds is little more
than an expensive gamble that will saddle taxpayers for years to come. And the very assumptions on which
these pension promises are theoretically built can easily be manipulated to the taxpayers’ demise. For
instance, if a pension fund assumes an overly generous rate of return on its investments or understates the
full actuarial costs of benefits, the taxpayers are exposed to a significantly greater risk.

Over the past several decades, the private sector has rapidly shifted away from defined-benefit plans and
toward defined-contribution plans for good reason—traditional plans are expensive, unpredictable, and
unsustainable in the long run.

The government has been slow to follow the private sector’s lead. But this is not only a reasonable course of
action for governments—it also represents significant benefits to workers too.

As the name implies, the main difference between defined-contribution pension plans and defined-benefit
plans is that defined-contribution plans spell out the level of contributions employers and employees will
make to the retirement system—not the level of benefit they will receive at retirement. Instead, the level of
benefit the employee receives upon retirement depends on the performance of his or her investment
portfolio, as well as his or her level of participation. Employees bear the risk of their investments but also
get to maintain control of these investments.

One of the greatest benefits of a defined-contribution plan, from a government employer’s perspective, is
that it provides a great deal of stability since contribution levels are known in advance and do not change
much from year to year. This is a sharp contrast to the volatility in contribution levels experienced under
defined-benefit plans.

While the stability/predictability argument offers one of the strongest practical benefits of definedcontribution
plans, perhaps the greatest moral benefit is that it allows employees the freedom to manage their
own retirement accounts and invest their own money as they see fit.

Defined-contribution participants have the freedom to invest their money as they choose and the critical
ability to take that entire investment with them from job to job—something defined-benefit plans lack. This
portability is extremely appealing to employees in an age where the average worker switches jobs numerous
times during his or her career.

Moreover, risk levels and investment strategies change with age and defined-benefit plans allow for that.
Defined-contribution plans allow employees to choose more aggressive investments when they are young
and switch to more conservative investments as they approach retirement.

Under a defined-contribution plan, lawmakers can still make very appealing retirement packages, including
attractive matching options. The defined-contribution plan structure simply requires that these costs be
recognized and dealt with in the current year as one of the government’s many priorities. Definedcontribution
plans prevent lawmakers from creating actuarial liabilities by pushing hidden costs off into the
future. This should be reason enough for taxpayers to embrace such a reform.

In addition, there are numerous other steps governments must take to address the pension deficit problem
and improve overall financial management of the state to ensure that the current pension crisis does not have
a spillover effect. This study presents opportunities for reform within the current pension fund environment.

It is time that governments learn what the private sector concluded decades ago: that defined-benefit plans,
typified by exorbitant benefit levels, are simply unsustainable. They should adopt the private-sector model
and switch to defined-contribution systems for all future government workers to ensure more responsible
fiscal management that rightly places a focus on providing high quality services. While few governments
have made the leap, a number are moving in that direction. This report explores that shift and offers new
insights on how it can benefit taxpayers, government agencies, and government employees alike.

So, main questions:

1) Are we screwed? Is Vallejo the tip of the iceberg?
2) If we're screwed at all, who/what is to blame?
3) What should be done?

[paperboy05]

So, main questions:

1) Are we screwed? Is Vallejo the tip of the iceberg?
2) If we're screwed at all, who/what is to blame?
3) What should be done?

1) I do think that Vallejo is the tip of the iceberg, but I don't think we are necessarily screwed just yet.

2)Politicians and the lack of business smarts

3)That's a damn good question.

[lobo411]

The bigger question is how many times the op can repost this thread without getting caught :P

So far we're at 3.

[paperboy05]

The bigger question is how many times the op can repost this thread without getting caught :P

So far we're at 3.

:huh:

[jamegumb]

The bigger question is how many times the op can repost this thread without getting caught :P

So far we're at 3.

I admittedly posted the Vallejo story in smaller versions elsewhere. It was a sidelight on those threads, so I flushed out the idea (including finding the pension storm article) and placed it separately for discussion.

I'm willing to take your views on the subject.

[holyschmoley]

Good article(s).

Living in San Diego, I already had become painfully aware of the pension crisis here. I've long said it's time for governments to do away with pensions once and for all and move to a 401k system that puts some of the responsibility on the employee for saving for retirement along with employer contributions. The same goes for pretty much all union jobs, in my opinion. The unions have been key in helping to dig themselves and their members into a hole, long term.

In San Diego, I'd like to see the city go Chapter 11, and then completely revamp the entire pension system once and for all, erasing all of the bad deals made by a few.

[paperboy05]

In San Diego, I'd like to see the city go Chapter 11, and then completely revamp the entire pension system once and for all, erasing all of the bad deals made by a few.

Would that even be possible without risking major fallbacks or some other problems?

[holyschmoley]

Would that even be possible without risking major fallbacks or some other problems?


I don't know. It just seems the city is in such a hole now that it will never be able to get out of unless the ridiculous pension deals are wiped out once and for all somehow.

[jamegumb]

2)Politicians and the lack of business smarts

I'm not sure it's lack of business smarts. I think the article makes the excellent point that there are essentially no negative repercussions for promising money that comes well down the road. Whether something may bankrupt the state 20 years from the time a bill is passed isn't terribly concerning to a politician trying to garner favor in the present day.

So, with a modicum of study proving such grants are 'fiscally responsible', these guaranteed pension laws passed and increased.

One of the most irresponsible bills -- SB 400 in California from 1999 -- increased pensions retroactively for public safety workers from 2% of salary per year to 3% of salary per year (with COLA increases). That's a 50% raise for all covered workers for life.

This bill passed the California Senate by the vote of 39-0. It passed the California Assembly by 70-7. The irresponsibility wasn't confined to a party, and presumably not everyone who passed it lacked business smarts.

After the state passed the bill, many localities matched the 3% at 50 offer. The Police Officer's Research Association of California offers a list of agencies (over 250) that offer the benefits: http://www.porac.org/3percent@50.html

[ASG]

Living in San Diego, I already had become painfully aware of the pension crisis here. I've long said it's time for governments to do away with pensions once and for all and move to a 401k system that puts some of the responsibility on the employee for saving for retirement along with employer contributions.
They did that already when they took a job that had a pension plan.
The same goes for pretty much all union jobs, in my opinion. The unions have been key in helping to dig themselves and their members into a hole, long term.
Unions shouldn't be trying to get the best possible deal for employees?
In San Diego, I'd like to see the city go Chapter 11, and then completely revamp the entire pension system once and for all, erasing all of the bad deals made by a few.
So you're proposing screwing over everybody who took a job expecting a pension when they retire?

[holyschmoley]

"Unions shouldn't be trying to get the best possible deal for employees?"

Unions have somehow finagled deals that sometime put companies under and cities like Vallejo and San Diego under. They go for immediate results only.


"So you're proposing screwing over everybody who took a job expecting a pension when they retire?"

These pension deals were ridiculous. They've put San Diego and other cities/companies into situations they can't get out of. So yes. In some circumstances, retirees are making more after retiring than before, which is ridiculous. These problems need to be addressed and remedied one way or another. And I would not touch pensions of those that have already retired or are about to in the next 5 or so years.

[jamegumb]

They did that already when they took a job that had a pension plan.

Unions shouldn't be trying to get the best possible deal for employees?

So you're proposing screwing over everybody who took a job expecting a pension when they retire?

I think this is exactly what needs to be brought up, and where the discussion needs to go.

The unions negotiated all of this in good faith. And, generally, if the government makes a contractual promise, it should fulfill it.

That said, there's a minor quibble -- while many of the members "took a job that had a pension plan", those plans have been greatly enhanced through the years. Many of these enhancements seem like relative windfalls compared to the deals when they took the job.

I would like to see a remedy against gaming the system to drive up final salaries so as to increase yearly pension payouts. But I suspect that even doing that would also be a form of reneging on a deal made.

[ASG]

Unions have somehow finagled deals that sometime put companies under and cities like Vallejo and San Diego under.
Are you claiming, with any evidence, that these cities didn't know what they were agreeing to?
They go for immediate results only.
You don't try to get the highest salary possible you can get "immediately" from your employer?
These pension deals were ridiculous. They've put San Diego and other cities/companies into situations they can't get out of. So yes. In some circumstances, retirees are making more after retiring than before, which is ridiculous. These problems need to be addressed and remedied one way or another. And I would not touch pensions of those that have already retired or are about to in the next 5 or so years.
Why should you touch any of them? San Diego and other cities agreed to these deals. They can try to make new deals in the future but I see no reason why they should be able to retroactively mess with money that people took the job expecting to get when they retire.

[jamegumb]

Are you claiming, with any evidence, that these cities didn't know what they were agreeing to?

You don't try to get the highest salary possible you can get "immediately" from your employer?

Why should you touch any of them? San Diego and other cities agreed to these deals. They can try to make new deals in the future but I see no reason why they should be able to retroactively mess with money that people took the job expecting to get when they retire.

I was just reading another story from 2003 on the issue -- http://www.almanacnews.com/morgue/2003/2003_11_19.pers.html

There's a part of the story on Woodside (a very wealthy small city between San Francisco and San Jose):

Woodside fire district: Still 'in good shape'

The Woodside Fire Protection District began offering the 3 percent at 50 retirement benefit to firefighters in July 2001. The district's four miscellaneous employees receive a lower retirement benefit plan.

Although the employer contribution has risen significantly since then, Woodside fire Chief Mike Fuge said there are no regrets about offering the more expensive retirement plan. "The timing was right. We got caught in a revenue glut like everyone else," he said.

Firefighters didn't even have to negotiate for the better benefits, they just received them, he said.

In 2001, the fire district contributed 8.8 percent of an employee's salary into the retirement system. That contribution rate is now at 19 percent, is expected to increase to 31 percent in the next fiscal year, and is projected to rise to 34 percent in 2005-06, said Kate Fraumeni, the district's accountant.

Retirement plan contributions now make up about 19 percent of the district's $8 million budget, she said.

Some of the cities, at the least, look like they just got caught up in matching benefits of other municipalities. Not that that should take them off the hook.

But if the fire district has gone from contribution 8.8% to 34% of salary, that's roughly a four-fold increase. Meaning that ~75% of the 19 percent of the district's $8 million budget is due to increased retirement plans. So, in a district with an $8 million budget, maybe $1 million to $1.2 million is going just to increased retirement plans.

[paperboy05]

I'm not sure it's lack of business smarts. I think the article makes the excellent point that there are essentially no negative repercussions for promising money that comes well down the road. Whether something may bankrupt the state 20 years from the time a bill is passed isn't terribly concerning to a politician trying to garner favor in the present day.

So, with a modicum of study proving such grants are 'fiscally responsible', these guaranteed pension laws passed and increased.

One of the most irresponsible bills -- SB 400 in California from 1999 -- increased pensions retroactively for public safety workers from 2% of salary per year to 3% of salary per year (with COLA increases). That's a 50% raise for all covered workers for life.

This bill passed the California Senate by the vote of 39-0. It passed the California Assembly by 70-7. The irresponsibility wasn't confined to a party, and presumably not everyone who passed it lacked business smarts.

After the state passed the bill, many localities matched the 3% at 50 offer. The Police Officer's Research Association of California offers a list of agencies (over 250) that offer the benefits: http://www.porac.org/3percent@50.html

Good points.

I don't know. It just seems the city is in such a hole now that it will never be able to get out of unless the ridiculous pension deals are wiped out once and for all somehow.

I agree something drastic probably should be done, but you have to think if that drastic action would cause worse problems then the initial ones.

[Doctor_Wu]

I read about the Pension Benefit Guarantee Corporation's shortfalls awhile back. I'm not sure if this article involves that entity specifically... but it's the same issue as far as i can tell.

Is Pension Insurance the next S&L Crisis? (http://www.cato.org/pub_display.php?pub_id=2834)

[redmaxx]

"Unions shouldn't be trying to get the best possible deal for employees?"

Unions have somehow finagled deals that sometime put companies under and cities like Vallejo and San Diego under. They go for immediate results only.

:nono1: The union did not do anything the city did not agree to.

"So you're proposing screwing over everybody who took a job expecting a pension when they retire?"

These pension deals were ridiculous.

My credit card interest rate is ridiculous. So does that mean I should be able to just walk away from it?

They've put San Diego and other cities/companies into situations they can't get out of. So yes.

:nono1: None of these employees put a gun to the city and demanded a pension.

[808Lurker]

Don't worry about it, what happened to the retired airline workers will happen to the retired C&C workers. When expenses get out of hand, chapter 11, erase the pensions, problem solved. I know several people that are devasted and the airlines got to continue and pay their ceo's millions in bonuses.

[redmaxx]

Don't worry about it, what happened to the retired airline workers will happen to the retired C&C workers. When expenses get out of hand, chapter 11, erase the pensions, problem solved. I know several people that are devasted and the airlines got to continue and pay their ceo's millions in bonuses.

Nobody ever seems to complain about CEOs making deals that kill the company.

[Candide]

Nobody ever seems to complain about CEOs making deals that kill the company.

This is that part of publicly owned that no one ever talks about. The CEO's bonuses are tied to this years performance. It makes no difference if the union deals they make ensure the company will go under 10 years from now. The CEO still gets the fat bonus.

The stock holders don't even care as long as they bail out before the stock tanks.

[chazjr]

They are virtually everywhere. Government employee pension systems across the nation are in crisis.

Many Pensions are invested in Bonds which are Funded and backed by... You guessed it.. This Subprime Mess..

Now we have a whole Generation of "Baby Boomers" getting ready to Retire with Unfunded Pensions and Unfunded Retiree Healthcare .

[jamegumb]

I read about the Pension Benefit Guarantee Corporation's shortfalls awhile back. I'm not sure if this article involves that entity specifically... but it's the same issue as far as i can tell.

Is Pension Insurance the next S&L Crisis? (http://www.cato.org/pub_display.php?pub_id=2834)

That article is taken directly from the long Reason Foundation study (it's part 6, pages 77-78). It's probably better to look at the actual source -- http://www.reason.org/ps335.pdf -- since the study goes into much more depth than the article (and has cool graphs, too).

[jamegumb]

Many Pensions are invested in Bonds which are Funded and backed by... You guessed it.. This Subprime Mess..

Now we have a whole Generation of "Baby Boomers" getting ready to Retire with Unfunded Pensions and Unfunded Retiree Healthcare .

I expect that some cities will seek bankruptcy as the only relief against obligations they can't meet. Vallejo may well be the test case in this regard; I have no clue what the state or nation may do to try to make sure that workers get the deals they've negotiated.

[ASG]

How exactly can a city declare bankruptcy?

[jamegumb]

How exactly can a city declare bankruptcy?

I have no clue how it exactly works, so I offer an article from the San Jose Mercury News. Apparently it's under Chapter 9:

http://www.mercurynews.com/breakingnews/ci_8330114

Vallejo bankruptcy could have far-reaching impact
By J.M. Brown and Sarah Rohrs

MEDIANEWS STAFF
Article Launched: 02/21/2008 09:16:15 PM PST

VALLEJO -- If Vallejo becomes one of the first California cities to file for bankruptcy, the negative effects could be far-reaching, but also may leave the city with a fresh start, experts said Thursday.

If it takes this route, Vallejo would still need to keep its doors open and provide municipal services, though employees may be asked to stay home if there's nothing in the coffers to pay them.

"The city would still be there and would still have to provide services for residents. With the city you can't just disappear," said Orange County Supervisor John M.W. Moorlach, an expert on bankruptcy since his own county took this route in 1994.

Through Chapter 9 protection, a federal bankruptcy judge would sort through the city's finances, labor and other contracts, and then work out a fiscal plan to move forward.

The situation is different than that of the Vallejo City Unified School District which plunged into a deep fiscal hole in 2004, and secured a $60 million state bail-out loan.

City officials have warned that declaring bankruptcy will not print money, or generate any revenues.

Vallejo's potential bankruptcy would not be California's first municipality filing for Chapter 9 bankruptcy.

Orange County filed for bankruptcy in 1994 after a series of bad investments. And Desert Hot Springs, a town of 20,000, sought Chapter 9 protection several years ago after a crushing court judgment on an environmental matter, said Marc Levinson, Vallejo's bankruptcy attorney.

Experts say Vallejo's case undoubtedly will raise speculation about municipal bonds that cities use to fund facility improvements and other activities because the once-certain guarantee of profitability will suddenly look poisonous to investors.

Bankruptcy is certain to spark fresh debate about the cost of unfunded employee benefits, and the impacts on bond holders.

As of December, the city had accrued a $135 million liability for the present value of retiree benefits earned by active and retired employees earned. Further, there is a $6 million added cost as current employees continue to vest and earn future benefits, the city said.

"If bond holders are hurt by a bankruptcy, then future lenders will probably put constraints on elected officials' ability to make promises while in office that must be paid after they leave," said CPA Marcia Fritz, vice president and treasurer for California Foundation for Fiscal Responsibility, which advocates for pension reform.

"It's almost a relief that it's finally coming to this in Vallejo because it will be an example of what happens when you've got a lot of people with their fingers in the cookie jar," she said. "I saw this coming years ago."

While some experts argue that bankruptcy can leave a city in better financial shape, others argue that it will hurt Vallejo's future credit rating and place the city's future in the hands of a federal bankruptcy judge.

The Vallejo school district is nervously keeping an eye on the city's fiscal emergency. District spokesman Jason Hodge said the crisis might cause the city to withdraw funding for campus police officers, and after-school programs.

The Chapter 9 process, which Vallejo has budgeted $1 million to pursue, could last for years until repayment plans are OK'd.

Experts agree one thing is certain. If the city cannot pay its employees because the general fund is dry -- which is predicted to happen by April -- City Manager Joe Tanner must instruct all employees to stay home.

"They can't come to work," said Levinson, Vallejo's bankruptcy attorney. "You can't ask for credit or to extend your credit if you know you can't repay the debt. It's not only common sense, it's the law."

Alan Davis, attorney for the police and fire unions whose leaders are negotiating with the city to erase an immediate $10 million shortfall, declined comment. The unions represent employees whose salaries total 80 percent of Vallejo's general fund.

The unions argue they have deferred salary increases and benefits for years while the city has failed to raise enough money to pay them.

For nearly two years, city and union officials have been haggling behind closed doors -- then in arbitration -- over cuts in salary and disputed staffing levels.

Nearly two-dozen police and firefighters retired last week or are expected to retire in coming days at a cost of at least $4 million in accrued sick and vacation time. The city is locked into contracts with the unions for two more years.

"Once granted, collectively bargained retirement promises can't be reversed, no matter how outrageous, and no matter how much citizens scream when they find out," Fritz said. "Bankruptcy may be the only way for Vallejo to legally break these promises and get control of its finances."

City bankruptcy attorney Levinson said he would rather see Vallejo reach compromises with the unions than file bankruptcy. That's a decision the City Council could consider Tuesday when it weighs an emergency fiscal plan calling for citywide layoffs.

Interim Fire Chief Russ Sherman agrees, saying, "It's a nightmare situation -- something that everyone has worked long and hard to try to prevent. I'm still holding out optimism that we can get to some sort of agreement to avoid bankruptcy because there would be no winners."

But Arthur J. Spector, the former chief bankruptcy judge of the U.S. District Court, Eastern District of Michigan, said bankruptcy may indeed make winners out of those who seek it.

In an interview Thursday, Spector, now a bankruptcy attorney in Florida, said any entity having a hard time getting credit because of crushing debt will only have a harder time the longer it waits to receive protection from creditors. Bankruptcy may eventually lead to a fresh, or at least fresher, start, he said.

"If you can't can you get credit today, tell me how bankruptcy would hurt your credit?" he said.

Orange County Supervisor Moorlach said Vallejo's problem is that it's spending more than it's taken in each year, and it's "creating obligations it never could afford and never should have made."

Vallejo's situation could be a forecast of what faces other municipalities which have agreed to "unsustainable employee and pension agreements," he added.

While rare, other cities and municipal districts nationwide have felt similar pressures of dropping revenues and increasing expenses enough to file for bankruptcy or publicly consider it, like New York City.

Bridgeport, Conn., a city of 140,000, shocked the investment world in 1991 when it filed for Chapter 9 protection due to a $17 million deficit on its $300 million budget. Bridgeport faced $220 million in general obligation debt.

Based on Chapter 9 provisions, a city's creditor separates into committees of unsecured creditors, like employees and contract services, and secured creditors with collateral-based debt, like bondholders. The city would then work to reach payment plans.

"Unsecured creditors don't have to be paid," Fritz said. "Anyone doing business with the city of Vallejo, like the garbage company, will be the first to get hit. Payments due them are not going to be paid right away."

A judge would rule on any payment agreements based on a city's financial ability and other factors, then oversee litigation if a city can't reach a deal with creditors. But a judge won't typically scour a city's books to see if it could draw money that it isn't already.

"A judge won't throw out creative solutions," Levinson said. "It's really up to the players to come up with the deal. You continue to try to achieve peace rather than going to war. War is expensive."

As the city works out deals, investment specialists are going to have a harder time selling municipal bonds, especially in California due to the state's $14 billion budget shortfall.

"Outside investors are getting spooked by our fiscal imbalance," Fritz said. "Once the city goes down in Vallejo, you're going to see bond prices dropping like flies. A whole specter of bonds will get hit by one bad apple -- it happens all the time on Wall Street."

[redmaxx]

This is that part of publicly owned that no one ever talks about. The CEO's bonuses are tied to this years performance. It makes no difference if the union deals they make ensure the company will go under 10 years from now. The CEO still gets the fat bonus.

Yep, if the company does badly they get a fat bonus. If they do OK, they get an even larger bonus. If they do great..

If the company does horribly, they get a nice parachute.

[udub4life]

And the morale of the story is . . . don't rely on just pensions/gov for retirement. Invest and save, or you'll probably be screwed, especially the people in my generation (20 - 25). Neither party will fix this problem, its been a problem in politics since the dark ages, everyone goes for the quick fix. Can't blame em, its what brings the votes in.

[jamegumb]

So:

* California's tax revenues have increased roughly 6% per year over the past decade (from 64.74 billion in 1998 to 109.32 billion in 2007 - source: California budget http://www.ebudget.ca.gov/pdf/BudgetSummary/BS_SCH3.pdf ) -- note this includes the vehicle license fee, both hiked and rescinded

* State pension contributions due to the 1999 law, which CalPERS had estimated costing $400 million per year, now cost ~$2.7 billion per year (source: Legislative Analyst's Office http://www.lao.ca.gov/analysis_2008/general_govt/gen_anl08011.aspx )

* The state's proposing a $4 billion dollar hit to schools to help cover shortfalls; 10,000 teachers are being laid off (source: San Francisco Chronicle article from today's front page: http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2008/03/14/MN6UVJBJH.DTL )



Is the pension fund the entire problem facing our state? Absolutely not. Is it a significant contributor? Absolutely.

[chazjr]

Is the pension fund the entire problem facing our state? Absolutely not. Is it a significant contributor? Absolutely.

Many people in California believe the following is he main cause of the problem, Even many minorities who are here legally, agree.
Immigration is fine. As long as they come into the country Legally..

"A Nation without Borders, is Not a Nation. At Least it won't be for long."

I don't agree that Ron Paul is the answer. But the following article is very thought provoking.. Prepare to be Shocked...

I hope the following 14 reasons for the United States financial "recession" disaster are forwarded over and over again, until American Citizens get the message and "Demand a Better Government." I have included the URL's for verification of all the following facts.

http://www.rense.com/general81/reacl.htm

[ripcurl]

Your city's pension problem can be fixed, but the city is going to have to pay for it. If the city claims bankruptcy, it's bond status would fall straight through the crapper, and the city would have a hard time funding future projects.

Good luck with it, my old city went through a similar crisis. The Republican mayor that was elected claimed he'd resolve the situation. He did, by spending millions in court fighting legal contracts, raising taxes by more than 50% over three years,cutting services and illegally monitoring employees and firing employees without arbitration, violating their contracts.

By the way, if you're unhappy with police,fire or resuce services now, just wait until they are told there is a freeze on pay and fail to negotiate a contract with them. They'll be slower than molasses in January...not a good idea. I've seen it, it is ugly.

[Anonymouse]

Why is it when a UNION is involved, suddenly it's "unearned money" that they get when they bargain for an increase in benefits?

If a company raises it's price for goods arbitrarily, I don't see any of those same free market kool-aide drinkers screaming it's "unearned money", why should labor be valued any differently than any other commodity in the market?

Oh, because gummint is a monopoly and you can't cost comparison shop for the best police protection or fire department with your tax dollars?
Gimme a break, PU-LEEZE. If the free market was involved in fire protection your house would be ashes before they ever arrived at the scene, just look at private security firms, they take longer than the police to get around to the scene of a property crime in process - if they even show up before the next day

Private fire house #6 east district.Fire protection gear - CHECK
Fire hoses - CHECK
Truck oiled and gased - CHECK
Address confirmed on Microsoft Streets & Trips 2008 - CHECK
Insurance forms for home owner packet - CHECK
and on & on until they CYA 10 ways to Sunday, pull out, roll up to your house and insure you are a subscribing customer and could you please show them your subscription card?
Oh, it's in the burning house, well, we're sorry but without proof of fire service subscription I'm afraid we can't really begin putting out the fire.
You c-c-c-c-c-can f-f-f-f-f-file a claim fo-fo-fo-fo-for reimbursement on your policy fo-fo-fo-fo-for any d-d-d-d-d-damages c-c-c-c-c-caused by our f-f-f-f-f-f-failure to f-f-f-f-f-f-fight the f-f-f-f-f-fire but w-w-w-w-w-we cannot p-p-p-p-p-p-p-proceed to p-p-p-p-p-p-pour water, willy-nilly, on a house j-j-j-j-j-j-j-just on someone's say-so. Why we might get sued for water d-d-d-d-d-damaged if w-w-w-w-w-we d-d-d-d-d-did that on a n-n-n-n-n-non-subscriber house - y-y-y-y-y-you know how f-f-f-f-f-frivolous lawyers are these d-d-d-d-d-d-days.I beg pardon for anyone who does suffer from stuttering, but I'm trying to make a point about speed of delivery here. No doubt, in addition, the employees of said Private fire house #6 are all minimum wage employees with no pension, medical, or overtime pay either.

[jamegumb]

Why is it when a UNION is involved, suddenly it's "unearned money" that they get when they bargain for an increase in benefits?


Please try not to get so defensive -- I think for the most part we're having a rational discussion here. There is a point where a UNION can have wages and benefits that break a municipality's ability to pay, isn't there?

[Anonymouse]

Please try not to get so defensive -- I think for the most part we're having a rational discussion here. There is a point where a UNION can have wages and benefits that break a municipality's ability to pay, isn't there?Of course, but that isn't the fault of the Union is it?

If the market will bear their wage at some point, and the municipality agrees to the deal - then later finds itself in deep doo-doo because they didn't adequately plan for the future - why should it be ANY portion of the Union package that is to blame?

This is a small twist on the same old off-shoring argument;
Unions priced themselves right out of a job, we had to ship the jobs overseas to remain competative.No they didn't, corporate managers failed to innovate, failed to plan ahead, and worst of all, collected HUGE salaries - many times that of the workers - and never did a DAMN thing to earn the money. They took the slacker's way out and shipped the jobs off to 3rd world countries instead of employing those Ivy College trained brains they supposedly were being paid so much money to use.

America is in the midst of a management crisis. Nobody seems to have the old "innovative spirit" that made guys like Henry Ford a household name. The last great management innovation in this country was the invention and installation in the workplace of the computer, over 50 years ago. Not a very good record for high priced management talent as far as I'm concerned.

This was Anonymouse post # 11,111 - for those of you into numerology. If I had 14 more rep points, I could have had
11,111
1111
under me name. :D

[jamegumb]

Of course, but that isn't the fault of the Union is it?

Almost certainly not. Although I suppose it could be argued that if the politicians who negotiated benefit/wage increases with the Union only came to power because they had Union backing, then such a connection could be made.

In any case, the people elected those politicians, and generally stood by while the negotiations were made -- presumably in good faith by both sides.

I'm really not here to bash the Union. I'm trying to focus on the coming crisis, and asking what we do about it, as well as where it may have come from. Vallejo is not (as someone hinted at earlier) my hometown, although I'm not terribly far from it. And that city has been run relatively haphazardly (to wit, public safety employees have seen ~45% increases in hourly wage rates since the year began, which in turn compounds the pension problems later...), hence its current crisis.

I fear, though, that that city is a canary in the coal mine reflecting untenable pension plans for municipal workers. Think about the fact that virtually every dollar of public safety salary across the state gets 28 cents added on to it by agencies to cover pension (plus 9 cents withdrawn from the worker). Compare that 37 cents to Social Security withdrawals from paychecks (6.2+6.2 = 12.4 cents). If Social Security is going to face a problem as fewer workers are counted on to handle more retirees, won't these pension plans be looking at similar issues?

[808Lurker]

Actually the whole pension crisis might solve itself in a couple years.

We are in for a period of massive inflation, basically making these fixed cost pension worth considerably less. As the American Dollar gets weaker, wages will rise slowly to account for inflation (when we are finally out the recession), fixed pensions won't. So after several years, even though the pension will stay the same (in terms of dollar amount), they will be less of the budget and worth less.

[jamegumb]

Actually the whole pension crisis might solve itself in a couple years.

We are in for a period of massive inflation, basically making these fixed cost pension worth considerably less. As the American Dollar gets weaker, wages will rise slowly to account for inflation (when we are finally out the recession), fixed pensions won't. So after several years, even though the pension will stay the same (in terms of dollar amount), they will be less of the budget and worth less.

Many of these pensions have COLAs incorporated. The 3% at 50 plans seem to:

Enhance d Retirement Benefits. During the late 1990s, when double-digit nominal returns were the standard for many Plans, many
Plan Sponsors adopted substantially enhanced retirement benefit packages, which dramatically increased the Actuarially Accrued
Liabilities (AAL) of their Plans. For example, many local agencies in California adopted “3 percent at 50” plans for public safety, enabling
public safety employees to retire as early as age 50 and receive a pension equal to 3 percent of earned compensation for each year of
service, generally with a Cost of Living Adjustment (COLA), for life. In many cases, these increased benefits were projected to be
“costless” to the Plan Sponsors as Plan surpluses were projected to offset the increased AALs. However, by reducing the age required
to retire and increasing the pension payout, at the same time that portfolio returns fell dramatically, such benefit packages appear to be
exerting extreme, unanticipated downward pressure on their Plans’ funding ratios.

http://www.treasurer.ca.gov/cdiac/debtpubs/2004/052004pobonds.pdf

[Anonymouse]

Again I say for the record, it is the municipality's cross to bear. If they bargained in good faith, and accepted the deal, then they are responsible for funding that liability. It's no different than paying off the loan on a car that was too expensive when you bought it but for whatever reason you assumed you could afford it.
They bought it and if they have to float a one-time massive bond to finance the retirement package they promised, so be it, that's their problem and the solution is no different than the ones home owners or consumers face every day.
Ultimately the people elected the folks who made the bargain so ultimately they bear the responsibility for what was done in their names.
If they don't like it, then next time vote more responsibly.

I have yet to see any REAL numbers on how much these % increases actually are.
45% or whatever may seem like a lot but if the original pension amounted to $600 per month after 30 years of service then the citizens are STILL geting off damn cheap IMHO.
We know neither the actual pension amounts nor the wages being earned by these muni workers. It could easily be one of those deals where they are grossly underpaid to start with and giving raises instead of pension benefits in the future would have required a large increase in the local property taxes that politicians were unwilling to face at the time.

I can ALWAYS see more than one side to an issue and hesitate to condemn until most, if not all, the facts are known.
For instance;
What is the cost to the good citizens if those retireees end up on welfare because their pensions are insufficient to meet their needs when they are retired? That could ultimately be far more expensive - with medical thrown in - than simply paying the increased pension benefits.
As I say, we really don't have enough information at this time.

[808Lurker]

Youch!

[jamegumb]

Again I say for the record, it is the municipality's cross to bear. If they bargained in good faith, and accepted the deal, then they are responsible for funding that liability. It's no different than paying off the loan on a car that was too expensive when you bought it but for whatever reason you assumed you could afford it.
They bought it and if they have to float a one-time massive bond to finance the retirement package they promised, so be it, that's their problem and the solution is no different than the ones home owners or consumers face every day.
Ultimately the people elected the folks who made the bargain so ultimately they bear the responsibility for what was done in their names.
If they don't like it, then next time vote more responsibly.

I have yet to see any REAL numbers on how much these % increases actually are.
45% or whatever may seem like a lot but if the original pension amounted to $600 per month after 30 years of service then the citizens are STILL geting off damn cheap IMHO.
We know neither the actual pension amounts nor the wages being earned by these muni workers. It could easily be one of those deals where they are grossly underpaid to start with and giving raises instead of pension benefits in the future would have required a large increase in the local property taxes that politicians were unwilling to face at the time.

I can ALWAYS see more than one side to an issue and hesitate to condemn until most, if not all, the facts are known.
For instance;
What is the cost to the good citizens if those retireees end up on welfare because their pensions are insufficient to meet their needs when they are retired? That could ultimately be far more expensive - with medical thrown in - than simply paying the increased pension benefits.
As I say, we really don't have enough information at this time.

The pension increases for public safety were passed through the California legislature in 1999. They were matched by most municipalities.

In most cases, these bumped pensions from 2% of salary per year worked to 3% of salary per year worked (multiplied by a maximum of 30 years). With retirement allowed at age 50 or 55, depending on trade. The salary used to base the percentage is that of the final year worked. Depending on agreement, overtime, holiday pay, sick pay reimbursed, etc. could bump up that final year salary. But, effectively, many employees across the state were given 50% retirement raises -- retroactively, since no additional funding was required by the employee -- without sufficient thought as to what such a thing may cost.

So, some public safety employees could work from ages 25-55, then retire and take home 90% of their pay at age 55, cost of living adjusted, as a pension for life.

The legislature was banking on CalPERS recommendations in 1999, which advised that due to stock performance, not much additional funding would be required to pay the 3% of benefits rather than 2% (even though it's 50% more money). CalPERS was wrong. The stock market's gains haven't been enough to offset the increased costs, and this is why municipalities are throwing in 28 cents to retirement for every dollar paid in salary.

The 45% I mentioned were Vallejo pay raises (per hour) for public safety since 2000. These raises get compounded in retirement costs off the other end.

A one-time massive bond package is possible, but may not eliminate the structural problem. Which is that 90% of final salary, cost adjusted for life, is one heck of a pension pill to swallow for continually retiring employees.

And while you say you don't know the Vallejo worker wages, that was published earlier in the thread. The firefighter base pay is over $80,000. (Source, San Francisco Chronicle: http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2008/03/10/MNFKVEV4L.DTL ) 292 Vallejo city employees made over $100,000 last year (Source, San Francisco Chronicle: http://www.sfgate.com/webdb/vallejo/ ). That's a minimum of $29,200,000 (but obviously much more) of gross wages -- not including benefits, in a city with a total budget of $80 million (source: http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2008/02/29/MNFQVAV0U.DTL ).

Unfortunately for everyone involved, the only way this municipality may be able to handle their self-imposed (I acknowledge that -- the city did cause this problem) lack of funding is by declaring bankruptcy. That's not the ideal way to solve the salary/pension/etc. crisis.

[Anonymouse]

Ok, so you have California firefighters making $80K in a state where the price of a house is something like a quarter million bux for a squatter's hovel?
Meanwhile back in good ol' mid-America, a bus driver is making over $100k per year and a house costs $85,000 for a squatter's hovel.
See the difference yet?

[jamegumb]

Ok, so you have California firefighters making $80K in a state where the price of a house is something like a quarter million bux for a squatter's hovel?
Meanwhile back in good ol' mid-America, a bus driver is making over $100k per year and a house costs $85,000 for a squatter's hovel.
See the difference yet?

Are you being purposely obtuse? You've got firefighters with base pay (read: starting salary) of $80K. But 90% of the department is clearing over 100K. With pensions to match. The city is going bankrupt. Maybe there are dots to connect here.

Yes, the cost of living is higher in California than Oklahoma. So that excuses not trying to hold a budget?

(BTW, is your bus driver fictional? I've not heard of such salaries in good ol' mid-America.)

[808Lurker]

It would depend if the salary is 80k, or due to overtime fighting massive fires. During some severe fire they can work serious hours at time and a half.

[jamegumb]

It would depend if the salary is 80k, or due to overtime fighting massive fires. During some severe fire they can work serious hours at time and a half.

It's base salary. Starting salary. What you get when you first sign up. (There are also enhancements for EMT/HAZMAT/other training; enhancements can be up to 10% of additional salary per skill.)

I think one traditional defense of the high pay is that their schedule is two days on, four days off. So they work 48 hours consecutively and then get 96 hours break. Meaning over an average week they're on the clock for over 56 hours.

During some of the "on the clock" time, they're sleeping, of course (and other times they're eating, relaxing, etc.), but they're ready and on call if a fire ever happens.

Again, Vallejo's compensation package for an "average" public safety employee are high, even by Bay Area standards; coupled with the downturn in the economy means the city's in a crisis.

[Anonymouse]

Are you being purposely obtuse? You've got firefighters with base pay (read: starting salary) of $80K. But 90% of the department is clearing over 100K. With pensions to match. The city is going bankrupt. Maybe there are dots to connect here.

Yes, the cost of living is higher in California than Oklahoma. So that excuses not trying to hold a budget?

(BTW, is your bus driver fictional? I've not heard of such salaries in good ol' mid-America.)Nope, top bus driver earner last year, for Madison Metro, was paid in excess of $130,000 after OT.
Typical pension contribution here is 5%, paid on behalf of the employee, and a matching 5% paid by the municipality into the State Retirement Fund. (effectively 10% but only applicable if the employee retires, otherwise they only get the 5% if they pull the funds and take the cash.)

The point I was making is, based on the cost of living, a firefighter in California should be making something equivalent to $150,000 or more per year.
Here a bus driver's salary is equal to about 1/2 the cost of a decent shack.
In California, that should hover around $150K right?
If those ffs are making $80k, then they are grossly underpaid, or else the Madison bus drivers are greatly overpaid, or maybe a little of both, but eventually California has to understand municiple services have a cost and a part of that cost is labor - fairly paid labor, and if they underpay labor and make promises for pensions in lieu of current salaries, then by gawd, they should have to honor those future commitments.

This is the same track I always see whiny conservatives on. They claim Unions killled Detroit. No they didn't, piss-poor management killed Detroit.
If management had acted like management initially, and paid the piper when his pay was due, they would have had to fund the wage increases far sooner but wouldn't now be in the pension/medical bail-out mode. They didn't want to accept "personal responsibility" in the bargaining process at the time and now they want to escape "personal responsibility" for their past misjudgements.

It is really convenient the Union busters have laid the foundation to blame the woes of America caused by outsourcing and chasing short term profits on the greed of Unions. It simply isn't truth though. Union members bargained in good faith and often forewent pay to help their companies remain solvent and competative with the promise that when the company was again in good fiscal health they would then be paid what they should have been paid initiallly.

Of course it was foolish to allow CEOs & BoDs the chance at extra profits and delay those earnings in trade for future benefit promises. CEOs are creatures of habit and can't help themselves when there is any extra money lying around. They simply HAVE TO take it and call it "profit". They also simply HAD TO short-change the future of their companies to make current earnings so they could justify their outrageous salaries, and therein lay the destruction of the Detroit automobile manufacturers and any companies built on the same sort of foundations and run by the same principles of management.

Unfortunately Unions had little to say about the "new style" of management that valued profits over survivability. Ultimately management viewed them as "old machinery" and replaced them the same way they capitalized all "old machinery" - get some new stuff at cut rates in 3rd world countries. Because they figured they would no longer need to do business with Unions in America, they had no qualms about screwing them over and not paying up what they owed.

[jamegumb]

The point I was making is, based on the cost of living, a firefighter in California should be making something equivalent to $150,000 or more per year.

Compensation for public safety employees in Vallejo account for over 80% of the city's budget at present. The city is actually closing firehouses (and cutting many other services) to pay firefighters.

If you believe that the compensation that they're receiving is "fair", then you're going to need a massive tax increase to cover all of the rest of the city's needs. But that's going to be hard -- "According to government data, the average salary for jobs in Vallejo, California is $41,338, and the median income of households in Vallejo was $54,706." ( http://www.simplyhired.com/a/local-jobs/city/l-Vallejo,+CA )

And nobody in California makes half the wage of a decent shack (yes, I'm exaggerating here, but not by much -- decent shacks start at $500,000**). That's been the story of the last two decades -- currently you've got mortgage payments that represent 50% of a family's income.


(**To be fair, that link above pointed to the median cost of a home in Vallejo as being $436,200. Though I'm not sure how that figure takes house appreciation into account, or if it's just a median based on the last sale price of each house. The link also says 2% of households in Vallejo make over $200K, and 4% make $150 to $199K.)

EDIT: I just found a San Francisco Chronicle editorial that supports some of the main points I've been trying to make here:

Vexed in Vallejo

Thursday, February 28, 2008

Vallejo may decide to file for bankruptcy today, which is a dire and difficult situation for all who live, work and do business there. What tilts this story over into tragedy, however, is that Vallejo is only the first large city in California to find itself in such a mess. Expect many other cities in California - including perhaps your own - to be faced with the same disaster soon.

What happened in Vallejo is a preview of what is slowly developing all over the state, and it can't be blamed on the crumbling housing market. Property values have eroded, for sure. The tax base is under stress, of course. But those recent developments have merely aggravated an existing situation: the fact that local governments all over the state have consistently promised wages, benefits, and retirement plans to their public employees that cities cannot afford to pay.

There are myriad reasons why cities do this, most of them political rather than logical, but the ironic and disturbing effects can't be underlined enough. To offer just one example: Despite lavishing incredible compensation packages on its public safety unions, the people of Vallejo will now have to hunker down in their homes, because a short-staffed police department will be directed to focus only on the most serious crimes. And one more: It may take Vallejo's bankruptcy, with all the ruin it will wreak on the city's businesses, property values, and other employees, to get civic leaders and the public safety unions to agree on restructured contracts that will happen under the terms of bankruptcy anyway.

Odds are, your city continues to negotiate overly generous compensation packages with its public employees, too. This means that Vallejo's situation will soon be at your doorstep.

This article appeared on page B - 6 of the San Francisco Chronicle

http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2008/02/28/EDG9V9M9K.DTL

[bucksnort]

How exactly can a city declare bankruptcy?
A City, Village, etc. is an incorporated entity. Therefore it is "Corporate", just like every other business. If you thought of the "City" as a take care of you forever you've got a thing coming. All the taxpayers are stockholders and are on the hook for ALL bonds and obligations their elected reps got them into.

[SigX]

Nope, top bus driver earner last year, for Madison Metro, was paid in excess of $130,000 after OT.
that is ridiculous. there is no way a bus driver should be clering 100k. i don't care where u live.

[bucksnort]

that is ridiculous. there is no way a bus driver should be clering 100k. i don't care where u live.
The guy didn't have a life and worked all the time. More power to him. Isn't this America and how much you put in should reward you with fruit? Of course in the People's Socialist Republic of Madison this goes against the collective ideals of the collective and shall not be tolerated. To earn that much and not kill somebody and get into wrecks takes real skill. Of course in the leftist Madisonian's mindset the bus driver should make as much as the bum panhandling on State St.

[gibbersome]

So, main questions:

1) Are we screwed? Is Vallejo the tip of the iceberg?
2) If we're screwed at all, who/what is to blame?
3) What should be done?

We're screwed!!! :whee:

[jamegumb]

Another example of why California is talking about raising taxes:

UC defends $2.1 million deal for police chief

Patricia Yollin, Chronicle Staff Writer

Friday, April 25, 2008

UC Berkeley officials are defending an unusual arrangement that allowed Police Chief Victoria Harrison to retire last year with a $2.1 million package and then return to the same job right away for more money.

"No laws were broken," Cal spokeswoman Marie Felde said Thursday. "That's very clear."

UC spokesman Paul Schwartz said the retirement package was consistent with university policy and reflected benefits she rightfully earned.

"She did not receive anything special," he said.

The two were reacting to a Contra Costa Times story published Thursday that said the chief of the UC Berkeley Police Department received "improper perks" and that administrators broke or bypassed UC and federal rules.

In an interview with The Chronicle, Harrison said she was stunned by the uproar over what she saw as a difficult decision on her part, but one that allowed her to keep working in a place she loves.

"I'm now 54," Harrison said. "I think I've got a few good years left in me, and I want to continue to contribute to the big U."

Harrison started her career at UC Santa Barbara in 1973 and came to Cal in 1985. Five years later, she took over as chief. In June 2007, however, she found herself in a quandary. She'd been eligible for full retirement for more than a year, with a pension that would have paid her as much as she was earning by working.

"I was at 100 percent of my salary," she said. "People kept asking me, 'When are you going to retire?' They were telling me I was crazy. And I was told that a job at another municipal police department was mine."

The problem was that she didn't want to leave, and her boss, Vice Chancellor Nathan Brostrom, didn't want her to go. The police chief said they explored her options and scoured retirement plans, "reading the fine print." They discovered that "if you take the lump sum payout, you're not considered retired."

Harrison got a $2,130,259 lump sum from the retirement plan. She will also receive $4,621 a month for 10 years, totaling $554,520, from a deferred compensation plan.

Before her retirement, Harrison was earning a base salary of $161,527. Combined with unused vacation pay and a stipend for her work as associate vice chancellor for public safety, her total compensation had amounted to $205,000 a year.

Under the terms of the rehiring, her base pay was $175,000, which increased to $181,125 two months later. In addition, she is receiving $12,700 annually for working with Cal's athletic director and on special projects - for a total of almost $194,000 a year.

On the other hand, Harrison said, she forfeited a monthly pension as well as health insurance and other benefits that would have lasted a lifetime.

"When I leave, I'll have to be self-insured," Harrison said. "If I don't do a good job investing all that money, I could be out on the street with a tin cup. I did a lot of soul-searching about whether I was willing to take that risk."

Harrison wanted to keep her 61 unused sick days and the university allowed it as an exception to policy, Schwartz said, because of "extenuating campus circumstances" - they didn't want to lose Harrison.

Schwartz also acknowledged that the university violated its policies by discussing rehiring before Harrison had retired. He said her "pending employment offer from an outside agency" prompted them to disregard the rules.

However, he insisted no federal rules were broken. Although the Internal Revenue Service states that such discussions shouldn't take place before normal retirement age, that age is 50 rather than 60 in the case of safety employees such as Harrison, Schwartz said.

The university also is permitting Harrison to work full time, although its guidelines say recall appointments should be part time - 46 percent or less.

Schwartz said campuses are authorized to determine the amount of work time based on their needs.

"In this case, UC Berkeley determined a full-time appointment was warranted given a range of campus safety issues confronting the campus, including an increase in violent crime and tree-sitting protesters," Schwartz said.

From UC's perspective, it all seemed like a good solution.

"She didn't want to keep working a job and not be paid," Felde said. "Everything was carefully and deliberately reviewed before the offer was made."

Others, however, find the deal disturbing, especially in light of a recent UC scandal in which millions of dollars in extra compensation and questionable perks were bestowed on top executives without disclosure to UC regents or the public.

"The lesson for us as students dealing with tuition hikes is this: UC won't give us accountability," said Jessica Schley, a 23-year-old junior at Cal and editor of the Berkeley Undergraduate Journal. "We've got to demand it."

Bob Stern, president of the Center for Governmental Studies, a Los Angeles nonprofit, said, "It's pretty amazing to me. It's like they have a tin ear. The university has done things by themselves without any oversight. They think they can do things other state agencies can't do."

He said it seemed clear that UC hadn't learned any lessons from the compensation debacle.

"They must have really wanted her to stay," he said. "But nobody is irreplaceable. I'd sure like to have that same deal here."

E-mail Patricia Yollin at pyollin@sfchronicle.com.

This article appeared on page B - 1 of the San Francisco Chronicle

http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2008/04/25/BALA10BJMH.DTL

The system is insane if it allows someone to retire, collect their pension, just to come back and work again. Also note that she could have made as much retiring as working back in 2007, when she was only 53. The system's incentives are completely backwards.

[rrc06]

This is the same track I always see whiny conservatives on. They claim Unions killled Detroit. No they didn't, piss-poor management killed Detroit. If management had acted like management initially, and paid the piper when his pay was due, they would have had to fund the wage increases far sooner but wouldn't now be in the pension/medical bail-out mode. They didn't want to accept "personal responsibility" in the bargaining process at the time and now they want to escape "personal responsibility" for their past misjudgements.

It is really convenient the Union busters have laid the foundation to blame the woes of America caused by outsourcing and chasing short term profits on the greed of Unions. It simply isn't truth though. Union members bargained in good faith and often forewent pay to help their companies remain solvent and competative with the promise that when the company was again in good fiscal health they would then be paid what they should have been paid initiallly.


There are a few reasons (http://www.forbes.com/forbes/2006/1127/048a.html) that people claim unions KILLED detroit.

You simply cannot compete internationally when powerful workers unions are requiring you to spend an addition $1-2 K on a car for workers expenses. When you make a product that most consumers have historically avoided over the past decade, you compound the problem. Detroit has been screwed as a result of making crappy products and product design (blame that on the corporates) and powerful unions (blame that on the workers). Why should a corporation pay its workers when their factory is idle??

I have said it before, but here it is again:

It seems like you aren't concerned with mediocrity Anonymouse --- why else would you be so pro-union? The "great" thing about unions is that everybody gets the benefits, and you can't fire anyone You get NO incentive to work harder, or produce more because you are getting the same bonuses and vacation that slacker susie in the next cubicle is getting, even though she hardly gets any work done. Of course they can't fire her, because she's in a union. I, for one, would want to be recognized for what I am able to do as an individual (and able to reap the rewards thereafter). Similarly, if somebody is slacking off on the company dime, FIRE THEM. The problem with unions is they BREED inefficiency and laziness and eventually drive up the costs of doing business. Ask the great state of New York, who has one of the highest rates of unionization in the country. Outside of NYC, it's an economic wasteland.

[ASG]

There are a few reasons (http://www.forbes.com/forbes/2006/1127/048a.html) that people claim unions KILLED detroit.

You simply cannot compete internationally when powerful workers unions are requiring you to spend an addition $1-2 K on a car for workers expenses. When you make a product that most consumers have historically avoided over the past decade, you compound the problem. Detroit has been screwed as a result of making crappy products and product design (blame that on the corporates) and powerful unions (blame that on the workers). Why should a corporation pay its workers when their factory is idle??

I have said it before, but here it is again:

It seems like you aren't concerned with mediocrity Anonymouse --- why else would you be so pro-union? The "great" thing about unions is that everybody gets the benefits, and you can't fire anyone You get NO incentive to work harder, or produce more because you are getting the same bonuses and vacation that slacker susie in the next cubicle is getting, even though she hardly gets any work done. Of course they can't fire her, because she's in a union. I, for one, would want to be recognized for what I am able to do as an individual (and able to reap the rewards thereafter). Similarly, if somebody is slacking off on the company dime, FIRE THEM. The problem with unions is they BREED inefficiency and laziness and eventually drive up the costs of doing business. Ask the great state of New York, who has one of the highest rates of unionization in the country. Outside of NYC, it's an economic wasteland.
The corporations agreed to these deals. The unions were just getting the best deal they could for their workers, the same way any employee would.

[Schooby]

I'm seeing a lot of ignorant comments generalizing union people here.

Since generalizing any part of a group is never a wise argument, let me enlighten some of you about true union workers in my line of work.

I started driving a school bus almost 27 years ago. Back then we got great medical benefits, a COLA of 6 cents twice a year and usually about a 4 or 5 % raise each year.

About 15 years ago we gave up our COLA in order to get about a 6% raise that contract (stupid move on our part). Things you give up, you never get back.

About 10 years ago when the economy started to show signs of stress in the school funding we started settling for contracts that averaged about 2.5% a year. We still held onto the fact that we had good medical coverage and many of us stayed for that reason. Considering the way the cost of everything else in life has risen...we have not kept up our quality of life in a very long time. We slip farther and farther down that scale.

Many of us chose in the mid '80s to have a % of each check put into a MIPSER account which would supplement our small pensions that we part of our pay package. MIPSERS allows us to work 30 years and then retire and collect our pension. We would have to pay a monthly premium for our medical (I believe at this point that is $113 a month) and that coverage is not very good. Very high co-pays...I was told by the people who work with the MI state employees retiree pensions that we'd pay 33% of our prescription cost at least.

Keep in mind we are struggling more and more to pay the bills that we used to be able to pay fairly easily.

We don't make a killing in out pay. Most drivers only get 5.5 hours a day for work. I had to be there about 12 years before I got full time employment. Granted, custodians and such have been full time all along.

My job has a very high liability issue woven into it...and driving many hours for many years is very bad for the body. My neck is shot. Thanks goodness for what medical I do have.

This past contract we agreed to all switch to Community Blue BCBS coverage with a $250 (for single and 500 for couple or family) premium and co-pays for office calls, higher co-papys for scripts. The trade off was that instead of 2% per year raise we'll get 2.5%. (this is a 3 year contract). What the district gets out of it is...we have to agree to participate in a health screening each year. They draw blood, take our B.P...simple things like that. If they find a health issue they contact us and hope that we are proactive and fix a problem before it gets worse and higher cost for their insurance premiums. It's supposed to be confidential and the district isn't supposed to be given any of the medical results. Many people are skeptical of that. If we do the screening we get back a percentage of our premium in the form of paying less the following year.

A republican gov. back in 1994 (I believe) enacted Public act 112, which in effect allows the employer to fire everyone without even negotiating with us to try to come to an agreement. We cannot strike or picket. My district has been good in that we all work together. And they honor our negotiations and contracts so far.
A couple of neighboring districts just privatized. The employees are all now unemployed, have no medical and lost their little pensions they were working towards. Some families had both parents working together so now the family has no income.

Contrary to popular misbelief, school bus drivers do not collect unemployment during the summer. At least not in this county and I'd be highly surprised to hear of any that did.

Those unemployed will now be eligible to collect unemployment ...thus putting a further drain on our state funds.

My job is in jeopardy right now because one of the privatized districts is basically a mirror image in economic wealth & population. At this point our Superintendent is not looking to privatize. He knows we do good work and value our jobs. But I know they will try to take away whatever they can on this next contract and we've already given up a lot.

Private companies are more lax about criminal screening, drug screening and don't usually pay to have their employees have extended safety training and skills work.
I have to have random drug and alcohol screening, yearly physicals and be road tested every time I renew my license (and that test is extensive).

When one of our employees is in the wrong, we do go into the meeting to represent them. I for one, helped a guy keep his job with a last chance agreement. If he screws up again he's gone, he knows it, we know it and we will not pursue any further debate about keeping him.
We discovered a coworker who had a drinking problem and we are the ones who brought it to the attention of the administration. Rather than putting people in harms way we worked with the admin. to let the person go quietly so the district didn't get any negative publicity and we kept the kids and roadways safe in the process. We do NOT just fight any fight to keep people at any cost. (I probably should have admitted this publicly...I doubt anyone can figure out my district or if they did, I doubt they'd try to do anything with this info...but I've been accused and known to be too trusting and open).

Oh and back to the pensions you all are claiming we don't deserve... I work full time during the school year (days that we don't work...we don't get paid), yes we earn vacation days just like most people, and get some sick days ..out of which come snow days, bereavements, etc. I work as much as I can during the summer months but at the most I get 7 hours a day, 4 days a week through July and as of last year I worked a couple of full time weeks in August to help the office. All in all...about 32K. Yeah... big haul I know :rolleyes:
I have figured out my pension to being about 35% of that. Plus I'll be paying a premium for medical and much higher co-pays for the many meds I'm on. Yeah, I have asthma and working with diesel fumes for all these years hasn't helped my health that way either.

Reading and hearing so many people all fired up to take that small pension away from me...or my medical makes me so angry I'm shaking.
Blame the people at the top of the food chain. Had the auto companies had the friggin foresight to make more fuel efficient cars, the districts found ways to advertise their strengths to pull in more students etc...we might not be in the position we are currently in.

We have a couple of saying... Management has the right to mismanage...
And AFA new employes coming in (yes...there is a small percentage of bad employees in every walk of life...we have a probation period of about a year for the employer to figure out which to not hire)...We don't hire them, we inherit them.

/soapbox

[Tomsawyer]

The corporations agreed to these deals. The unions were just getting the best deal they could for their workers, the same way any employee would.

Sure they did. The problem is that the pensions that have been promised to workers by governments (state, local, federal, etc) are unsustainable.

You can argue back and forth that the right thing to do is to pay the workers, but the bottom line is that the municipalities will not be able to pay in the next 5 - 10 years. At that point, who cares if its the right thing to do.

Government doesnt have any money, they tax the people to get their money, or they borrow it. At some point, they will not be able to tax the people, and no one will loan them the money needed for some of these pensions.

[ASG]

Sure they did. The problem is that the pensions that have been promised to workers by governments (state, local, federal, etc) are unsustainable.

You can argue back and forth that the right thing to do is to pay the workers, but the bottom line is that the municipalities will not be able to pay in the next 5 - 10 years. At that point, who cares if its the right thing to do.

Government doesnt have any money, they tax the people to get their money, or they borrow it. At some point, they will not be able to tax the people, and no one will loan them the money needed for some of these pensions.
Who said anything about "the right thing to do"? It is an obligation, it was what was agreed to that was part of the reason these workers took these jobs in the first place.

[rrc06]

The corporations agreed to these deals. The unions were just getting the best deal they could for their workers, the same way any employee would.

Without any regard for the long-term viability of the company. Cutting off your nose to spite your face isn't going to help you in the end.

Do you think the UAW would have handled things differently if they could have seen what the shape of Detroit Auto is today?

[ASG]

Without any regard for the long-term viability of the company. Cutting off your nose to spite your face isn't going to help you in the end.

Do you think the UAW would have handled things differently if they could have seen what the shape of Detroit Auto is today?
I would hope not. They represent the employees. As an employee, I'm gunning for the best salary/benifits I can get from my employer. Its up to the company to look long term and determine what they are willing to give me.

[jamegumb]

I would hope not. They represent the employees. As an employee, I'm gunning for the best salary/benifits I can get from my employer. Its up to the company to look long term and determine what they are willing to give me.

This sentence works well in theory. Unfortunately, in reality businesses and governments have flush times and lean times. During the flush periods, high salaries and benefits are negotiated for; unions argue for "sharing the wealth" and employers needing to keep the wheels turning generally meet demands and hope for a rosy outcome. During the lean periods, these benefits and salaries can break businesses and governments.

(This is precisely what's happening across municipalities in California. During the good times for CalPERS, they gave an extra 50% to many pension plans while demanding nothing in return. Now, during the lean times, they find that these plans are unaffordable and at least one city is threatening to plunge into bankruptcy.

Again, I'm not trying to point blame here, just showcasing the problem.)

[rrc06]

Its up to the company to look long term and determine what they are willing to give me.

Do you think they had a completely unrestricted choice in the matter? UAW certainly wields (weld) a fair amount of power.

[redmaxx]

Do you think the UAW would have handled things differently if they could have seen what the shape of Detroit Auto is today?

Maybe they could have negotiated to not have idiots for management and golden parachutes for all the executives. I cannot feel bad that worker's unions have held Detroit back when executives get paid big bucks to crash the company. The union did not singlehandedly ruin GM, it was largely due to management's decision to build products that consumers didn't want and ruin their image of quality. Had management actually managed correctly, the union's contract wouldn't be a burden on the company. Instead, management let Honda, Toyota and Nissan eat their lunch and are now trying to put all the blame on the union.

[ASG]

Do you think they had a completely unrestricted choice in the matter? UAW certainly wields (weld) a fair amount of power.
Uh, that's the point of the union. If they didn't have any power than individual employees would be better off doing it on their own without paying dues.

[Tomsawyer]

Who said anything about "the right thing to do"? It is an obligation, it was what was agreed to that was part of the reason these workers took these jobs in the first place.

You are missing my point. It doesnt matter if it is an "obligation". If the government doesnt have the money to pay it, they wont be able to pay. Thats it, end of discussion.

Government has to get the money somehow, they can either sell bonds, or raise taxes. If the people refuse to pay more in taxes (either by voting out politicians who raise the taxes or directly voting against tax raising ballot initiatives), and other people refuse to buy the bonds sold by the municipality, then the pensioners will not be collecting their pensions.

At that point, the municipality will file bankruptcy and dump the pension obligations.

How do you propose the governments pay pensions with money they dont have?

[ASG]

You are missing my point. It doesnt matter if it is an "obligation". If the government doesnt have the money to pay it, they wont be able to pay. Thats it, end of discussion.

Government has to get the money somehow, they can either sell bonds, or raise taxes. If the people refuse to pay more in taxes (either by voting out politicians who raise the taxes or directly voting against tax raising ballot initiatives), and other people refuse to buy the bonds sold by the municipality, then the pensioners will not be collecting their pensions.

At that point, the municipality will file bankruptcy and dump the pension obligations.

How do you propose the governments pay pensions with money they dont have?
These pensions are obligations. If the people refuse to pay more taxes, they must cut spending in every other area, from how much they give to the schools to laying off workers, in order to meet this obligation. Any program like this that was guaranteed should be treated as the type of debt that can't be eliminated via bankrupcy.

[jamegumb]

These pensions are obligations. If the people refuse to pay more taxes, they must cut spending in every other area, from how much they give to the schools to laying off workers, in order to meet this obligation. Any program like this that was guaranteed should be treated as the type of debt that can't be eliminated via bankrupcy.

I agree with this. California's case may be slightly different, as some of the pensions that were given were awarded post facto -- that is, workers worked for decades under one system, then the legislature (in its infinite wisdom) awarded additional pension money to be applied retroactively. Rollbacks of that would still be going against promises made, but could perhaps be more justified.

FWIW, Schwarzenegger just announced the expected deficit in the Golden State has ballooned to $20 Billion. In spite of the fact that state tax collections have risen from $73B in 2001 to an expected $118B in 2008-9 (source: http://www.ebudget.ca.gov/pdf/BudgetSummary/SummarySchedules.pdf -- note that revenues in 2000, the last internet bubble year, were $88B; the spending during those flush times has come back to bite the state today).

[Tomsawyer]

These pensions are obligations. If the people refuse to pay more taxes, they must cut spending in every other area, from how much they give to the schools to laying off workers, in order to meet this obligation. Any program like this that was guaranteed should be treated as the type of debt that can't be eliminated via bankrupcy.

Sure, thats your theory, but how is it going to work. Is a local government going to lay off every single cop, fireman, public official, trash collector,etc. yet still collect taxes from people and pay every penny out in pensions?

Whats a city going to look like with no cops or firefighters? You going to stay in a city like that, or would you move to a new city that filed bankruptcy last year and dumped their pensions so they can afford to pay cops now?

Like I said before, whether it is right or wrong or an obligation or whatever is irrelevant. When the money is gone, so are the pensions. Thats the bottom line.

[ASG]

Sure, thats your theory, but how is it going to work. Is a local government going to lay off every single cop, fireman, public official, trash collector,etc. yet still collect taxes from people and pay every penny out in pensions?

Whats a city going to look like with no cops or firefighters? You going to stay in a city like that, or would you move to a new city that filed bankruptcy last year and dumped their pensions so they can afford to pay cops now?

Like I said before, whether it is right or wrong or an obligation or whatever is irrelevant. When the money is gone, so are the pensions. Thats the bottom line.
No it isn't. When you declare bankrupcy there are certain obligations you can't just cast off by being bankrupt. The pension plan should have a right to their money before everybody else they would owe (such as bond holders).

[ASG]

On a related note: (http://nullspace2.blogspot.com/2008/02/why-vallejo-matters.html)

One precedent of note is Bridgeport, CT which attempted to declare bankruptcy in the early 1990’s but was told that it could not because it had the fiscal capacity to raise taxes or borrow enough to get through its situation. That precedent was clearly on the mind of Pittsburgh city officials in the early 1990s’s when money was literally running out and the sale of the water authority was the only thing that got the city through several years of severe operational budget deficits. City officials at the time would have preferred a bankruptcy I am sure, but am equally sure they were told by lawyers that they couldn’t.

[jamegumb]

On a related note: (http://nullspace2.blogspot.com/2008/02/why-vallejo-matters.html)

One precedent of note is Bridgeport, CT which attempted to declare bankruptcy in the early 1990’s but was told that it could not because it had the fiscal capacity to raise taxes or borrow enough to get through its situation. That precedent was clearly on the mind of Pittsburgh city officials in the early 1990s’s when money was literally running out and the sale of the water authority was the only thing that got the city through several years of severe operational budget deficits. City officials at the time would have preferred a bankruptcy I am sure, but am equally sure they were told by lawyers that they couldn’t.

Thanks for the link -- that's interesting commentary. As a note, Vallejo pushed its bankruptcy decision off from late April to early May (May 6th, I think). So we'll know fairly shortly which direction they're headed in.

[Tomsawyer]

No it isn't. When you declare bankrupcy there are certain obligations you can't just cast off by being bankrupt. The pension plan should have a right to their money before everybody else they would owe (such as bond holders).

And if there is no money?

[ASG]

And if there is no money?
Then the town should have their future wages (taxes) garnished until it is paid.

[Tomsawyer]

Then the town should have their future wages (taxes) garnished until it is paid.


Not sure if that is even legal. Regardless, its never going to happen. No one is going to live in a town with 100% taxes when they could move to a new one with reasonable taxes.

[jamegumb]

Then the town should have their future wages (taxes) garnished until it is paid.

This is part of the problem with guaranteed benefit pensions in general -- unfunded liabilities. The state of California's unfunded liability is supposedly about $15B at present (source: http://www.lao.ca.gov/analysis_2008/general_govt/gen_anl08011.aspx ).

[rrc06]

Why not have matching contributions from the employer (city) and make the employees responsible for managing it ---- No more guaranteed pensions.

[jamegumb]

Thanks for the link -- that's interesting commentary. As a note, Vallejo pushed its bankruptcy decision off from late April to early May (May 6th, I think). So we'll know fairly shortly which direction they're headed in.

City Staff is recommending bankruptcy -- see page 113 of 168 here:
http://www.ci.vallejo.ca.us/uploads/253/A050608%20agenda%20with%20packet.pdf

Here's a quote from page 115:

Over the past two years, employee costs have increased by 11% while revenue growth has been 2.6%. To mitigate growing per-unit employee costs, the General Fund work force has been reduced by 18%, from 494 to 407 employees...

So, not only are city costs ballooning to the point where they can't be afforded, Vallejo is employing many fewer people to try to do the work of the public. Whatever system they have in place seems untenable.

[jamegumb]

City Staff is recommending bankruptcy -- see page 113 of 168 here:
http://www.ci.vallejo.ca.us/uploads/253/A050608%20agenda%20with%20packet.pdf


I just recognized that this document also contains the average firefighter and officer compensation (without overtime) for Vallejo:

[See pages 150, 151 of document:]

Firefighter (current compensation):
Salary (a) $114,170
PERS (pension contribution by city) $32,046
Health/Dental $13,568
Worker's Comp $9,134
SS/Medicare $1,655
Other $677

Total $171,250

Firefighter (full 2008-2009 contract rate after raises of 8.2% - which reflects restoring compensation previously deferred so that earlier budgets could be balanced - and 5.5% - current COLA)

Salary (a) $130,112
PERS (pension contribution by city) $36,521
Health/Dental $13,568
Worker's Comp $10,409
SS/Medicare $1,887
Other $677

Total $193,174

Police Officer (current compensation):
Salary (a) $106,590
PERS (pension contribution by city) $29,880
Health/Dental $13,568
Worker's Comp $17,374
SS/Medicare $1,372
Other $532

Total $169,316

Police Officer (2008-9 Full Contract Rate):
Salary (a) $121,518
PERS (pension contribution by city) $34,070
Health/Dental $13,568
Worker's Comp $19,807
SS/Medicare $1,565
Other $532

Total $191,060

(a) "Salary includes base salary and other compensation depending upon bargaining group, such as education incentives, holiday buy-back, uniform allowance, longevity, preceptor, EMT, paramedic, hazmat, bilingual, and other special pays.

.....


From my math, Vallejo's pension contribution to police and firefighters is roughly $15M per year, and they're expecting a deficit of $8-$16M this year, depending on the source.

Without the 3% at 50 retirement rule passed by the legislature in the late 90s (and enacted by cities like Vallejo), perhaps 2/3 of this contribution could be saved. While that's a giant bite (and perhaps it reflects most of the deficit), certainly the pension isn't the only thing dragging the city under.

[jamegumb]

http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2008/05/06/BACH10HUK6.DTL&tsp=1

Vallejo votes to declare Chapter 9 bankruptcy

Carolyn Jones, Chronicle Staff Writer

Wednesday, May 7, 2008


(05-07) 00:12 PDT Vallejo -- The Vallejo City Council voted to declare bankruptcy Tuesday night after months of last-ditch wrangling failed to rescue the city from financial catastrophe.

The North Bay city of 117,000 now heads into largely uncharted territory, as no California city of this size has ever opted for this route.

"This has been a long frustrating process for everyone," said City Manager Joseph Tanner. "There are no winners here tonight."

After about four hours of discussion and public comment from the standing-room-only crowd, the council voted 7-0 to approve Tanner's recommendation to declare Chapter 9 bankruptcy protection as a means to reorganize its finances, which have been shattered by spiraling public employee salaries and the plummeting housing market.

The move allows the city to freeze its debts while maintaining city services. Police, fire and other unions and many in the audience were outraged at the move, accusing the council of poor leadership.

The city suffers from mismanagement and has less debt than it claims, said a union spokesman, Ken Shoemaker, a representative of the electrical union.

Vallejo faces a $16 million shortfall and no money in its reserve account for the fiscal year beginning July 1. In March, the city shaved several million dollars from its payroll, museums, public works, senior centers, libraries and other services to avoid bankruptcy, but needed to make further cuts to meet increased expenses in the next fiscal year.

The city and its police and fire unions held a final contract negotiating session Sunday but failed to reach an agreement before Tuesday's City Council meeting.

The city and its public safety unions have been at the bargaining table for about two years. The city is asking for its police and firefighters to take salary, benefit and staff cuts, while the unions say any further cuts would endanger public safety as well as the safety of the police and firefighters.

Vallejo spends 74 percent of its $80 million general fund budget on public safety salaries, significantly higher than the state average. The generous contracts are the result of deals struck in the 1970s, following a police strike that left the city in turmoil.

The City Council had been split on whether to declare bankruptcy. Some, including Mayor Osby Davis, said the stigma would threaten the city's long-term economic development and discourage investors, while others said it would give the city time to restructure its budget and offer protection from creditors.

What's unknown is whether bankruptcy will dissolve the city's labor contracts, which most City Hall staffers say is the primary reason for the city's financial mess. A judge will have to decide whether to dissolve the contracts.

Vallejo became the second California city to declare bankruptcy, but the first to do so because of long-term economic woes. Desert Hot Springs (Riverside County) declared bankruptcy in 2001 after losing a lawsuit brought by a developer. Orange County declared bankruptcy in 1994 after losing $1.6 billion in bad investments.

Cities and counties throughout the state are in a predicament similar to Vallejo's, and many are watching to see what happens in the North Bay city over the next few months.

If the regional and national economies suffer another down year, numerous Bay Area cities - especially those highly dependent on the housing market for property- and transfer-tax revenues - are likely to be investigating bankruptcy options.

E-mail Carolyn Jones at carolynjones@sfchronicle.com.

This article appeared on page B - 1 of the San Francisco Chronicle

[Piccaboo]

http://www.bloomberg.com/apps/news?pid=20601103&sid=atl3yFmV508A&refer=us


Vallejo, California, Plans to File for Bankruptcy

May 7 (Bloomberg) -- Vallejo, California, officials voted to file for bankruptcy because the San Francisco suburb isn't able pay its bills after costs for police and firefighters soared and the housing market's slide cut into tax revenue.

The city council's unanimous decision last night will make Vallejo the largest California city to file for bankruptcy and the first in the state to seek protection from creditors because it ran out of money to pay for basic services. The decision came after it failed to win salary concessions from labor unions.

The city of 117,000 is facing ballooning labor costs and declining housing-related tax revenue that have left it with a $16 million deficit forecast for the year starting in July. In bankruptcy, creditors will be kept at bay while officials devise a plan to balance the books. City services would still operate.

``Nobody wants bankruptcy, but there doesn't appear to be a whole lot of options left,'' said city councilwoman Joanne Schivley. ``We are going to be out of money by June 30. It's all a numbers game now.''

Cities and towns rarely go bankrupt. Since 1937 there have been 543 municipal bankruptcies, two-thirds of which were small tax districts established to sell municipal bonds for projects, according to James Spiotto, a municipal bankruptcy specialist at Chapman and Cutler LLP in Chicago.

The last California city to file was Desert Hot Springs, a town of 20,000 north of Palm Springs that was hit with a legal judgment it couldn't afford. Orange County filed in 1994 amid bad bets on derivatives.

Cost Squeeze

Vallejo's plight stems from rising pay for police and firefighters under current labor contracts, including minimum staffing requirements, which have caused overtime compensation to increase. The problems were compounded by plunging home values, declining retail sales, and a slowdown in new housing development that cut $5 million from the city's revenue projections between June and February. The closure of the local Wal-Mart store also pinched the city's sales tax receipts.

Police and firefighting salaries, pension and overtime consume almost 80 percent of Vallejo's $89 million general fund budget. Cities in California on average spend about 60 percent of their budgets on firefighter and police salaries, according to the League of California Cities.

City and labor union officials have been meeting since January to revise the existing contracts. The unions have balked at pay cuts. By filing for bankruptcy, Vallejo is asking a judge to step in and force salary concessions from the labor unions.

Judge's Decision

Once Vallejo files its petition, a federal bankruptcy judge must decide whether the city is actually insolvent. If so, the case can proceed. If the judge rules Vallejo isn't legally broke, the case would be dismissed, said the city's bankruptcy attorney Marc Levinson of Orrick, Herrington & Sutcliffe.

The fiscal strains afflicting Vallejo are reverberating across the U.S., as a housing slump and slowing economy curb revenue for states and local governments. Even so, no other California city, including those bordering Vallejo, has been pushed into insolvency because their revenue wasn't enough to pay day-to-day expenses.

Vallejo may be a unique case, given that no municipalities in areas such as Riverside County that have been hardest hit by the housing market rout are known to be considering bankruptcy, said Standard & Poor's analyst David Hitchcock.

Anger

Some residents are angry at city officials.

``It's a sad day when the officials we elected to lead this city just throw up their hands,'' resident Kenneth Shoemaker told the board prior to the vote.

U.S. state sales-tax collections fell in the first quarter for the first time in six years, according to a study by the Nelson A. Rockefeller Institute of Government in Albany, New York.

California Governor Arnold Schwarzenegger's office predicted the state's budget deficit may reach $20 billion, more than twice the size of previous estimates and enough to account for nearly one-fifth of the budget. States overall expect to have at least $26 billion less than they need to pay bills in the next budget year, according to an April report by the National Conference of State Legislatures.

S&P today lowered the ratings on Vallejo's certificates of participation, a type of bond backed by its share of the state's vehicle license fees, to B from A, given the uncertainty of how the revenue source would be dealt with under bankruptcy, the rating company said in a statement. It also lowered the rating on Vallejo Public Financing Authority's bonds to B from A-.

`Difficult Day'

Orange County in Southern California filed the biggest municipal bankruptcy in U.S. history in December 1994 after former Treasurer Robert Citron's wrong-way bet on interest-rate derivatives lost $1.6 billion. The county of 3 million people is the third-most populous in California after Los Angeles and San Diego Counties.

``It's a sad and difficult day in Vallejo,'' said Orange County Treasurer Chriss Street. ``Now, it's time to stop the blame game and time to start the management game. People need to start understanding that there's a pot of money and it can only go so far. The city is going to need learn to live with different expectations.''

Vallejo, on the San Francisco Bay, was home to the West Coast's first shipyard, and residents say its economy never recovered after it was shuttered in 1996 as the U.S. military closed facilities after the end of the Cold War.

Hard Hit

The area has since been one of the hardest hit in Northern California by the housing market slump. Home prices in Solano County, where the town resides, dropped 19 percent in January from the year before, according to DataQuick Information Systems, a firm which tracks real-estate markets in the state.

There are currently 1,214 ``real estate owned'' homes in Vallejo, meaning that the homeowners have been foreclosed and their lenders now own the houses, according to Irvine, California-based RealtyTrac, which sells data on foreclosures. Another 1,014 properties are in the foreclosure process, and 464 houses are scheduled to be auctioned.





Guess the Goobermint can bail out B&S, but the hell with California :eek:

[riptide_slick]

Cities should not be allowed to file for bankruptcy. I realize that there are few alternatives, but I can't stand the idea, personally.

It's not like I have any kind of magical solution to Vallejo's problems, but one must wonder what went on in the heads of the city managers when they were forecasting their budgets for the last, say 4 years or so. It's not like CA has had a plethora of state-level funding lately. Combined with the fact that the potential downside effects of Prop 13 have existed since 1978, this situation shouldn't have been such a surprise to them.

But bring on the union bashing - this just HAS to be their fault. Evil unions wanting their people to get paid fair wages, and contractors wanting to be paid for their services. What a bunch of asshats. :rolleyes:

[jamegumb]

Cities should not be allowed to file for bankruptcy. I realize that there are few alternatives, but I can't stand the idea, personally.

It's not like I have any kind of magical solution to Vallejo's problems, but one must wonder what went on in the heads of the city managers when they were forecasting their budgets for the last, say 4 years or so. It's not like CA has had a plethora of state-level funding lately. Combined with the fact that the potential downside effects of Prop 13 have existed since 1978, this situation shouldn't have been such a surprise to them.

But bring on the union bashing - this just HAS to be their fault. Evil unions wanting their people to get paid fair wages, and contractors wanting to be paid for their services. What a bunch of asshats. :rolleyes:

We (well, largely I) have been discussing this in the pensions thread below. I don't think we should reflexively defend or defame the unions here, but you should certainly know the facts of what it costs to hire/retain employees in the city before you make a stance.

The city's problems are systemic -- it was going to get hosed whenever the housing bubble burst.

[riptide_slick]

We (well, largely I) have been discussing this in the pensions thread below. I don't think we should reflexively defend or defame the unions here, but you should certainly know the facts of what it costs to hire/retain employees in the city before you make a stance.

The city's problems are systemic -- it was going to get hosed whenever the housing bubble burst.I don't need to know the particulars to know that it can't be soley the fault of unions. It's a combination of a lot of things, and unfortunately I don't have a better idea for them (or CA). But I still don't like the idea of allowing cities to do this.

AFAIK, CA in general is more affected than other states by an average economy because we depend so much on a robust economy for tax revenue. We're just screwy like that. But I also think that city managers ought to plan better for bad times. Sort of like Arnie's proposal to create a "savings" account of sorts when times are better.

[jamegumb]

I don't need to know the particulars to know that it can't be soley the fault of unions. It's a combination of a lot of things, and unfortunately I don't have a better idea for them (or CA). But I still don't like the idea of allowing cities to do this.

AFAIK, CA in general is more affected than other states by an average economy because we depend so much on a robust economy for tax revenue. We're just screwy like that. But I also think that city managers ought to plan better for bad times. Sort of like Arnie's proposal to create a "savings" account of sorts when times are better.

Regarding the bottom point, during the robust times generally the cities negotiate with the unions to deliver the higher wages that are denied during the lean times. There is rarely money left over.

I've heard a lot of sources of blame thrown around for the city's woes, among them:

1) City anti-business policies turning away potential sources of tax revenues
2) Increased wages due to binding arbitration (which was enforced after the city had a police strike in the 70's)
3) Benefits / wages tied to surrounding Bay Area cities which are more prosperous

None of these are solely union issues. But when you look at the city going bankrupt, it's inescapable to note that it costs Vallejo roughly $170,000 (without overtime) to employee an average firefighter or police officer, and that about 75% of its general funding goes to public safety.

[riptide_slick]

Regarding the bottom point, during the robust times generally the cities negotiate with the unions to deliver the higher wages that are denied during the lean times. There is rarely money left over.

I've heard a lot of sources of blame thrown around for the city's woes, among them:

1) City anti-business policies turning away potential sources of tax revenues
2) Increased wages due to binding arbitration (which was enforced after the city had a police strike in the 70's)
3) Benefits / wages tied to surrounding Bay Area cities which are more prosperous

None of these are solely union issues. But when you look at the city going bankrupt, it's inescapable to note that it costs Vallejo roughly $170,000 (without overtime) to employee an average firefighter or police officer, and that about 75% of its general funding goes to public safety.Good points. But they could have halted the building of new parks, or raised the rent on Six Flags, or negotiated better contracts, no?

$170K for an average FF/PO is outrageous. According to Salary.com, the average pay for a FF in SF is between $36,092 and $60,153 (http://swz.salary.com/salarywizard/layoutscripts/swzl_salaryresults.asp?hdSearchByOption=0&hdSearchByOption=0&hdKeyword=Fire%20Fighter&hdJobCategory=LG01&hdZipCode=94104&hdStateMetro=&hdGeoLocation=San%20Francisco,%20CA%2094104&hdJobCode=LG12000019&hdJobTitle=Fire%20Fighter&hdCurrentTab=&hdNarrowDesc=Fire,%20Law%20Enforcement,%20and%20Se curity) and the average pay for a FF in Vallejo is between $32,480 and $54,734 (http://swz.salary.com/salarywizard/layoutscripts/swzl_salaryresults.asp?hdSearchByOption=0&hdSearchByOption=0&hdKeyword=Fire%20Fighter&hdJobCategory=LG01&hdZipCode=94590&hdStateMetro=&hdGeoLocation=Vallejo,%20CA%2094590&hdJobCode=LG12000019&hdJobTitle=Fire%20Fighter&hdCurrentTab=&hdNarrowDesc=Fire,%20Law%20Enforcement,%20and%20Se curity).

What the heck are they paying for?

[jamegumb]

Good points. But they could have halted the building of new parks, or raised the rent on Six Flags, or negotiated better contracts, no?

$170K for an average FF/PO is outrageous. According to Salary.com, the average pay for a FF in SF is between $36,092 and $60,153 (http://swz.salary.com/salarywizard/layoutscripts/swzl_salaryresults.asp?hdSearchByOption=0&hdSearchByOption=0&hdKeyword=Fire%20Fighter&hdJobCategory=LG01&hdZipCode=94104&hdStateMetro=&hdGeoLocation=San%20Francisco,%20CA%2094104&hdJobCode=LG12000019&hdJobTitle=Fire%20Fighter&hdCurrentTab=&hdNarrowDesc=Fire,%20Law%20Enforcement,%20and%20Se curity) and the average pay for a FF in Vallejo is between $32,480 and $54,734 (http://swz.salary.com/salarywizard/layoutscripts/swzl_salaryresults.asp?hdSearchByOption=0&hdSearchByOption=0&hdKeyword=Fire%20Fighter&hdJobCategory=LG01&hdZipCode=94590&hdStateMetro=&hdGeoLocation=Vallejo,%20CA%2094590&hdJobCode=LG12000019&hdJobTitle=Fire%20Fighter&hdCurrentTab=&hdNarrowDesc=Fire,%20Law%20Enforcement,%20and%20Se curity).

What the heck are they paying for?

I quoted that in the other thread (this was taken from the city of Vallejo's recommendation for bankruptcy):

Firefighter (current compensation):
Salary (a) $114,170
PERS (pension contribution by city) $32,046
Health/Dental $13,568
Worker's Comp $9,134
SS/Medicare $1,655
Other $677

Total $171,250

Firefighter (full 2008-2009 contract rate after raises of 8.2% - which reflects restoring compensation previously deferred so that earlier budgets could be balanced - and 5.5% - current COLA)

Salary (a) $130,112
PERS (pension contribution by city) $36,521
Health/Dental $13,568
Worker's Comp $10,409
SS/Medicare $1,887
Other $677

Total $193,174

Police Officer (current compensation):
Salary (a) $106,590
PERS (pension contribution by city) $29,880
Health/Dental $13,568
Worker's Comp $17,374
SS/Medicare $1,372
Other $532

Total $169,316

Police Officer (2008-9 Full Contract Rate):
Salary (a) $121,518
PERS (pension contribution by city) $34,070
Health/Dental $13,568
Worker's Comp $19,807
SS/Medicare $1,565
Other $532

Total $191,060

(a) "Salary includes base salary and other compensation depending upon bargaining group, such as education incentives, holiday buy-back, uniform allowance, longevity, preceptor, EMT, paramedic, hazmat, bilingual, and other special pays.

Unfortunately, they've been cutting things to the bone to try to pay for these salaries (there's about 80% of the public safety on staff that there was a few years ago). Eventually, it became too much. (And the idea of taxing Six Flags seems a bit too late. Rather, I think they wish they'd been more receptive to Wal-Mart moving in and development at Mare Island.)

Note that firefighters are on for about 56 hours/week in this deal typically (that reflects two 24-hour days each six days for the entire year -- all of that work time is spent on the job, whether fighting fires, training, eating, or sleeping in the firehouse). I think the police officer pay is for standard 40 hour weeks, but could easily be wrong.

[808Lurker]

Good points. But they could have halted the building of new parks, or raised the rent on Six Flags, or negotiated better contracts, no?

$170K for an average FF/PO is outrageous. According to Salary.com, the average pay for a FF in SF is between $36,092 and $60,153 (http://swz.salary.com/salarywizard/layoutscripts/swzl_salaryresults.asp?hdSearchByOption=0&hdSearchByOption=0&hdKeyword=Fire%20Fighter&hdJobCategory=LG01&hdZipCode=94104&hdStateMetro=&hdGeoLocation=San%20Francisco,%20CA%2094104&hdJobCode=LG12000019&hdJobTitle=Fire%20Fighter&hdCurrentTab=&hdNarrowDesc=Fire,%20Law%20Enforcement,%20and%20Se curity) and the average pay for a FF in Vallejo is between $32,480 and $54,734 (http://swz.salary.com/salarywizard/layoutscripts/swzl_salaryresults.asp?hdSearchByOption=0&hdSearchByOption=0&hdKeyword=Fire%20Fighter&hdJobCategory=LG01&hdZipCode=94590&hdStateMetro=&hdGeoLocation=Vallejo,%20CA%2094590&hdJobCode=LG12000019&hdJobTitle=Fire%20Fighter&hdCurrentTab=&hdNarrowDesc=Fire,%20Law%20Enforcement,%20and%20Se curity).

What the heck are they paying for?

Something seems fishy, how can the average pay be between 32-55k a year, and the city claims it is $114,170..

I just want to know one thing... did the city council/mayor take a pay cut, or are they just asking the FF/PO to? Where I live the civil servants received a 4% raise, while the counsil received a nice 22% one, not including all the perks they receive (travel, paid staff, etc etc).

[jamegumb]

Something seems fishy, how can the average pay be between 32-55k a year, and the city claims it is $114,170..

I just want to know one thing... did the city council/mayor take a pay cut, or are they just asking the FF/PO to? Where I live the civil servants received a 4% raise, while the counsil received a nice 22% one, not including all the perks they receive (travel, paid staff, etc etc).

Salary.com seems full of it. The base -- absolute lowest -- pay for a full time firefighter in Vallejo is over 80K; with some training (Paramedic, bilingual, etc.), this base is easily bumped over 100K.

Other unions in the city don't appear to have it as good. Top compensation for an IBEW maintenance worker (including benefits) is under $94K, with nearly $61K of that being salary.

The city manager is earning $300K this year (because it's a hazardous job -- the last couple haven't lasted very long, and this apparently was the going rate for anyone who would voluntarily take the job), but for the most part it appears that the costs of compensating public safety are really what's sinking Vallejo.

And you can check out recent pay raises for city employees here: http://www.ci.vallejo.ca.us/uploads/253/A050608%20agenda%20with%20packet.pdf

(page 149)

[jamegumb]

Vallejo unions fight back:

Vallejo city workers offer to cut pay

Charles Burress, Chronicle Staff Writer

Tuesday, May 13, 2008

Hoping to prevent a city bankruptcy that would suspend their union contracts, Vallejo's police, firefighters and rank-and-file employees went public Monday with an offer to cut their salaries and give up raises.

Capping months of fiscal agonizing, the City Council voted last week to file for Chapter 9 bankruptcy following dire predictions by city staff of imminent insolvency. The petition for bankruptcy is expected to be filed sometime this week, said city spokeswoman Joann West.

Only one other city in California - Desert Hot Springs (Riverside County) in 2001 - has gone into bankruptcy. Orange County took the same step after $1.6 billion in investment losses in 1994. Both emerged from bankruptcy after resolving the debts and adopting financial reforms.

In a joint statement, three Vallejo employee unions said police officers and firefighters would sacrifice 6.5 percent of their salaries for a year and give up raises totaling 11 percent for the next two years. General workforce employees, represented by the International Brotherhood of Electrical Workers, would give up 3 percent of their salaries for a year and forego anticipated raises of 10 percent over the next two years, according to the unions.

The labor groups said their proposal would save the city $10.6 million in the next fiscal year, beginning July 1. Chris Norem, spokesman for the three unions, said the proposal does not call for the unions to later recoup the $10.6 million.

City staff estimates that without bankruptcy or draconian reductions, the general fund deficit in the 2008-09 fiscal year would be $16 million.

The unions say bankruptcy, which would let the city renegotiate its debts and labor contracts, is not needed.

Asked how saving $10.6 million would avert the need for bankruptcy in the face of a projected $16 million deficit, police Detective Mat Mustard, vice president of the Vallejo Police Officers Association, said, "If we solve two-thirds of their problem, I would hope they could come up with the other third. There's a lot of things they can do to save money."

West said she cannot comment on the unions' proposal because the city is abiding by a confidentiality agreement not to discuss negotiations over the labor contracts. The City Council is scheduled to discuss the union contracts and the city's pending bankruptcy in closed session at its meeting tonight. She said the council is seeking a multiyear solution that keeps the city solvent through 2012.

City and union negotiators have been meeting with a mediator since March to discuss contract revisions but have not resolved their differences. Their most recent meeting was Friday.

Employee salaries and benefits account for 76 percent of the fiscal year 2007-08 budget for the general fund, with the lion's share going to police and fire, according to city staff. That percentage is significantly higher than the average for 13 Bay Area cities surveyed by city staff, according to a staff report to the council.

The unions say the comparison is misleading because Vallejo has "shifted services and other program costs out of the general fund into special funds or specific service districts, driving up the public safety percentage of the general fund," according to the unions' statement Monday.

The city's current general fund budget lists salaries and benefits for police and fire as $50.3 million, or 58 percent of the $87.4 million in total general fund expenses. It lists an additional $2.6 million in retiree health benefits for all employees without identifying the percentage for police and fire.

The city and the two public-safety unions in March agreed to a temporary cut in salary increases, but that agreement expires June 30. The city also closed two of eight fire stations until June 30, reduced the number of police officers and cut other services.

City staff says the contract allows a 21.4-percent salary increase for police and fire over the three years ending June 30, 2009. Mustard said the city's estimate is inflated.

E-mail Charles Burress at cburress@sfchronicle.com.

This article appeared on page B - 1 of the San Francisco Chronicle

http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2008/05/13/BA2710L7BD.DTL&hw=vallejo&sn=002&sc=511

[rrc06]

Figefighters and cops make as much as doctors and dentists :lol:

Fat pensions spell doom for many cities (http://money.cnn.com/2008/06/02/pf/retirement/vallejo.moneymag/index.htm?postversion=2008060305)

Vallejo, Calif., took the extreme step of filing for bankruptcy to get out of generous obligations to public employees. Other cities and states are watching.

June 3, 2008: 5:49 AM EDT

NEW YORK (Money Magazine) -- The jig is up. For years, politicians have been playing what amounts to a multi-trillion-dollar shell game with state and local pensions. They've doled out lush retiree benefits to their heavily unionized workforces, knowing that they could shove the cost for those benefits onto future generations of taxpayers.

But a recent financial bombshell dropped by a San Francisco suburb shows why that shell game is now starting to unravel in a nasty way. And it's a cautionary tale that you can't afford to ignore.

Here's the skinny: In late May, Vallejo, Calif., became the largest city in California history to declare bankruptcy. Its financial demise was brought about partly by the real estate crash, which decimated home prices in the area and put a major dent in the city's tax revenues.
But the real nail in Vallejo's coffin was the city's labor costs. Under the current labor agreement, the average police officer walking the beat in Vallejo will be paid $122,000 this year before overtime, according to city documents. An average sergeant will make $151,000; a captain, $231,000. The average firefighter, meanwhile, will bring in $130,000 before overtime.

That's just the salaries, though. The final budget-crusher was the city's pension plan. Thanks to retroactive benefit enhancements approved by the city council in 2000, police officers and firefighters can now retire at age 50 and receive an annual pension equal to 90% of their final pay (assuming 30 years on the job), an amount that gets increased every year to help keep pace with inflation. The old plan had given the workers a pension equal to 60% of their final pay at age 50.
So a Vallejo police sergeant making $150,000 a year can now retire at age 50 and receive an annual pension of $135,000, increased each year for inflation. To put that amount in context, you would need to amass a retirement nest egg equal to about $3.5 million to produce a similar retirement income on your own.
It wasn't just police and firefighters who benefited from the city's largess. The annual pensions for rank-and-file city employees were jacked up from 60% of final pay at age 55 (after a 30-year career) to a whopping 80% of pay, increased each year for inflation.
Other towns in trouble
Here's the scary part: What's going on Vallejo isn't unique.

Back at the turn of this century, when the stock market was still booming, public pension plans across the country were suddenly overflowing with surplus money. Politicians responded by handing out heavily sweetened pensions.

Then, even though the stock market collapsed, politicians couldn't stop the trend. In 2001 alone, pension benefits were increased in at least 17 state plans, as well as some major cities.

For a while, inflated housing prices came to the rescue, handing many municipalities a windfall in increased property tax revenues.

Now that bubble has collapsed and the stock market is floundering. State pension plans alone are about $360 billion short of the assets they should ideally hold for future retirees, according to a recent report by the Pew Center on the States. And that's not including city plans.

Cities and states that enriched their benefits in the past few years are especially at risk. That's because no matter how badly a pension plan's investments perform, the enhanced pension benefits promised to state and local employees back in the boom times can't be taken away, or even modified - they are locked in by constitutional and legal guarantees.

There is, however, one potential option for cutting back on public pension benefits: bankruptcy. And that's what it has now come to in Vallejo. Elected officials in other struggling areas will surely be watching.

Of course, nobody wins in a bankruptcy. Vallejo must now slash services and lay off workers to make ends meet - a sad outcome for both the city workers and residents. Bankruptcy will also wreak havoc on the city's credit rating, making it much more expensive to borrow money for building roads and schools and maintaining the city's infrastructure.

So what's the lesson here? I'm certainly not suggesting that state and local workers be deprived of the pensions they were promised when they started their careers. That was part of the deal they signed up for and it should be honored. The police and firefighters of Vallejo, for example, were told they'd get a pension equal to 60% of their pay at age 50, and so they should.

But the practice of retroactively boosting public sector pensions without any serious debate or approval by taxpayers has got to stop. As the Vallejo debacle illustrates, the stakes are simply too high.

Historically, the justification for these types of pension enhancements has been that public sector workers are forgoing the salaries they would have otherwise received in the private sector, in exchange for better retirement benefits.

But that no longer seems to hold true. According to the federal Bureau of Labor Statistics, the hourly salary (before benefits) of public-sector professionals (including teachers and lawyers) was $31.51 in December 2007, virtually identical to the $31.75 for private-sector professionals. Public-sector service employees (including many blue-collar jobs) averaged $16.72 an hour in salary, compared to $9.87 for private-sector employees.
This is an election year. As such, many states and municipalities are under heavy pressure to sweeten the pension plans for their workers - Massachusetts, South Carolina and Pennsylvania are but three high-profile examples. And ironically, just a few hours south of Vallejo, the city of Rialto, Calif., recently approved a similar retroactive pension increase that will give police officers a pension equal to 90% of their salaries at age 50.

The bottom line: If similar changes are being considered in your city or state, the Vallejo disaster tells you that it's well worth your while to get the facts.

Maybe you'll discover that your local pension fund is flush with money and that elected officials in your area have out laid out a sound, fiscally responsible plan for funding any pension improvements. But I wouldn't bank on it.

[jamegumb]

I looked through some California State University documents, and found some of the 2008-9 state pension contribution rates:

State Peace Officer/Firefighter
Unit 8
(Payroll Codes 51 and 52)
34.064%*

State Peace Officer/Firefighter
MPP Directors and
Lieutenants of Public
Safety and other Unit 9
Firefighter Classifications
(Payroll Codes 53 and 54)
26.064%

State Miscellaneous – Tier 1
All Other CSU Employees
(Payroll Codes 00, 08, and
20)
16.574%

*Includes 8% employee contribution rate paid by CSU.

(The top percentage means that for employees in this category, for every $1 paid in salary, CSU chips in over $.34 in pension contributions to the system.)

Again it looks like pension contributions will cost the state about $3B this year, with most of the cost due to the state legislature's inane decision to increase benefits in the late 90s since stock market gains were good at the time and the state and CalPERS convinced themselves that general fund contributions due to the pension increases would be negligible.

And these contributions will be matched by localities already fighting budget problems statewide.

A tax increase in the state to close its deficit is imminent. Glad everything is being run with such fiscal discipline.

[jamegumb]

Two updates:

1) Judge OKs bankruptcy filing for Vallejo, Calif. (http://www.sfgate.com/cgi-bin/article.cgi?f=/n/a/2008/09/05/financial/f171155D64.DTL) (San Francisco Chronicle Article)

2) Open letter from Vallejo city councilwoman (taken from http://ibvallejo.com/index.php?option=com_content&task=view&id=230&Itemid=1):

9/15/08

By Stephanie Gomes--Vallejo City Councilmember

I grew up playing sports – swimming, soccer and basketball. I was a fierce competitor who played with passion and gave it everything I had. Fortunately, that fierce competitiveness was tempered by the wisdom of my coaches, which I still call upon today. They taught me to play hard and play to win – but win with dignity and lose with grace. And always offer your hand to your opponent, whichever side you end up on at the end of the match.

I am in no way saying that our City's slide into bankruptcy was a game. But it was a challenge, unfortunately, that forced people to take sides and fight. I was fighting for the future of our city. The Public Safety Unions were fighting for the welfare of their members. It has been a time fraught with emotion and anger and betrayal. Of course it was – we're talking about issues that mean something to all of us.

A lot has happened. A lot was said. A lot was misrepresented. A lot was done. But it's time to put that aside, unclench our fists, and offer our hands to each other. Because in the end, we can't get out of this alone.

I'll start. I never intended nor wanted to break any union. I wanted to negotiate new collective bargaining agreements, though, because I knew we simply couldn't afford what we have in place. Was it fair that previous Councils agreed to these contracts and we're now saying we can't afford them? No. But unfortunately, that's one of our new realities. Those contracts should never have been agreed to in the first place because it was obvious that eventually the City would be unable to afford them.

I know that the work our employees do for me as a citizen, and for our City as a Council member, is not always easy. Some of the work is dangerous. And stressful. And many employees have had to do more with less for way too long now.

I also know that our citizens have been shouldering the burden of living with fewer services and a degrading infrastructure while continuing to pay the same or more in taxes and fees. Is this fair to our taxpayers? No. But unfortunately, that's one of the realities we've been living with for quite a few years now.

My goal for the next phase of the bankruptcy process is to negotiate new collective bargaining agreements that are not overly convoluted and complicated, that are sustainable in the long-term and still provide for growth as the city grows. I want every one of our employees to be well compensated for the work they do. I want a simple, fair agreement that provides market-rate salaries and benefits that lie somewhere in the middle – not 10 percent above, and not 10 percent below. I want contracts that are ultimately fair to both the employees and to the taxpayers of Vallejo.

We can do that. We have to do that. And it shouldn't be so hard to achieve if we approach each other with outstretched hands. I know it will take time to heal as a community and as a City. But there's only one way to go from here, and we should take that path together. The choice is ours.

Choose
The single clenched fist lifted and ready,
Or the open hand held out and waiting.
Choose:
For we meet by one or the other.
~Carl Sandburg

[jamegumb]

Stock market declines are (obviously) making the problem worse. CalPERS is now funded at 68% and may be soon to ask the state and counties for more contributions:

* OCTOBER 23, 2008

Calpers Looks to Shore Up Assets
Huge Pension Fund to Demand Greater Employer Contributions Unless Returns Improve
By CRAIG KARMIN, JUSTIN SCHECK, RHONDA L. RUNDLE and JENNIFER LEVITZ

The nation's largest public pension fund said it intends to tap California public employers for more money if its heavy investment losses don't reverse, a sign that more financial pain could be in store for state and local governments.

The California Public Employees' Retirement System, known as Calpers, said its assets have declined by more than 20%, or at least $48 billion, from the end of June through Oct. 10.

Unless returns improve, Calpers is poised to impose an estimated increase in employer contributions of 2% to 4% of payroll starting in July 2010 for about two-thirds of its state-employer members, and in July 2011 for the remaining third. Any decision will be made after Calpers knows its returns for the fiscal year.

The average employer contribution rate for public agencies including cities and counties is 13% of payroll in the current fiscal year, Calpers said.

A Calpers rate increase would add to a fiscal mess in California, where falling sales-tax and income-tax revenue and a tanking real-estate market have affected government agencies across the state. With budget cuts for state and local governments projected in coming years, an increase from Calpers would be one more burden.

The news "bodes very badly for us," said Lori Ordway-Peck, assistant superintendent of business services for Burbank Unified School District, which serves about 15,000 students near Los Angeles. "Something would have to give to find that money.

Joe DeAnda, a spokesman for California Treasurer Bill Lockyer, said "the most obvious impact is going to be on taxpayers, who will have to fund any additional increases" to Calpers contributions, though he added that the treasurer is maintaining hope that a market recovery will minimize, if not eliminate, any additional burden. H.D. Palmer, a spokesman for the California Department of Finance, declined to comment, as Calpers hasn't yet decided whether to enact the increase.

With most economists forecasting a recession in the U.S., and at least a slowdown abroad, analysts see a tough road ahead for corporate earnings, and expectations for the stock market are low.

For the fiscal year ended in June, Calpers lost 2.4%; Merrill Lynch recently estimated the average public pension fund's return as negative 5.1% for that period. Regardless of whether Calpers beats its peers, losses make it more difficult for the fund to fulfill its job of delivering pension payments to 1.6 million beneficiaries -- retirees and others.

Between Oct. 31, 2007, when Calpers assets peaked at $260.4 billion, and Oct. 20 of this year, when assets stood at $192.7 billion, the fund lost about $67.7 billion. The giant fund has tried to steer through the recent market turmoil while searching for new leadership, as its chief executive officer and chief investment officer both stepped down midyear.

While Calpers may end up among the first public pension funds to pass on the costs of investment losses to employer members, it may not be the last. Almost every public pension fund is grappling with losses in stock markets, where funds hold on average 58% of their assets, said Keith Brainard, research director at the National Association of State Retirement Administrators. "Sooner or later the money coming in has to equal the money going out," he said.

The increase in contributions to Calpers could be greater than 4% if the fund's assets decline further by the end of the fiscal year in June 2009. The increases would be smaller, or potentially not occur, if the fund reverses those losses.

A Calpers spokeswoman said that because of strong returns over the four years through June 2007, the fund has put aside 14% of its assets to serve as a cushion during bad times. As a result, the potential increases in employer contributions would be less than increases imposed during previous downturns.

The declines could take a toll on Calpers's funding status, which is the fund's assets divided by its liabilities. That status would be 68% by the end of June 2009, based on the market value of its assets and if the current 20% decline holds.

The ratio for healthy pension funds should be at least 80%, according to Mr. Brainard. At the end of the 2008 fiscal year, Calpers was 92% funded. It was 102% funded at the end of June 2007.

While Calpers has the ability to increase employer contributions, most public funds can't impose any contribution increase unless it is approved by the state legislature. And given economic woes, other state legislatures may be loath to impose more burdens.

Mr. Brainard said that while pension funds could allow their unfunded liabilities to grow in the short term, they will eventually have to dig themselves out of a hole to meet their obligations to beneficiaries.

Roger Mialocq, a partner with Harvey M. Rose Associates who serves as audit manager for Santa Clara County, says the county is struggling financially, and balanced its budget this year "only by using very large amounts of reserves." Santa Clara County includes much of Silicon Valley.

Mr. Mialocq said finance officials at Santa Clara and other counties have been bristling at Calpers rates since 2005, when the fund increased its contribution requirements to make up for losses from the dot-com bust. For Santa Clara, Mr. Mialocq said, the rate the county was paying for most employees jumped to about 13 cents for each dollar of salary from about eight cents.

Mr. Mialocq says that for the current fiscal year, the county is paying $176 million to Calpers for its 15,000 employees, and is projecting a $320 million shortfall for the next budget year. The kind of increase Calpers is projecting, which wouldn't start until 2011 for Santa Clara, could mean a bump of $20 million or more for the county, he estimates.

A Calpers spokeswoman said the formula for calculating the raise for an employer member relies on many factors, including the size of the payroll and the rate of retirement. "The true picture will only emerge as we get closer to the date," the spokeswoman said.

Meanwhile, on Wednesday, the U.S. House of Representatives' Education and Labor Committee, headed by Rep. George Miller, a California Democrat, said the U.S. Pension Benefit Guaranty Corp. lost $3.1 billion in stock investments in the 11 months through August. The PBGC is a government agency that insures private pension plans, takes over failed pension plans, and pays benefits to workers in those plans.

On Sept. 30, 2007, the value of PBGC's total investments was about $63 billion, according to the agency's Web site. Jeffrey Speicher, a spokesman for the PBGC, said the agency now has $68 billion in assets and has "sufficient funds to cover our obligations for years and years into the future."

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