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Trading Lessons

California Dreaming: Bankruptcy, Pensions and Taxes

Politics / US Debt Dec 05, 2012 - 05:29 AM GMT

By: BATR

Politics

The California Public Employees' Retirement System lives in the rarified air where financial magic somehow materializes to pay for their irrational exuberant pensions. When the drug high is over, the real world requires a harsh penalty for ebullient irresponsibility. The Chicago Tribune reports:

"San Bernardino, a city of 210,000 about 60 miles east of Los Angeles, filed for bankruptcy protection on August 1. Since then, it has halted its bi-weekly, $1.2 million payment to Calpers, saying it wants to defer any payments to the fund until fiscal year 2013-2014. Calpers says the city is already $6.9 million in arrears since August 1.


The San Bernardino bankruptcy is fast emerging as a precedent-setting case over how creditors, especially Wall Street bondholders and insurers, are treated in a municipal bankruptcy, because never before has a city seeking bankruptcy halted payments to Calpers or threatened its historical primacy as a creditor.

Under Californian state law, the contract between Calpers and debtor cities is viewed as inviolate and has been treated as such by state courts. Unlike Calpers, other creditors have historically been forced to renegotiate or forgive debt to debtor cities."

The concept of an inviolate obligation tied to public employee retirement payouts is a sacred cow that needs purging from law and, more importantly from populace endorsement.

Notwithstanding, expressing such supportive government orthodoxy, that bastion of objective news as reported by the Sacramento Bee, writes on the pro taxation argument of Jerry Brown: California tax vote start of national tax hike sweep.

"Revenue means taxes, and certainly those who have been blessed the most, who have disproportionately extracted, by whatever skill, more and more from the national wealth, they're going to have to share more of that."

The Democratic governor's remarks follow passage last week of Proposition 30, his initiative to raise the state sales tax and income taxes on California's highest earners.

According to Governor Brown the expanded role for government programs and, by inference, public employee unions, is never ending. Just ask the taxpayers who live in San Bernardino if they are paying enough. Next, ask the municipal bond creditors, who stand to lose significant capital from the forthcoming bankruptcy.

Defining the extent of the self-inflicted injury, California: Anatomy of an exploding government obligation, reveals an alarming example of the cold hard truth why the state is financially broke.

"A promise to pay a retiree's health care coverage is essentially a kind of defined benefit plan, in which government pledges to cover a certain percentage of the cost of health insurance regardless of how much money it has actually set aside for this benefit. As the State Budget Task Force's recent report on California explains, right now workers covered in California by this retirement benefit are earning credits that should be financed to the tune of $4.7 billion a year, if California is going to have enough money to pay off this obligation over the years.

But instead of pre-funding the benefit, California has chosen to pay for it on a pay-as-you-go basis, taking the cash for the health insurance premiums of retirees right out of its annual budget. Right now that's only costing the state $1.7 billion annually because of the limited number of retirees who qualify for the benefit. But over time more and more workers will qualify, and those workers will live on average decades in retirement, swelling the rolls of those whom California must provide health coverage for."

Where in the present distressed economy are there new corporate employment contacts that include defined benefit plans? The old name is a pension. In the corporate world, IRAs and 401 K are common. The dinosaur companies that accepted union contracts with future defined benefit obligations are out of business, either escaped offshore or are hanging on by their fingernails.

Why should government employees have a privileged position, when the realities of further municipal bankruptcies are growing daily? It seems that Governor Brown forgets his own rhetoric.

Populism, Progressives and Public Unions cites a quotation from the current California governor.

"Several unions have agreed to larger employee contributions for their members. Taxpayers are living with cuts and making sacrifices to deal with the reality of California's budget crisis, state workers are going to have to do the same." Jerry Brown

Another quote referenced in a Public Employee Unions Guarantee National Bankruptcy article, also confronts the unrealistic mindset that exists in "The Golden State". Someone needs to explain to public officials that the state has used up their precious metal riches and their union members are not willing to do the hard labor of mining new veins of revenue benefit reductions that will balance their budgets.

"The Assembly Public Safety Committee today is considering one of the most noxious, special-interest pieces of legislation we’ve seen in a while—one that will endanger public safety, tread on the California constitution and reinforce the perception that some government workers are part of a special, coddled group that’s exempt from the normal legal and ethical standards that are applied to other Californians." The Registry

In this same BATR essay the Steven Greenhut’s critique in the WSJ, Public Employee Unions Are Sinking California, is emphasized. California legislators inhabit the same psychotropic mental escapism, exemplified with the double dippers that create the public employee entitlement culture. Financial reality never hits the retirement paychecks of the civil service sector, while the tormented taxpayer is told they must pay more.
The rush to leave the state has Californians perplexed for solutions as long as the Sacramento progressive ‘pols’ refuse to challenge the public union mafia. Those who remain will bear an even higher tax burden to feather the nests of the most unproductive elements in society, namely government.

Governor Brown preaches. "And everyone is going to have to realize that building roads is important, investing in schools is important, paying for the national defense is important, biomedical research is important, the space program is an indicator of the world leader - all that takes money". Just maybe a bankrupt state and municipalities needs to reduce the size and scope of government itself.

James Hall – December 5, 2012

Source : http://www.batr.org/negotium/120512.html

Discuss or comment about this essay on the BATR Forum

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Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors

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