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The fall of San Bernardino

15 Nov 2012 by Jim Fickett.

Reuters recently published a useful case history of municipal bankruptcy, that of San Bernardino, a suburb of Los Angeles. The selling out of politicians to greedy unions, in return for election endorsements, seems to be the root of the problem. Beyond this, some of the moving parts are quite interesting.

on close examination, the city's decades-long journey from prosperous, middle-class community to bankrupt, crime-ridden, foreclosure-blighted basket case is straightforward … San Bernardino succumbed to a vicious circle of self-interests among city workers, local politicians and state pension overseers. …

Unions poured money into city council elections, and the city council poured money into union pay and pensions. The California Public Employees' Retirement System (Calpers), which manages pension plans for San Bernardino and many other cities, encouraged ever-sweeter benefits. Investment bankers sold clever bond deals to pay for them. …

In bankrupt San Bernardino, a third of the city's 210,000 people live below the poverty line, making it the poorest city of its size in California. But a police lieutenant can retire in his 50s and take home $230,000 in one-time payouts on his last day, before settling in with a guaranteed $128,000-a-year pension. …

Almost 75 percent of the city's general fund is now spent solely on the police and fire departments …

Complicating matters were obscure budgeting procedures that left residents in the dark. The word “pension” doesn't appear once in the most recent 642-page budget, and retiree costs are buried in detailed departmental line items. …

[The pension plan passed in 2006] enabled the public-safety workers to retire at 50 with a pension of up to 90% of their final salary. …

The average salary for a full-time San Bernardino firefighter in 1997 was $75,610 [in] 2010 dollars. By 2010, it was nearly $147,000, according to a Reuters analysis of Census Bureau data. …

City workers took advantage of compensation rules, common among public employees in California, that made retirement deals even better. Key to this was boosting an employee's eve-of-retirement wages, which form the basis of the pension calculations.

Mike Conrad, chief of the fire department from 2006 to 2012, said he saw managers negotiate a promotion in their final year, to boost their final salary. It was not uncommon for someone to move into a position with a $30,000 annual pay rise shortly before retirement, he said. …

In 2009, patrol lieutenant Richard Taack retired at the age of 59, after 37 years of service. He took home $389,727 that year, including $194,820 in unused sick time and $33,721 for unused vacation time, according to city payroll records. Shortly after Taack retired - on an annual lifetime pension of $128,000 - he was hired part-time by Penman's city attorney's office, at $32 an hour.

Taack's 2009 income was nearly double that of the city's entire street-sweeping department. …

Scott Moss, head of the firefighters union, … 46, a fire paramedic, said he might retire at 53. Payroll records show a base pay of $94,500, and total 2011 wages, with overtime, of about $147,000. Moss confirmed the base figure but didn't comment on the overtime number. …

Led by a board of directors who are all themselves members of the pension plan, Calpers has for decades pushed to sweeten benefits for retirees.

A 1999 law championed by Calpers, known as SB 400, cut the retirement age five years and increased benefits for state workers, all on the premise that a rising stock market meant benefits could be juiced up at little or no cost. …

When the stock market tumbled in 2000, cities and towns suddenly had to ramp up payments to Calpers to make up for the hit to their fund balances, which were heavily invested in shares. …

Led by the now-defunct Lehman Brothers, [investment bankers] persuaded many cities - including San Bernardino and Stockton, which is also in bankruptcy - that the best way to satisfy growing obligations to Calpers was to borrow the money via so-called pension obligation bonds. San Bernardino raised $50 million in 2005 by issuing these notes. Between 1999 and 2009, 26 California cities sold about $1.7 billion of debt to fund their pensions, including bond issues that were used to pay off earlier debt. …

When the Bay Area city of Vallejo went bankrupt in 2008, it declined to challenge the pension payments to Calpers, in part because of the daunting legal costs involved.

But the pension-bond insurers who are now on the hook for defaulted bonds in both Stockton and San Bernardino have signaled their intention to do battle with Calpers in bankruptcy court. San Bernardino, in an unprecedented move, has already stopped making payments to Calpers. …

One of Governor Jerry Brown's marquee initiatives is “realignment,” an effort to move more public-safety, welfare and prison services from state control to the cities and counties. Local governments are more flexible and more responsive to local issues, Brown argues, and thus able to make better decisions.

Over the next few years it will be quite interesting to see how the story ends for cities that can no longer afford their public workers.

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