Vallejo's story of financial woe raises eyebrows because it is not a desperately poor or dilapidated city like Newark or Detroit. It is quintessential middle-class America, with an average family income of about $57,000. When the city announced it wouldn't be able to meet $6 million of unpaid bills starting in April, no one was as surprised as the residents themselves. Part of the problem is that the real estate crisis is especially pronounced in California and, as housing values fall, so do city property tax collections. The city projects a $20 million budget shortfall this year and next, which is a big bucket of red ink out of an annual budget of $80 million. City officials saw bankruptcy as the only legal option to void its unsustainable wage and retirement labor contracts and their $135 million of unfunded liabilities.You'll want to read the whole thing.Vallejo,CA isn't going to be the last town to file for bankruptcy protection.
These contracts are so exorbitant that some of the richest residents of Vallejo are the police and firemen. Ten firemen earned more than $200,000 last year with overtime--a salary nearly four times higher than what the average family in Vallejo earns. Incredibly, 80 percent of the city's budget is consumed by labor and pension costs. "No city or private person wants to declare bankruptcy," says Councilwoman Stephanie Gomes, "but if you're facing insolvency, you have no choice but to seek protection."
Soaring public employee pension costs are crunching municipal budgets and causing service cuts or tax hikes across the state. In the Los Angeles County school system, health, pension, and workers compensation liabilities are so mountainous that an estimated one of every three dollars budgeted for the L.A. schools goes to teacher retirement costs. "The three Rs in the L.A. County school system are now reading, writing, and retirement," moans Richman.
There are other horror stories. The CFFR found that many cities have a 3 percent rule which allows a worker to accrue a pension benefit of 3 percent of his final salary for each year worked. So an employee who started on the job at age 22 can retire at age 52 with a lifetime pension benefit of 90 percent of the final salary. Most California towns also allow city employees to "spike" their pensions. This is a popular scam that allows workers to pad their final salary--and so their pension--by as much as 50 percent through bonuses, overtime, accrued vacation, and other add-ons. These pensions also come with an annual cost of living adjustment and lifetime health care.
"Pensions are the second biggest line item in most municipal budgets today behind law enforcement," says Steven Frates, a professor at Claremont McKenna College and an expert on California's pensions system. He adds that "the annuity value for many public employee pensions in this state is $1.5 million." Some of the highest paid state workers are walking away with lifetime annual pension and health benefits of $300,000 a year. With hundreds of thousands of public employees in California, you have the potential for catastrophic long-term financial distress.
Plenty of cities outside California are facing a similar tsunami of debt thanks to years of super-generous labor agreements. The ten largest Chicago-area cities face a combined $18.7 billion in unfunded pension liabilities, according to a new report by the Chicago Civic Federation. The city of Chicago has less than 50 percent of the money it needs to pay the benefits promised to Chicago police and firemen. Philadelphia was forced to issue a $4.5 billion bond in February to cover unfunded pension liabilities for 33,000 retirees. The total cost to states for paying for all teacher retirement health and pension obligations is now estimated at $3 trillion, and growing each year.
As California taxpayers wake up to the enormous future tax increases they and their children face to pay for expansive promises to city, county, and state workers, they're wondering, says Frates, "how did they get these sweet deals?" There lies the real scandal. For years, even decades, the only people who've cared much about public employee salaries are the public employee unions. The politicians who sit across the table and negotiate with the union bosses have little if any incentive to drive a tough bargain. The costs won't be visible until the politicians who negotiated them are long gone.
Friday, May 09, 2008
Unions Bankrupt America's Cities
Here's a very important article Stephen Moore wrote on 03/24/2008 for The Weekly Standard: