Falling Off the Cliff: Public Finance

We saw on Friday that finally reality had been recognized, and Greece was deemed to have officially defaulted on its debt.

Many others will be following close behind, and not all of these entities will be ?over there?:

On Tuesday, Suffolk County, one of the largest counties outside New York City, projected a $530 million deficit over a three-year period and declared a financial emergency. Its Long Island neighbor, Nassau County, is already so troubled that a state oversight board seized control of its finances last year.

And the city of Yonkers said its finances were in such dire straits that it had drafted Richard Ravitch, the former lieutenant governor, to help chart a way out.

Even as there are glimmers of a national economic recovery, cities and counties increasingly find themselves in the middle of a financial crisis. The problems are spreading as municipalities face a toxic mix of stresses that has been brewing for years, including soaring pension, Medicaid and retiree health care costs. And many have exhausted creative accounting maneuvers and one-time spending cuts or revenue-raisers to bail themselves out.

A moment to comment on a certain philosophical viewpoint.

I?ve had some people push back at me with regards to public pensions and entitlements, talking about ?fairness? and ?we/they didn?t cause the problem?. Etc.

Now, while I could spend some time discussing what should have been done, and the best way to set up promises so that one could have some security that they will be fulfilled?. we are beyond that point right now. That was a discussion that would have been better made 40 years ago.

?Fairness? and ?it?s not our fault!? are not magic words that =poof=! make money appear out of nothing. There was theory that government doesn?t go out of business. But it totally does.

Speaking of government going out of business, most Greek pension funds, public and private, held Greek sovereign debt. Oh, and look:

As corporations under public law, the pension funds were forced to make a risky investment. They were obliged to carry out the informal instructions of the incumbent governments, namely that reserves could only be invested in Greek bonds. Now the funds fear the wrath of their members. And they are not alone in that fear. According to KfW CEO Schr?der, many fund managers and asset managers outside Greece have also decided not to participate in the debt swap, out of concerns they could be sued by their clients.

Well, that article is pre-debt swap cramdown. They had to suck it.

And a lot of parties will have to suck it. Yes, taxpayers will get soaked. Worry not. But they aren?t the only ones who will get hit:

Stockton, Calif., a hard-pressed industrial city of nearly 300,000 people in the agriculturally lush Central Valley 80 miles east of San Francisco, is grabbing national headlines because it might become the largest U.S. city yet to enter Chapter 9 bankruptcy.
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Stockton?s situation epitomizes the reality of local government in California today: City governments don?t exist to provide services to the public, but function mainly to dispense high salaries and pensions to the people who work for the government.

Ninety-four of Stockton?s retirees, for instance, receive six-figure pensions, placing them among a rapidly growing list of 15,000 California public retirees in the $100,000 pension club.

No wonder that 81 percent of Stockton?s general-fund budget goes to pay for employee costs, including a generous health care plan that pays the entire medical costs for city employees and spouses for life.

As is typical in California, the city?s police and firefighters can retire at age 50 with 90 percent of their final year?s pay, cost-of-living adjusted ? and that?s before the pension-spiking gimmicks that often push their retirement pay above the pay they received while working.

To make ends meet, the city floated $124 million in pension-obligation bonds, which is the equivalent of taking out a home-equity loan to pay the current mortgage.

Oh yes, borrowing money from the pension fund to make ?contributions? to the pension fund. Reminds me of spending all those Social Security ?contributions? on current political desires, and stuffing the Trust Fund with IOUs. I tried something like that when I was younger. Spent about $100 on Magic cards and put a note saying: ?I owe me $100? in my wallet. That IOU was totally an asset!

Oh right. I was a young idiot. So what is the excuse of the various people involved in such shenanigans as pension obligation bonds, contribution holidays, etc.? I assume they were older than 19.

California is in a bad position. And so is New Jersey. Illinois. And countless other government groups.

But look ? squirrel!

Faced with depressing fiscal numbers, the Sacramento brain trusts have decided that the best way to deal with unfunded pension liabilities is not to reduce the benefits that are causing the problem. Their idea is to create yet another program that would boost pensions for private-sector workers after first deducting 3 percent of workers? paychecks to fund it. In the view of the Democratic leaders who propose this goofy idea, government pensions are fine. The real problem is the stingy private sector. And they have a new government program to fix it.

Thing is, the public has gotten a clue that when the Boomers had too few kids, there were consequences, one of which is there aren?t enough productive younger people to feed the appetites of the ones wishing to exit the rat race.

So nice attempt at political theater, but you?ve got a cratering tax base, California, especially amongst the ?rich? that people love to target. Funny how depending on the income of people who are not only extremely mobile but also have extremely variable income (that they can sometimes control when they receive it) is a losing policy when it comes to public finance.

Yes, taxpayers will still get soaked. Bondholders will have to take cramdowns.

But if you?re a net dependent on government cash (i.e. taxpayer/bondholder cash), I?d be expecting to get a cut, too.

ADDITIONAL: A map of government entitlements, clearly showing the aging of the population.

You can look at the percentages overall increasing from 7.8% in 1969 to 17.6% in 2009.

But the biggest movers are Medicare and Social Security. SocSec ? 3.4% in 1969; 5.6% in 2009. Medicare ? 0.9% in 1969; 4.1% in 2009. While medical inflation figures in the second, the main driver is lots of people living well past 65.

Source: http://www.conservativecommune.com/2012/03/falling-off-the-cliff-public-finance/

st nicholas mindy mccready mindy mccready cliff harris cliff harris josh turner barnaby