WSJ Opinion Piece:
Andy Kessler's website: http://www.andykessler.com
Andy Kessler, author and former hedge fund manager, posted an interesting opinion piece yesterday on WSJ.com titled "The Pension Rate-of-Return Fantasy." He discusses some of the issues faced by municipalities regarding pension liabilities and questions the rate of return assumptions used to determine liabilities. An informative read.
WSJ Opinion Piece:
Andy Kessler's website: http://www.andykessler.com
If you are following the pension crisis in California, here's a link to a Reuters special report on the San Bernardino bankruptcy: http://www.reuters.com/article/2012/11/13/us-bernardino-bankrupt-idUSBRE8AC0HP20121113
The article identifies a host of issues that doomed San Bernadino, including:
The article says no single element caused the bankruptcy but all contributed. It's an interesting read and a cautionary tale of conflicts of interest and fiscal mismanagement.
Each election, I compare the endorsements of the Chamber of Commerce, Democratic Party and Republican Party for the California and San Francisco propositions. In some cases all three of these organizations agree on a ballot measure.
Here's a summary of the endorsements for San Francisco propositions:
Links to SF sites:
Here's a summary of the endorsements for California propositions:
The article "California Muni Bankruptcies a Growing 'Disease,' Kotok Says" explores the difficulties encountered by California municipalities trying to meet their financial obligations in an environment of increasing costs and declining revenues. According to the article, the California city of Atwater, with a population of 28,000 located in California's central valley, is about to declare a fiscal emergency, which is the first step towards declaring municipal bankruptcy. Here's a link to the article: http://www.sfgate.com/default/article/California-Muni-Bankruptcies-a-Growing-3916615.php
There's a good op-ed piece in today's SF Examiner on the recent bankruptcies by California cities. In "City bankruptcies ignite finger-pointing frenzy," the viewpoints of the political left and right are explored, and the impact on pensions in a bankruptcy proceeding is examined. Here's the link:
The recent Bloomberg article "Police Chief's 204,000 Pension Shows How Cities Crashed" is a look at how some California cities are struggling with the costs of generous pension packages. The example given is that of a former police chief of Stockton, CA who was on the job for less than three years and now receives an annual pension of more than $204,000, which is paid even though this person now has another job. Link to the article:
As expected, San Bernadino, California has filed for municipal Chapter 9 bankruptcy. San Bernadino is the third California city to file for bankruptcy this year, after Stockton and Mammoth Lakes. There are several other California cities that have significant unfunded pension liabilities and are viewed as candidates for future bankruptcies, including Fairfield, Inglewood, Pomona and Compton. Other cities have declared fiscal emergencies, including La Mirada, Culver City and Stanton.
Link to my prior post on San Bernadino, which discusse:
Links to articles:
Two California cities, Stockton and Mammoth Lakes, have filed bankruptcy in the past several weeks. Another California city, Vallejo, recently emerged from bankruptcy. San Bernadino has authorized a bankruptcy filing. In the New York Times article "Bankruptcy in California Isn’t Seen as a Trend," the bankruptcies of these California cities isn't having a big impact on the municipal bond market and is not seen as a national trend. The issues confronting California cities include falling revenue, fiscal mismanagement (or over-optimistic financial planning), and rising pension and healthcare costs. Here's the link: http://www.nytimes.com/2012/07/13/business/bankruptcy-in-california-isnt-seen-as-a-trend.html?_r=2
San Bernadino, California, has voted to file for bankruptcy. San Bernadino, a city of roughly 210,000 residents, is located about 65 miles east of Los Angeles. It will become the third California city to file for bankruptcy this year, following Stockton and Mammoth Lakes. According to the city's report on the problem, the insolvency is due to a variety of issues including:
Links to articles on the bankruptcy:
San Bernadino Sun: http://www.sbsun.com/ci_21044462
Los Angeles Times:
Link to the budget analysis report by the City of San Bernadino:
Stockton, California's 13th largest city with a population of 290,000, yesterday filed for Chapter 9 bankruptcy protection. Stockton is the largest city by population in the United States to file for bankruptcy, but the 2011 bankruptcy filing by Jefferson County in Alabama is the largest municipal bankruptcy in terms of debt outstanding.
Here are links to articles on the bankruptcy:
San Francisco Chronicle:
Here's a link to my prior post on Stockton:
The recent Bloomberg View opinion piece "California's Bad Bet Makes JPMorgan's Look Minor" by David Crane, President of Govern For California, is a good history lesson of how California adopted the pension legislation that is causing so many problems now. A worthwhile read. Here's the link: http://www.bloomberg.com/news/2012-06-17/california-s-bad-bet-makes-jpmorgan-s-look-minor.html
The opinion piece "From The California Dream To A Cautionary Tale" by Edward Luce in today's Financial Times provides a frank and sobering analysis of the state of the (formerly?) great State of California. The piece discusses how California is lagging other states in economic growth, suffers from high unemployment and is eroding the quality of the state's world-recognized University of California system. According to the piece, the problem is two-fold: too much democracy (the Ballot Initiative process has tied the system in knots); and too little democracy (a voter initiative that became law requires a two-thirds majority in the legislature to pass new taxes). If you're a Californian, this is an important read. Unfortunately it's behind a subscription firewall, but a free registration will enable viewing the article. Here's the link: http://www.ft.com/cms/s/0/7557edba-b08d-11e1-8b36-00144feabdc0.html
In critical voting in San Jose and San Diego, pension reform measures passed in both cities. According to a Bloomberg Report, the pension reform measures passed by wide margins.
Here are links to articles on the voting:
San Jose Mercury News:
Here are links to prior posts on pension reform:
The State of California and many of its cities and counties, including San Jose (the 10th largest city in America), San Diego and Stockton, are facing a massive financial crisis relating to pension liabilities. The Reuters article “INSIGHT-California city's pension vote-a precedent for U.S.?” provides a good analysis of the massive scope of the problem. The article discusses San Jose’s pivotal vote this Tuesday to reduce public employee pension benefits, and the controversy surrounding rate of return assumptions (which I believe are too high). In my opinion, this pension crisis could impact most Californians at some point in the future (via higher taxes or reduced funding for critical programs, like education) unless it is addressed very soon. Here’s the link: http://www.reuters.com/article/2012/06/02/usa-california-pensions-idUSL1E8GPIL620120602
Here are links to prior posts on California's financial crisis:
A recent article on Calpensions.com entitled "Ballot-box Pension Reform Wins First Court Test" provides an interesting look at how several California cities are handling pension reform: through the ballot box. It's worth a read. Here's a link to the article:
The Wall Street Journal recently interviewed demographer Joel Kotkin about the exodus of nearly four million people (mainly young families) from California to other states over the past two decades. The articles is "Joel Kotkin: The Great California Exodus" and was in the April 20 edition of The Wall Street Journal.
In the interview, Mr. Kotkin identifies several issues that are contributing to the exodus: state and local restrictions of development causing an artificially limited housing supply, especially in coastal areas; trade-and-cap law AB32 which will raise the cost of energy (California's electricity prices are 50% higher than the national average); restrictions on oil drilling; water restrictions which are endangering Central Valley farmers; an unfavorable business tax environment; and a steeply progressive income tax system where even middle class workers pay a higher rate than millionaires in 47 other states.
Where are the people (and jobs) going? According to Mr. Kotkin, to the "growth corridors" of the Gulf Coast, the Great Plains, the Intermountain West, and the Southeast. These areas have lower costs of living, lower taxes, less regulation and natural resources. Salt Lake City is cited as an example.
It's an interesting article and a wake up call for California.
Here'a a link to the article: http://online.wsj.com/article/SB10001424052702304444604577340531861056966.html
We all know of California's state and local pension crisis (if not, see these posts). However, there's also an unfunded $62 billion liability for retiree healthcare benefits for California state employees, according to a recent press release issued by the California State Controller's Office. Because it is unfunded, this means that the State of California pays for these benefits on a "pay as you go" basis. According to the State Controller, California needs $4.7 billion in fiscal 2011-12 to pay for these unfunded retiree healthcare benefits, when only $1.7 billion was provided for in the state budget.
The State Controller argues that the state should shift to "pre-funding" these healthcare costs, and that by doing so, significant cost savings could be achieved. However, recognizing the difficult budget environment, the Controller suggests that even partial funding of these costs would significantly reduce the state's liability.
Here's a recent story on NBC Bay Area on the topic:
Here's a link to the press release by the State Controller's Office: http://sco.ca.gov/eo_pressrel_11680.html
Several California cities are broke, near broke, or on their way to being broke. There's an interesting (and likely controversial) op-ed piece that recently appeared on Bloomberg.com that discusses the financial mess that Stockton is in, the new 90 day mediation period required before a municipality can declare Chapter 9 bankruptcy, the genesis of the problem, and how San Diego has proposed to fix their financial mess.
Here's a link to the op-ed piece:
Here are links to my prior posts on California's pension crisis: http://www.allenlatta.com/1/post/2011/11/reforming-the-california-public-pension-system.html
California's non-partisan Legislative Analyst's Office has released its 2012-13 budget update, which includes an estimate of the possible impact to the California budget by the initial public offering of Facebook. Facebook's IPO and subsequent stock sales by its employees are estimated to generate $2.45 billion in capital gains tax and other Personal Income Tax (PIT) revenue to California over a period of several years, and a whopping $1.5 billion in 2012-2013. Here's a chart showing the PIT revenue estimates to California from the Facebook IPO and subsequent stock sales:
Just another reason to look forward to the Facebook IPO.
Here's the link to the Legislative Analyst's Budget Update: http://www.lao.ca.gov/analysis/2012/update/economic-revenue-update-022712.aspx
California is in the midst of a pension crisis at both the state and local levels. Here are some recent articles discussing the problem:
Daily News: Editorial: Gov. Jerry Brown Must Curb Big Pension Paydays For Management
LA Times: San Diego Tackles Municipal Pensions
LA Times: Commit a Crime, Collect a Pension
Sacramento Bee: Group Suspends California Public Pension Reform Ballot Effort
Here's a link to a prior post on California's Pension Problem:
The title of the Forbes article sums it up nicely: "New Study: With Giant Pension Debts, California is Screwed." The Stanford Institute for Economic Policy Research (SIEPR) has issued a report entitled "Pension Math: How California's Retirement Spending is Squeezing The State Budget" which looks at the UNFUNDED pension liabilities for three California pension systems (CalPERS, CalSTRS, and UCRP) and finds that the combined unfunded liability for these pensions systems is an astonishing $290.6 billion, using a discount rate of 6.2% (which discount rate is aggressive in my opinion). Using a risk-free discount rate, this unfunded liability is a staggering $497.9 billion. In my view the truth is somewhere in between, but it doesn’t really matter much. California has a huge pension problem, and it must be dealt with immediately.
Link to Forbes article:
Link to SIEPR:
Link to the SIEPR report:
Link to California Common Sense Transparency Portal analysis of CA pension funding status:
California Governor Jerry Brown is confronted with an estimated budget shortfall of up to $13 billion, and limited tools to eliminate that shortfall. His solution: prepare a balanced budget that includes the impact of proposed tax increases, and if the tax increases aren't passed automatic spending cuts will occur. As one can imagine, the proposal has met with considerable mixed response. The LA Times essentially agrees that more revenues are needed and calls for lawmakers to "come to the table with an open mind and a willingness to compromise." An opinion column in the Orange County Register argues that Governor Brown's proposal to increase the sales tax and to raise income tax rates on the top earners in California are not the solution, but are a continuation of California's "failed management of existing resources and poor understanding of the dynamics of state revenue." In my view, this is a very complex problem that is compounded by a complex legal framework that no longer works in California.
Here's a link to a Bloomberg article on the issue: http://www.bloomberg.com/news/2011-12-08/brown-to-seek-more-automatic-budget-cuts-if-california-tax-increase-fails.html
Here's the link to the LA Times piece: http://www.latimes.com/news/opinion/opinionla/la-ed-brown-20111209,0,4157624.story
Here's a link to the Orange County Register piece: http://www.ocregister.com/opinion/state-330661-income-tax.html
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