Stockton, CA Declares Bankruptcy

Stockton bankruptcy can move forward, judge rules:

The $900 million Stockton owes to the California Public Employees Retirement System to cover pensions is its biggest debt -– as is the case with many cities in California.

Stockton slashed its police and fire departments, halted bond payments, cut employee benefits and adopted an emergency spending plan that cut many city services. But the city continues to pay into the state pension.

CalPERS – California’s retirement system for government employees – has a long history of problems itself. Some of it is due to ridiculously over-generous pensions, with some state retirees pulling down more than $100,000 every year in retirement. CalPERS let’s employees retire as early as 55, so those retirement payments can stretch out for decades. CalPERS’s own actuary says the pension costs are “unsustainable.”

State auditor: California’s net worth at negative $127.2 billion:

Were California’s state government a business, it would be a candidate for insolvency with a negative net worth of $127.2 billion, according to an annual financial report issued by State Auditor Elaine Howle and the Bureau of State Audits.

The report listed the state’s long-term obligations at $167.9 billion, nearly half of which ($79.9 billion) were in general obligation bonds, with another $30.8 billion in revenue bonds, many of which were issued to build state prisons, whose “revenue” is lease payments from the state general fund.

The list of long-term obligations did not include the much-disputed unfunded liabilities for state employees’ future pensions, nor the $60-plus billion in unfunded liabilities for retiree health care. The Governmental Accounting Standards Board and Moody’s, a major bond credit rating house, have been pushing states and localities to include unfunded retiree obligations in their balance sheets and were they to be added to California’s, it could push its negative net worth down by several hundred billion dollars.

So that $127 billion doesn’t even include the underfunded liability for CalPERS and other government employee retirement and healthcare. This report lists the underfunded liabilities for just three programs – CalPERS, CalSTRS, and the University of California Retirement Plan – at $137 billion. This is what happens when politicians operate on the “buy votes now, pay debts after you’ve left office” plan.

Good News, California!

Illinois’ credit rating downgraded; state drops to worst in the nation.

Stockton, CA Going Bankrupt

Reuters – Stockton, Calif. to take up bankruptcy budget plan:

Stockton, California was poised on Tuesday to take a major step toward becoming the largest U.S. city ever to file for bankruptcy after talks with its creditors on Monday at midnight.

Despite the cuts, Stockton has not been able to avoid recurring deficits. Its revenue is weak and its financial troubles have been compounded, according to city officials, by generous pay and benefits for city workers and retirees and too much debt taken on by the city when it enjoyed a home-building boom in the early part of the last decade that transformed it into a distant bedroom community for the San Francisco Bay area.

This is Your Train on Drugs: CA Train Versus Endangered Species, Asthmatic Children

LA TimesEnvironmental objections in path of bullet train:

The California bullet train is promoted as an important environmental investment for the future, but over the next decade the heavy construction project would potentially harm air quality, aquatic life and endangered species across the Central Valley.

Eleven endangered species, including the San Joaquin kit fox, would be affected, according to federal biologists. Massive emissions from diesel-powered heavy equipment could foul the already filthy air. Dozens of rivers, canals and wetlands fed from the rugged peaks of the Sierra Nevada would be crossed, creating other knotty issues.

Where the train’s path isn’t wrecking the environment it will wreck homes and businesses. Those properties will have to be bought after contentious, expensive lawsuits. The expense and destruction involved in putting in new rain lines is one of the reasons for the saying “buses good, trains bad.” Buses can use the same existing streets as cars without disrupting the environment, homeowners, or businesses. But buses aren’t glamorous and there isn’t a Big Bus industry to grease the palms of elected officials, which is how things get done.

And besides all that, the train would also be a massive, over-budget, 100 billion dollar boondoggle in a state that’s quickly going bankrupt.

PreviouslyThis is Your Train on Drugs: Garbage In, Garbage Out

Repo Man Visits Stockton, CA; Tows Away City Hall and Parking Garages

MishWells Fargo Seizes Stockton California City Hall, Parking Garages; City Prepares Bankruptcy Contingency Plans; Bondholder Mediation Underway:

The Stockton City Council announced Wednesday that they will look at bankruptcy contingency plans after Wells Fargo seized the new city hall building.

The city paid $35 million to buy the 8-story building, but was not able to move in because of its money problems, and recently stopped making debt payments all together. This is the fourth building that was repossessed by Wells Fargo; the bank seized three city parking garages for the same reason.

I thought it was nice of the banks not to repossess the orphanage and kick out the orphans. Or to shut down the schools and turn them into all night casinos with hookers and blackjack. But the city fathers better hurry up and either get caught up on their payments or declare bankruptcy. The banks are running out of buildings to repossess that taxpayers won’t miss.

PreviouslyStockton, California Shuffling Towards Bankruptcy

This is Your Train on Drugs: Garbage In, Garbage Out

Now we know how California’s high speed train got approval. They lied about everything in the study justifying its construction.

City JournalSolyndra Times Seven:

The bullet train’s “reasonableness of financial estimates” is questionable, beginning with the project’s revenue forecasts. The LAO noted a projection of 44 million riders a year when the L.A.-Bay Area line is complete. That’s down from the hallucinatory claim of 117 million passengers that proponents of Prop. 1A offered in 2008, but it’s still ridiculous. In reality, 44 million passengers would be 50 percent higher than the number of people Amtrak carries to and from more than 500 stations in 46 states and three Canadian provinces each year.

So the state of California is high, is what they’re trying to say.

How was the estimate derived? Elizabeth Alexis, a Palo Alto finance expert and co-founder of Californians Advocating Responsible Rail Design, delved into the methodology and discovered, among other things, that the rail authority assumed that the future cost of gasoline would top $40 a gallon.

Pretty gigantic assumption there. Let me guess: they didn’t likewise factor $40/gallon gasoline into their construction and maintenance costs, did they?

Alexis also noted that the public-opinion polls that bullet-train backers crafted to gauge potential passenger interest were heavily biased. For example, 96 percent of commuters surveyed were already train riders. But unlike commuters in other states, only a tiny percentage of Californians rides the train.

They basically need to tear up this study and start over.

Hat tip to Glenn Reynolds.

Stockton, California Shuffling Towards Bankruptcy

MishStockton California, Population 292,000, Takes Steps Toward Bankruptcy, City Manager Says:

Stockton, California, may take the first steps toward becoming the most populous U.S. city to file for bankruptcy next week because of burdensome employee costs, excessive debt and bookkeeping errors that misrepresented accounts, city officials said today.

They’ve cut city workers, including a 25% cut in the police force. Now they want bondholders to take a cut.

As these bankruptcies proceed, how will it affect rates for other municipal governments?

California Dreamin’ is Meetin’ with Reality

How Much Could California’s Government Pensions Cost Taxpayers?:

This week both of California’s largest government employee pension funds, CalPERS and CalSTRS, released their portfolio earnings numbers for the most recent twelve months. In a statement released on January 24th, “CalSTRS Calendar Year-End Investment Returns Show Slight Gains,” CalSTRS disclosed “Investment returns for the California State Teachers’ Retirement System (CalSTRS) ended the 2011 calendar year posting a 2.3 percent gain.” CalPER’s statement released on January 23rd, was titled “[CalPERS} Pension Fund earns 1.1 percent return for 2011 calendar year.”

These funds, and the rest of California’s many local government employee pension funds, are still clinging to long-term rate of return assumptions of between 7.5% and 7.75% per year. So how much would taxpayers be on the hook for if rates of return stay this low?

If the pension fund’s return is 7.75%, the state pays $23 billion to pension funds each year.
If the pension fund’s return is 6.75%, the state pays $29 billion to pension funds each year.
If the pension fund’s return is 5.75%, the state pays $39 billion to pension funds each year.
If the pension fund’s return is 4.75%, the state pays $51 billion to pension funds each year.
If the pension fund’s return is 3.75%, the state pays $66 billion to pension funds each year.

It is interesting to note that both CalPERS and CalSTRS failed to even achieve a 3.75% return in calendar year 2011, the lowest amount used in these examples and the lowest amount that can even keep pace with inflation.

Which may be part of the reason California is going to run out of cash in one month.

California Dreamin’ is Meetin’ with Reality

CalPERS Earned 1.1% on Investments in 2011, Plan Assumptions are 7.75%:

The nation’s largest public pension fund, the California Public Employees’ Retirement System, posted a 1.1% return on its investment portfolio in 2011, Chief Investment Officer Joseph Dear told his board.

The 2011 performance was well below the estimated average annual return of 7.75% that the fund’s actuaries say is needed to meet current and future obligations to its members.

The $229.5-billion CalPERS provides retirement and other benefits for 1.6 million state and local government employees and their families.

Here’s a compound interest calculator. Start with $10,000. After 10 years you’ll have $21,094 with 7.75% interest. With 1.1% interest you’ll have $11,156. Big difference.

California dreamin’ is meetin’ with reality

Michael Lewis in Vanity FairCalifornia and Bust:

At that point, if not before, [San Jose] would be nothing more than a vehicle to pay the retirement costs of its former workers. The only clear solution was if former city workers up and died, soon. But former city workers were, blessedly, living longer than ever.

This wasn’t a hypothetical scary situation, said Reed. “It’s a mathematical inevitability.” In spirit it reminded me of Bernard Madoff’s investment business. Anyone who looked at Madoff’s returns and understood them could see he was running a Ponzi scheme; only one person who had understood them both­ered to blow the whistle, and no one listened to him. (See No One Would Listen: A True Financial Thriller, by Harry Markopolos.)

I ask [the San Jose mayor] what the chances are that, in this pinch, he could raise taxes. He holds up a thumb and index finger: zero. He’s recently coined a phrase, he says: “service-level insolvency.” Service-level insolvency means that the expensive community center that has been built and named cannot be opened. It means closing libraries three days a week. It isn’t financial bankruptcy; it’s cultural bankruptcy.

“How on earth did this happen?” I ask him.

“The only way I can explain it,” he says, “is that they got the money because it was there.” But he has another way to explain it, and in a moment he offers it up. “I think we’ve suffered from a series of mass delusions,” he says.

I didn’t completely understand what he meant, and said so.

“We’re all going to be rich,” he says. “We’re all going to live forever. All the forces in the state are lined up to preserve the status quo. To preserve the delusion. And here—this place—is where the reality hits.”

The stories from bankrupt Vallejo, California ain’t pretty. It’s like a scene from a zombie movie minus the zombies.

Welcome to vallejo, city of opportunity, reads the sign on the way in, but the shops that remain open display signs that say, we accept food stamps. Weeds surround abandoned businesses, and all traffic lights are set to permanently blink, which is a formality, as there are no longer any cops to police the streets. Vallejo is the one city in the Bay Area where you can park anywhere and not worry about getting a ticket, because there are no meter maids either. The windows of city hall are dark, but its front porch is a hive of activity. A young man in a backward baseball cap, sunglasses, and a new pair of Nike sneakers stands on a low wall and calls out an address:

“Nine hundred Cambridge Drive,” he says. “In Benicia.” The people in the crowd below instantly begin bidding. From 2006 to 2010 the value of Vallejo real estate fell 66 percent. One in 16 homes in the city is in foreclosure. This is apparently the fire sale, but the characters involved are so shady and furtive that I can hardly believe it.

The lobby of city hall is completely empty. There’s a receptionist’s desk but no receptionist. Instead, there’s a sign: to foreclosure auctioneers and foreclosure bidders: please do not conduct business in the city hall lobby.

Like Glenn Reynolds says, government cheerleaders like to pretend that all of your tax money goes to teachers, police, and firefighters. The reality is that cities like San Jose and Vallejo are paying so much to retired government workers of all kinds that they’ve had to lay off teachers, police, and firefighters.

That’s what happens when government becomes a pension fund that serves the unions instead of a civil agency that serves the taxpayers. The retired government workers become the zombies that terrorize the city.

In Bizarro World Bankruptcy Am Good

Zero Hedge32 States Now Officially Bankrupt: $37.8 Billion Borrowed From Treasury To Fund Unemployment; CA, MI, NY Worst:

Courtesy of Economic Policy Journal we now know that the majority of American states are currently insolvent, and that the US Treasury has been conducting a shadow bailout of at least 32 US states. Over 60% of Americans receiving state unemployment benefits are getting these directly from the US government, as 32 states have now borrowed $37.8 billion from Uncle Sam to fund unemployment insurance. The states in most dire condition, are, not unexpectedly, the unholy trifecta of California ($6.9 billion borrowed), Michigan ($3.9 billion), and New York ($3.2 billion). With this form of shadow bailout occurring, one can only wonder how many other shadow programs are currently in operation to fund states under the table with federal money.The full list of America’s 32 insolvent states is below, sorted in order of bankruptedness.

Chicago Going as Bankrupt as California

MishIllinois Doesn’t Pay Bills; Crisis Pushes Businesses to Edge of Bankruptcy:

Illinois isn’t bothering with the formality of issuing IOUs, as California did last year. It simply doesn’t pay. Right now, $4.4 billion worth of bills, some dating back to October, are sitting in the Illinois comptroller’s office waiting to be paid someday.

Shawnee Development, for instance, is waiting on about $380,000 in back payments, officials say. That amounts to one-quarter of the council’s budget for senior care in seven southern counties.

Illinois’ deadbeat reputation has created some embarrassing situations. A supplier refused to sell bullets to the Department of Corrections unless it got paid in advance. Legislators have gotten eviction notices for their district offices because the state wasn’t paying rent. One legislator said he had to use campaign funds to pay the telephone bill after service was cut off at his office.

California Uber Alles

Ride FastThe California Way – Stealing from the wage earners:

As of yesterday, California is stealing an additional 10% of wage earners pay, by pre-deducting today your future taxes of tomorrow. They say it’s all wonderful and rainbow, unicorn farts, cause you’ll get the money back.

Ah, no, you won’t. They won’t be paying interest. And since they didn’t ask, it’s stealing. I say they’re breaking the law by not passing a tax increase. Borrowing isn’t a tax increase, they say. Raising fees on everything isn’t a tax increase, they say. I call bullshit on that.

In California the notion of government by the people, of the people, and for the people is dead. It’s now the people working to pay for the government.

How bad is it in California? It’s so bad the L.A. Times finally admits California taxes are too high:

These folks pulling up stakes and driving U-Haul trucks across state lines understand a reality the defenders of the high-benefit/high-tax model must confront: All things being equal, everyone would rather pay low taxes than high ones. The high-benefit/high-tax model can work only if things are demonstrably not equal — if the public goods purchased by the high taxes far surpass the quality, quantity and impact of those available to people who live in states with low taxes.

Today’s public benefits fail that test, as urban scholar Joel Kotkin of and Chapman University told the Los Angeles Times in March: “Twenty years ago, you could go to Texas, where they had very low taxes, and you would see the difference between there and California. Today, you go to Texas, the roads are no worse, the public schools are not great but are better than or equal to ours, and their universities are good. The bargain between California’s government and the middle class is constantly being renegotiated to the disadvantage of the middle class.”

CalPERS actuary says pension costs “unsustainable”

MishCalPERS Admits California “Pension Costs Unsustainable” – So What To Do About It?

The CalPERS chief actuary says pension costs are “unsustainable,” and the giant public employee pension system plans to meet with stakeholders to discuss the issue.

“I don’t want to sugarcoat anything,” Ron Seeling, the CalPERS chief actuary said as he neared the end of his comments. “We are facing decades without significant turnarounds in assets, decades of — what I, my personal words, nobody else’s — unsustainable pension costs of between 25 percent of pay for a miscellaneous plan and 40 to 50 percent of pay for a safety plan (police and firefighters) … unsustainable pension costs. We’ve got to find some other solutions.”

California pensions loses 23% of assets, managers get millions in bonuses

Sacramento BeeCalPERS, CalSTRS award big bonuses despite losses:

California’s two biggest public employee pension funds handed out millions of dollars in bonuses last year to their top executives and investment managers, despite losing billions of dollars. The biggest bonus check, $322,953, went to Christopher Ailman, chief investment officer of the California State Teachers’ Retirement System. It nearly doubled his base pay of $330,000 for fiscal 2007-08.

Ailman’s counterpart at the California Public Employees’ Retirement System, Russell Read, received a $208,677 bonus to his $555,360 base pay in August, more than a month after he had resigned from the fund’s top investment job.

Much has been said about private investment firms rewarding failure. Judging from above it isn’t just private companies that pay big bonuses even when they lose money. Government outfits do it, too. That doesn’t make it right, of course. It does suggest that there’s something to the notion of a perverse bonus culture inside the financial community that’s disconnected from reality.