San Diego City Hall - Reading the Tea Leaves

Two articles in today's U-T point to the growing realization by the City Council that the issues of fiscal responsibility raised by the Tea Party are the new reality.

Item 1. The council appears poised to rescind the big box economic analysis law in the face of Walmart's successful petition drive. Key swing vote, Tony Young, council President is quoted as saying:

“With the city facing significant unemployment challenges and historic budget deficits, it is difficult to see the sense of spending over $2.5 million for a special election,” he said in a statement. Young said the money could be better spent elsewhere as the city faces a $53 million budget deficit.

The key issue is the cost of the election. Nice to see the council member thinking about cost. The U-T reports that DeMaio, Zapf, Faulconer and Lightner are solid votes to repeal, so this is looking good for a repeal. To give credit where it is due, Richard Rider has been predicting this outcome.

Item 2. City Trims Its Pension Shortfall Craig Gustafson is also reporting that the City Council has decided against paying $100 million in illegally obtained benefits to current and former city employees. The background:

The benefit at issue is called the “purchase of service credit” program, enacted in 1997 under then-Mayor Susan Golding. It’s still in effect, although not for new hires.

Employees can buy as many as five years of service that they didn’t work. For example, a 15-year worker could retire with 20 years of credit. The move increases future pension payments and, in some cases, allows workers to retire earlier.

The pension system wasn’t charging workers enough for the credits between 1997 and 2003 to cover its costs.

The San Diego City Employees’ Retirement System board voted on Aug. 15, 2003, to increase the rates and delayed implementation for more than two months. Word spread quickly and nearly as many people bought credits in that brief window as in the previous six years combined.

However, the state constitution forbids gifts to employees which is what the award of the pension credit without adequate pay in amounts to. Good to see the city council shaving $8.8 million off its annual bill. By the way, how is this different from the case of Judie Italiano getting $700,000 in unearned pension benefits? Also, what is wrong with the pension board? They had asked the council last November to approve the illegal pensions. Can't we fire these jokers?

But over all, I pretty happy. The way I see it, that's a nice deficit reduction of $11.3 million. Plus, I might get to shop at a Walmart SuperCenter in my home town some day. The one I visited in North Charleston was pretty sweet.

Image of Tony Young at top right courtesy of San Diego CityBeat.

Cross-posted to sdrostra.com.

Another Pension Crisis

Teamster support for Democrats in 2008 isn't going to save them from pension disaster.

Two days ago I tweeted about the newest pension issue, the underfunding of the school district pensions, documented by the U-T. In the latest Reason magazine, yet another pension debacle is documented. This problem is a little trickier to explain. In many unionized industries, multiple companies join together to fund a defined benefit plan called a multiemployer plan. There are about 1,500 such plans covering 10 million workers. However, the plans have some catches that are causing problems. First, they are defined benefit plans, so stock market or other investment losses increase the funding required. Second, they have a "last man standing" rule, that works like this. If five companies were originally in the plan and four go bankrupt, the fifth company is liable for all of the pensions in the plan. Third, withdrawing from the plan requires discharging the debt to the plan, and every major firm that has withdrawn to reduce future liabilities has had to pay in, far more than the markets predicted. For example, in 2007, UPS had to cough up $6.1 billion to withdraw from the Teamsters plan.

This is where a new accounting rule put forward by the FASB comes into play. The FASB is moving towards requiring that company exposure to liabilities under multiemployer plans be fully disclosed in financial statements. (The FASB is not a government agency, but the SEC generally enforces adherence to their standards.) The problem facing the unions is that once the rules are in place, they will wipe huge amounts of book value from company balance sheets. This will erode stock price and put participating companies under threat of bankruptcy. The threat to private sector unions is huge. From Reason magazine "Labor's Last Stand?" by Mark Hemingway (not yet available online):

First, unions will no longer have one of their most effective selling points: the promise of a stable job and a generous defined-benefit retirement plan. Second, workers who are denied their promised retirement due to gross financial mismanagement are going to get awfully litigious, awfully fast. Once aggrieved union members become fully aware of the problem, you can expect a flurry of class action lawsuits, with workers looking to recoup their lost retirements by going after the assets of the employers -- and unions -- that managed their plans.

This is why the unions have been campaigning so hard for card check, they need fresh members to start shoring up the plans with new donations contributions. Further, Senator Bob Casey introduced legislation last March, the Orwellian named Create Jobs and Save Benefits Act of 2010 to create an unlimited entitlement to have the United States assume liability for these plans, just as if they were Treasury bonds. Fortunately, the bill has not made it out of committee and did not appear to get traction in the lame duck session. Neither did card check for that matter.

Meanwhile, the FASB has put on hold the proposed change, probably at the behest of unions. But it probably doesn't matter, because investors are increasingly demanding to understand these liabilities and pricing stocks accordingly. Ultimately, these plans collapse will go a long way to destroying what remains of America's private sector unions, down to 7% of the work force, because they will take down many of the companies that are liable for funding them.

Protest AB 32 - Support Prop 23

With the state of California about to issue IOUs, again, you would think that opposition to AB32, California's version of cap & trade would be an easy call. As noted by Temple of Mut:

This is an important issue. A California State University study estimates that compliance with the regulations derived from AB32 will cost an average family cost about $3,900 per year, a small business about $50,000 per year, and will result in a total loss of business output in the range of $180 billion yearly.

Not such an easy call for Meg Whitman, who has said "she would probably vote against Proposition 23, which would create a moratorium on the state's landmark climate-change law." To let Meg know of her foolishness, join the Tea Party in protesting Meg at the Grand Hyatt next to the San Diego Convention Center, Friday, Aug 20 (tomorrow) at 5:00 p.m. Temple of Mut has the details.

About those IOUs.

From the Financial Times:

John Chiang, California’s controller, told the Financial Times that the state was once again flirting with IOUs because of a budget stalemate between Arnold Schwarzenegger, its governor, and the state government. The budget is two months late.

KT has an interesting comment about the effort to make the IOUs a pseudo-legal tender:

Essentially, this creates a new currency, one only valid within the government. The money is trapped entirely within the State economy since you can't use it to buy things from private parties. The idea of being able to use the IOUs within the State seems like a good idea until you pair it with our growing Justicialism. Consider this.

The government owns GM. Ford is a private company. If you can use IOUs to buy government products, but nothing else, then Ford is at a significant disadvantage. This example is Federal, but it illustrates the entangling nature of fascism. Working with the government becomes the preferred means of doing business when the government grows in all directions. Anyone left outside has all kinds of problems, from regulatory ones to being able to be paid.

Root Causes

Last March, I set out to explain the causes of the seemingly perennial budget madness in California (with pictures) and concluded the state employees pensions are the prime culprit. Until we deal with reducing the current and future pension costs, we are doomed to never have enough money to run the state. (By the way, this is why I was initially excited about Meg Whitman, she seemed to have a tough agenda to take on the unions.) In today's WSJ, R. Eden Martin comes to the same conclusions, and calls out some solutions, the comments I like follow:

Bailing out state pensions would be astronomically expensive. According to a Pew Foundation estimate this year, the total unfunded liabilities of the 50 states' pension funds amounted to about $1 trillion in 2008.
...
Current defined benefit pension plans would be "frozen," meaning no new benefits would be accrued under those plans.
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Participating states could set up new retirement programs for both current and new employees in the form of defined contribution plans such as 401(k)s.
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Though state laws vary, many states and cities may be able to take the legal position that they are not liable as guarantors if and when a pension fund goes under. In Illinois, a retiree's contract claim would be against the pension fund, not the state. In any event, practically speaking, it is not likely that retirees would be able to recover tens of billions of dollars in past pension claims against their states.

The ruling class' arrogance and greed has finally become too much for America's economy to handle. This is why I am voting for the candidates best positioned to take on the unions. This is making for some uncomfortable political bed fellows, but remember this single and simple truth:

Government growth threatens our liberty and our prosperity.