This article first appeared at The McAlvany Intelligence Advisor on Wednesday, Mary 19, 2014:
Denial of reality seems to be a job requirement to hold a position on the city council in Vallejo, California. Despite increased payments demanded from the city by CalPERS (the California Public Employees’ Retirement System), everything’s OK in Vallejo. Despite a warning from Moody’s in February that everything is not OK in Vallejo, everything’s OK in Vallejo.
Just ask the mayor, Osby Davis: “We’re doing everything we can to make ends meet. It’s going to be a tough struggle, but I’m sure we will get there.” Or ask Deborah Lauchner, the city’s finance officer, the person tasked with developing budget plans that will keep the city afloat and solvent: “We are not on the brink of [another] bankruptcy. We are not going there.”
Back in February 2008, everything was definitely not OK in Vallejo. As councilwoman Stephanie Gomes said at the time: “Our financial situation is getting worse every single day. No [one] wants to declare bankruptcy, but if you’re facing insolvency, you have no choice….” At that moment in time, the city’s budget shortfall – in an $80 million budget – was $9 million. Two months later, it was $15 million.
The city council voted 7-0 to declare Chapter 9 bankruptcy. The numbers were simply staggering: the city owed its bondholders $53 million, its pension and healthcare plans another $220 million.
The losers were going to be the taxpayers and the bondholders. The taxpayers were asked to vote for another 1 percent in the sales tax while bondholders were asked to take a haircut.
But what about the pension and health plan beneficiaries? Prior to Vallejo, no bankruptcy judge had ever declared that a Chapter 9 would erase pension obligations. No one, that is, until U.S. Bankruptcy Judge Michael McManus ruled that Vallejo could do so in 2009. It was a groundbreaking, earthshaking moment. The whole world was watching, especially towns like Stockton and San Bernardino and others who were also in trouble. If it worked in Vallejo, it would work elsewhere. It would be called “Doing a Vallejo.”
Except that Vallejo didn’t. Upon receiving word of McManus’ decision, CalPERS informed the city council that it was NOT going to be doing any negotiating of the overgenerous plan benefits passed by the council during the city’s heyday of high tax revenues thanks to an obscenely robust real estate market. No way, said CalPERS. We’re part of the state of California, and we don’t negotiate with entities like Vallejo. We don’t care what McManus said.
The council folded like tissue paper. Gomes said: “We realized we did not have the time or the money to take on a giant behemoth like CalPERS.” So they proceeded to stiff everyone else in sight, leaving in place the plans that were paying benefits up to 90 percent of a retiree’s last year’s salary by age 50. Those retired in the last five years are getting checks averaging $100,000 a year.
The city exited bankruptcy in 2011, partly based on those bondholders’ haircuts, partly on some concessions given by the city’s unions, and partly thanks to the increased sales tax revenue, estimated in the first year to be $12 million.
That exit is likely to be short-lived. Said the city’s finance director at the time: “Our five-year business plan was based on things we knew.” But things changed. The very entity that wouldn’t negotiate, the entity that was bankrupting the city, was upping the ante and forcing higher and higher premium contributions on Vallejo. Reductions in rate of return assumptions demanded more contributions from the city. Much more. Said the director: “Now we have to figure out a way to pay for these new CalPERS rates. Every time we react to the last rate change they impose, they come up with another one.”
The very entity that refused to negotiate during the city’s first bankruptcy is now a primary cause of the next one.
But everything’s OK in Vallejo. Despite increases from CalPERS that are conservatively estimated to rise between 30 and 42 percent over the next five years, everything’s going to be OK. Despite cutting the police force from 145 to 80, everything’s going to be OK. Despite leaving shuttered three of the city’s eight fire stations, everything’s going to be OK. Despite cutting street maintenance, everything’s going to be OK.
Except that potholes are now not only an inconvenience but a menace. In 2006 there were seven homicides. Last year there were more than two dozen. Burglaries are up. Violent crime is up. But everything’s OK in Vallejo.
How do we know? The city council just voted to accept a resolution that balanced its books for 2014. The budget was short by $5 million. But with a bookkeeping entry that anticipated an upcoming settlement with a local union for some more wage cuts and a pending cap on health care benefits – voila! – the budget is balanced. Everything’s OK in Vallejo.
Not according to Moody’s. Its analyst Tom Aaron said last month:
Vallejo substantially restructured its compensation structure, including significant cuts to retiree health care benefits, but by failing to address [its CalPERS] pension liabilities it remains vulnerable to increasing annual payments….
Vallejo now faces the risk of a second bankruptcy if its finances continue to degrade.
The only people doing OK in Vallejo are the pension beneficiaries. Unless and until someone with some backbone confronts CalPERS and challenges them, and succeeds in forcing them to negotiate and share the pain along with everyone else, towns and cities like Stockton, San Bernardino, and Vallejo will continue to move from crisis to crisis, from bankruptcy to bankruptcy. Until then, the river of denial continues to flow through Vallejo, California.