City of Los Angeles Bankruptcy May be Coming

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Credit:siepr.stanford.edu

A City of Los Angeles bankruptcy could be nearing, with the city a victim of the same unfunded public pension liabilities that are crippling municipalities like Stockton and San Bernardino across California, and elsewhere as well.

A Stanford study sums up the dismal figures. The percentage growth for spending on pensions is greater than that for public safety.

In 1999, Los Angeles City’s aggregate annual required contributions for its three systems totaled $291 million, rising to $923 million in 2011, an annual average growth rate of 11.1 percent. This growth outpaced that of spending on public protection, which grew at 5.2 percent, on health and sanitation (3.6 percent), and on recreation and cultural services (5.8 percent), and it occurred while spending on public assistance programs fell by an average of 3.0 percent per year.

It gets worse. Unfunded liabilities for the three public pension funds in Los Angeles approach $27 billion; this for a city that already has a budget deficit and is struggling to pay its bills. Former L.A. Mayor Richard Riordan is looking prescient now for his declaration in a 2010 Wall Street Journal editorial that L.A. would go bankrupt by 2014.

Los Angeles is facing a terminal fiscal crisis: Between now and 2014 the city will likely declare bankruptcy. Yet Mayor Antonio Villaraigosa and the City Council have been either unable or unwilling to face this fact.

Two years later, Villaraigosa and the City Council are still unwilling to face the stark fact that Los Angeles has about run out of money. Instead, they continue the tired and intellectually dishonest practice of pretend-and-extend so favored by Sacramento. Pretend everything is fine then use accounting trickery or borrowing extend the problem out for a few more months. But this solves nothing and just makes things worse when the inevitable financial reckoning comes (or should that be “wreckoning”?)

Riordan says the city council is beholden to public unions and that pensions and salaries are higher for city workers than in the private sector. Mayor Villaraigosa has attempted a few reforms like raising retirement ago to 67 from the current 55 or 60 and prohibiting retirement at 100% of pay. But the unions have fought even this.

This may blow up in their faces because a bankrupt entity has the ability to break existing agreements.

Pension expert Marcia Fritz said that all of the city’s employees should pay at least half of pension costs. “This eliminates the employer paid pension contribution and will reduce pension costs as a whole,” she said.

“Another thing L.A. should do,” if bankruptcy becomes reality, “is break retiree health contracts,” she said. “They weren’t prefunded, so are empty promises, and courts have allowed retiree health to be lumped in with other unsecured creditors.”

Do the unions really want to play chicken with bankruptcy court?

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  1. Algernon Moncrief PROOF THAT COLORADO’S GOVERNMENT LIES: COLORADO PERA’S ATTEMPT TO TAKE CONTRACTED RETIREE BENEFITS. When I was young I held the belief that public service in the United States is honorable, that the United States of America was exceptional in the world, that governments in the United States, while flawed, deserved the respect of citizens. Now that I am old, I see that I was naive . . . that governmental entities in the United States will intentionally deceive to achieve their goals, and that over two centuries our soldiers have died for a country that will countenance, and even celebrate, base behavior on the part of its public sector instrumentalities. It saddens me, but if this state of affairs pers ists in the United States . . . Honor is dead. Some background . . . You may know that an entity of Colorado state government, Colorado PERA, is attempting to breach its public pension contracts with its retirees. Colorado PERA is attempting a retroactive taking, a “clawback” of accrued, fully-vested pension benefits that were earned by retired PERA members over decades. Colorado PERA public pension benefits include a “base benefit” that is set at retirement and a “COLA benefit” that adjusts pensions annually to compensate for inflation. The “base benefit” and the “COLA benefit” are set forth in Colorado statutes with identical force of law and legal status. In its attempt to breach retiree contracts Colorado PERA has created a contrivance. The contrivance that Colorado PERA is using is that somehow the “base benefit” is a contractual obligation, but the “COLA benefit” is not a contractual obligation, in spite of the fact that both pension benefits are set forth in law in an identical manner. What this boils down to is attempted, unabashed, theft by government. Whether or not Colorado PERA’s attempt to take fully-vested public pension benefits from PERA retirees is ultimately successful in the courts, one fact has been incontrovertibly established . . . Colorado PERA, as an instrumentality of the State of Colorado, is an organization that will lie to achieve its policy goals. This is a sad fact for the many employees of Colorado PERA, for the trustees that have served on the Colorado PERA Board of Trustees over 80 years, and for the thousands of PERA members and retirees. And now, the proof of the deceit . . . Colorado PERA has told us, in writing, that the PERA COLA benefit IS a contractual obligation of PERA . . . and then, after initiating their attempt to breach contracts, Colorado PERA has told us, in writing, that the PERA COLA benefit IS NOT a contractual obligation of PERA. Both of these statements cannot be true. Colorado PERA in a written document, to the Colorado General Assembly’s Joint Budget Committee on December 16, 2009 states that the PERA COLA benefit IS a contractual obligation of PERA: “The General Assembly cannot decrease the COLA (absent actuarial necessity) because it is part of the contractual obligations that accrue under a pension plan protected under the Colorado Constitution Article II, Section 11 and the United States Constitution Article 1, Section 10 for vested contractual rights.” Link: http://​www.kentlambert.com/Files/​PERA_JBC_Hearing_Responses-​12-16-2009_Final.pdf Colorado PERA on page 23 of its May 6, 2011 “Reply Brief” in the pension case Justus v. State states that the PERA COLA benefit IS NOT a contractual obligation of PERA: “Plaintiffs seek to create a contract right that has never existed—an unchangeable COLA for life triggered (inconsistently) by either the date of their retirement or ‘full vesting.’” Link: http://​saveperacola.files.wordpres​s.com/2011/06/​2011-05-06-pera-defendants_​-reply-in-support-of-summa​ry-judgment.pdf That is simply unbelievable. In one document PERA writes "the contract right has never existed." In the other they write that the COLA benefit is a contractual obligation protected under the Colorado and US constitutions. When PERA writes that they need "actuarial necessity" to take the COLA benefit, they are not denying that it is a contractual obligation, in fact, it is an admission of the contractual nature of the COLA benefit. For further information regarding Colorado PERA’s attempt to take fully-vested pension benefits from retirees visit saveperacola.com or Friend Save Pera Cola on Facebook.
  2. Jess Dinkin You have my sympathy. Your benefits were promised and now they seem to be at risk. That is a situation that exists for thousands of public sector employee all over the country. We are all learning that while many people rely on the promises of their governments, in fact those promises in many cases are no more reliable than the promises extracted from ordinary people when their livelihood is threatened. This is a failure of democracy. When corporate money and union money is allowed into politics, elected representatives must follow the wishes of the people who put them there even when doing so ends in a disaster like this.
  3. Tough Love Sorry, but no ympathey from me: Private Sector Plans do not provide automatic COLA increases and neither should Public Sector Plans … at Taxpayer expense. The collusion between our elected representative and Public Sector Unions has been exposed … and BASIC pensions (not just COLAs) for CURRENT workers (and in some cases for those already retired as well) must be significantly reduced. Public Sector workers are NOT “special” and deserving of greater pensions and better benefits at our expense …. and all while Public Sector workers make no less in “cash pay” (per the Us Gov’t BLS) than their Private Sector counterparts.
  4. Jess Dinkin I'm with you on all that stuff, Tough Love. It's just that I keep thinking back to when I was in high school history class and thinking about how today's events would be written up for the history classes of 20 years from now if the school system is still around. I think a lot of this will have played out by then and a lot of the people who want to believe they have these fabulous pensions coming will have been told the truth which will be some version of "Unfortunately...". Maybe, if Proposition 30 fails in November and Proposition 32 passes, it will start becoming apparent that whatever today's retirees get will not be available to meet the promises made to the retirees 20 years hence. If that doesn't happen then it will take longer for the truth to become obvious, but there will be less to play with. However it plays out, one thing is apparent. Public sector employees will not get more than they have been promised, and they may get significantly less.
  5. Tough Love again ?
  6. eatingdogfood BANKRUPTCY; JUST DO IT : Please !!!
  7. Jess Dinkin Why should taxpayers have to pay for these promises when the creation of the promise violated the California constitution? Article XVI Section 18 of the California Constitution says: "SEC. 18. (a) No county, city, town, township, board of education, or school district, shall incur any indebtedness or liability in any manner or for any purpose exceeding in any year the income and revenue provided for such year, without the assent of two-thirds of the voters..." Orange County tried to use this provision to refute pension plan changes made by a prior board of supervisors to the county sheriffs but they referred to the actuarial cost of the promised benefits. The judge found that the actuarial cost represented only an estimate rather than a real liability. So, don't fight it based on an actuarial estimate. Fight it based on an actual accounting. Every year, every employee covered by a Calpers pension gets a statement detailing how much money has been set aside to cover his or her pension. Why not go on tracking that amount and when that amount has been paid to the retired employee, then it stands to reason that any additional sums paid to that retiree are being paid out of current year revenues in violation of the constitution. Stop this practice.
  8. Capt’n Ron All of California's politicians need to pull their heads out of the sand, or wherever they have them buried, and face the unpleasant reality they have created. They should start by curbing abuses that artificially inflate retirement payouts, and block employees from collecting pensions while still working. Legislators should raise retirement ages to private-sector levels, instead of letting employees retire as early as age 50. The Legislature should also cap pension levels, make workers pay more toward their own retirements and create more affordable benefits for new employees. And public retirees should go into Medicare, instead of collecting a separate health benefit at taxpayers’ expense.
  9. Tough Love While the latter (the need to stop paying games with their inflated expected rates of return) is more appropriate and provides greater trasparency, it will simply increase contribution levels. That's not what we need. We need to REDUCE BENEFIT LEVELS.
  10. Bob Morris Without bankruptcy, it would be next to impossible to reduce existing benefits. Plus state-run public pensions can force the government to make up shortfalls. That probably goes away if there is a bankruptcy. Public pensions also need to stop paying games with their inflated expected rates of return (the rules for them are much more lax than those for private pensions.)
12 comments
Algernon Moncrief
Algernon Moncrief

PROOF THAT COLORADO’S GOVERNMENT LIES: COLORADO PERA’S ATTEMPT TO TAKE CONTRACTED RETIREE BENEFITS.

When I was young I held the belief that public service in the United States is honorable, that the United States of America was exceptional in the world, that governments in the United States, while flawed, deserved the respect of citizens.

Now that I am old, I see that I was naive . . . that governmental entities in the United States will intentionally deceive to achieve their goals, and that over two centuries our soldiers have died for a country that will countenance, and even celebrate, base behavior on the part of its public sector instrumentalities. It saddens me, but if this state of affairs pers

ists in the United States . . . Honor is dead.

Some background . . .

You may know that an entity of Colorado state government, Colorado PERA, is attempting to breach its public pension contracts with its retirees. Colorado PERA is attempting a retroactive taking, a “clawback” of accrued, fully-vested pension benefits that were earned by retired PERA members over decades.

Colorado PERA public pension benefits include a “base benefit” that is set at retirement and a “COLA benefit” that adjusts pensions annually to compensate for inflation. The “base benefit” and the “COLA benefit” are set forth in Colorado statutes with identical force of law and legal status.

In its attempt to breach retiree contracts Colorado PERA has created a contrivance. The contrivance that Colorado PERA is using is that somehow the “base benefit” is a contractual obligation, but the “COLA benefit” is not a contractual obligation, in spite of the fact that both pension benefits are set forth in law in an identical manner. What this boils down to is attempted, unabashed, theft by government.

Whether or not Colorado PERA’s attempt to take fully-vested public pension benefits from PERA retirees is ultimately successful in the courts, one fact has been incontrovertibly established . . . Colorado PERA, as an instrumentality of the State of Colorado, is an organization that will lie to achieve its policy goals.

This is a sad fact for the many employees of Colorado PERA, for the trustees that have served on the Colorado PERA Board of Trustees over 80 years, and for the thousands of PERA members and retirees.

And now, the proof of the deceit . . .

Colorado PERA has told us, in writing, that the PERA COLA benefit IS a contractual obligation of PERA . . . and then, after initiating their attempt to breach contracts, Colorado PERA has told us, in writing, that the PERA COLA benefit IS NOT a contractual obligation of PERA. Both of these statements cannot be true.

Colorado PERA in a written document, to the Colorado General Assembly’s Joint Budget Committee on December 16, 2009 states that the PERA COLA benefit IS a contractual obligation of PERA:

“The General Assembly cannot decrease the COLA (absent actuarial necessity) because it is part of the contractual obligations that accrue under a pension plan protected under the Colorado Constitution Article II, Section 11 and the United States Constitution Article 1, Section 10 for vested contractual rights.”

Link:

http://​www.kentlambert.com/Files/​PERA_JBC_Hearing_Responses-​12-16-2009_Final.pdf

Colorado PERA on page 23 of its May 6, 2011 “Reply Brief” in the pension case Justus v. State states that the PERA COLA benefit IS NOT a contractual obligation of PERA:

“Plaintiffs seek to create a contract right that has never existed—an unchangeable COLA for life triggered (inconsistently) by either the date of their retirement or ‘full vesting.’”

Link:

http://​saveperacola.files.wordpres​s.com/2011/06/​2011-05-06-pera-defendants_​-reply-in-support-of-summa​ry-judgment.pdf

That is simply unbelievable.

In one document PERA writes "the contract right has never existed." In the other they write that the COLA benefit is a contractual obligation protected under the Colorado and US constitutions.

When PERA writes that they need "actuarial necessity" to take the COLA benefit, they are not denying that it is a contractual obligation, in fact, it is an admission of the contractual nature of the COLA benefit.

For further information regarding Colorado PERA’s attempt to take fully-vested pension benefits from retirees visit saveperacola.com or Friend Save Pera Cola on Facebook.

Jess Dinkin
Jess Dinkin

Why should taxpayers have to pay for these promises when the creation of the promise violated the California constitution? Article XVI Section 18 of the California Constitution says:

"SEC. 18. (a) No county, city, town, township, board of education, or school district, shall incur any indebtedness or liability in any manner or for any purpose exceeding in any year the income and

revenue provided for such year, without the assent of two-thirds of the voters..."

Orange County tried to use this provision to refute pension plan changes made by a prior board of supervisors to the county sheriffs but they referred to the actuarial cost of the promised benefits. The judge found that the actuarial cost represented only an estimate rather than a real liability. So, don't fight it based on an actuarial estimate. Fight it based on an actual accounting. Every year, every employee covered by a Calpers pension gets a statement detailing how much money has been set aside to cover his or her pension. Why not go on tracking that amount and when that amount has been paid to the retired employee, then it stands to reason that any additional sums paid to that retiree are being paid out of current year revenues in violation of the constitution. Stop this practice.

Capt'n Ron
Capt'n Ron

All of California's politicians need to pull their heads out of the sand, or wherever they have them buried, and face the unpleasant reality they have created. They should start by curbing abuses that artificially inflate retirement payouts, and block employees from collecting pensions while still working. Legislators should raise retirement ages to private-sector levels, instead of letting employees retire as early as age 50. The Legislature should also cap pension levels, make workers pay more toward their own retirements and create more affordable benefits for new employees. And public retirees should go into Medicare, instead of collecting a separate health benefit at taxpayers’ expense.

Tough Love
Tough Love

Marcia Fritz's suggestion to end the Retiree healthcare promises "if in bankruptcy" is a good idea. But why wait? Will the money magically appear w/o bankruptcy?. Certianly any further "accrual" or service credit towards it should immediatelyend for all current employees.

As to her suggestion that the workers pay 50% of their pension Plan costs, while better than now, it's still not sufficient. The GOAL should be taxpayer contributions toward their workers' retirement Plans no greater (as a % of pay) that what Private Sector taxpayers typically get from their own employers ... which is rarely more than 10% (INCLUDING the employers share of Social Security contributions).

But Public Sector Plans are so rich that miscelaneous worker pensions typically cost a level annual 30-35% of pay to fully fund over that worker's career and 50-60% for a safety worker with a 3%@50 pension. HALF of those percentages (as Marcia suggest) is MUCH MUCH greater than the 10% of pay that Private Sector Taxpayers typically get from their employers.

The 10% of pay we (the Taxpayers) get is the MAXIMUM taxpayers should contribute. If the workers insist on getting these extrordinarily rich pensions, let them pay the full remainder (in excess of the 10% we contribute) themselves.

Tough Love
Tough Love

Quoting ...." Pretend everything is fine then use accounting trickery or borrowing extend the problem out for a few more months. But this solves nothing and just makes things worse when the inevitable financial reckoning comes".

Not a surprising stace of politicians. After all "SOLVING" the problem require that these Politicians turn on their campaign contributors .... the Public Sector Unions.

Needed actions:

(1) Stop digging the hole DEEPER now, by immediately reducting the accrual rate for FUTURE service for CURRENT (as well as new) employees by 50% (more for safety workers). Or, better yet, hard freeze (i.e., END) the currentl Defined Benefit Plans (zero future growth) and replace these Plans for future service with a Defined Contribution Plan (ala 401K Plans) with a modest Taxpayers "match" not exceeding 5% of Base Pay. If neither of the above are possible, OUTSOURCE 90+% of all Public Sector workers. This ends the "employment relationship" and with it all future growth in pensions and benefits.

(2) The above only addresses the financial mess from getting worse. To address the current unfunded liability for past service pension and benefit accruals, we need to look at the "promises" made in the context of the environment in which they were made .... one of collision between Public Sector Unions trading campaign contributions and election support in exchange for favorable votes on pay, pensions and benefits .... and remove that portion of those "promises" that would not have reasonably been made in the absence of that collusion. FYI, the reduction would be AT LEST 50% (closer to 75% for safety workers).

Jess Dinkin
Jess Dinkin

You have my sympathy. Your benefits were promised and now they seem to be at risk. That is a situation that exists for thousands of public sector employee all over the country. We are all learning that while many people rely on the promises of their governments, in fact those promises in many cases are no more reliable than the promises extracted from ordinary people when their livelihood is threatened.

This is a failure of democracy. When corporate money and union money is allowed into politics, elected representatives must follow the wishes of the people who put them there even when doing so ends in a disaster like this.

Bob Morris
Bob Morris

Without bankruptcy, it would be next to impossible to reduce existing benefits. Plus state-run public pensions can force the government to make up shortfalls. That probably goes away if there is a bankruptcy.

Public pensions also need to stop paying games with their inflated expected rates of return (the rules for them are much more lax than those for private pensions.)

Tough Love
Tough Love

Sorry, but no ympathey from me:

Private Sector Plans do not provide automatic COLA increases and neither should Public Sector Plans … at Taxpayer expense.

The collusion between our elected representative and Public Sector Unions has been exposed … and BASIC pensions (not just COLAs) for CURRENT workers (and in some cases for those already retired as well) must be significantly reduced.

Public Sector workers are NOT “special” and deserving of greater pensions and better benefits at our expense …. and all while Public Sector workers make no less in “cash pay” (per the Us Gov’t BLS) than their Private Sector counterparts.

Tough Love
Tough Love

While the latter (the need to stop paying games with their inflated expected rates of return) is more appropriate and provides greater trasparency, it will simply increase contribution levels.

That's not what we need. We need to REDUCE BENEFIT LEVELS.

Jess Dinkin
Jess Dinkin

I'm with you on all that stuff, Tough Love. It's just that I keep thinking back to when I was in high school history class and thinking about how today's events would be written up for the history classes of 20 years from now if the school system is still around. I think a lot of this will have played out by then and a lot of the people who want to believe they have these fabulous pensions coming will have been told the truth which will be some version of "Unfortunately...". Maybe, if Proposition 30 fails in November and Proposition 32 passes, it will start becoming apparent that whatever today's retirees get will not be available to meet the promises made to the retirees 20 years hence. If that doesn't happen then it will take longer for the truth to become obvious, but there will be less to play with.

However it plays out, one thing is apparent. Public sector employees will not get more than they have been promised, and they may get significantly less.