COMING ATTRACTIONS:  "...There’s a famous exchange in Hemingway’s The Sun Also Rises. Someone asks Mike Campbell, 'How did you go bankrupt?  Two ways, he replies. 'Gradually, then suddenly.'”  Below, a photo of Central Park "Hooverville" - shantytown set up in the depths of the Great Depression.  Story, or scholarly paper, here.

BANKRUPT CITIES AND TOWNS AND COUNTIES IN THE U.S.A.;  HARTFORD, CT, SOMEDAY SOON?  HOW ABOUT THE POST OFFICE?
150th anniversary of the war between the states this year...north in blue, south in grey...black if discussion of both. 

ARTICLE ON THE 13 FINANCIALLY SICKEST AMERICAN CITIES;  STATES WITH BANKRUPT CITIES OR COUNTIES:  AND THEN THERE IS THIS...AND THE STATES (North and South)
 CONNECTICUT AND ITS 169 TOWNS
 COMMENTARY
RATING AGENCIES' ROLE
OTHER - Editorial, etc.
 

S.E.C. Accuses Illinois of Securities Fraud
By MARY WILLIAMS WALSH, NYTIMES
March 11, 2013

For the second time in history, federal regulators accused an American state of securities fraud on Monday, ordering Illinois to stop misleading investors about the condition of its public pension system.

In announcing a settlement with the state, the Securities and Exchange Commission said Illinois had passed a law in 1994 allowing itself to put less than the required amount into its pension system each year. For the next 15 years, the state issued annual reports showing that it was on track with its lawful schedule, even as it fell further behind the real-world amount needed to pay all public retirees their benefits. In 2005, the state passed another law giving itself a holiday from even the inadequate amounts on the schedule.

From 2005 to 2009, Illinois issued $2.2 billion worth of municipal bonds, which the S.E.C. said were marketed under false pretenses. There was a growing hole in the pension system, putting increasing pressure on the state’s finances every year. That raised the risk that at some point retirees and bond buyers would be competing for the same limited money. The risk grew greater every year, the S.E.C. said, but investors could not see it by looking at Illinois’ disclosures.

In effect, that meant investors overpaid for bonds of a lower quality than they were made out to have, although the S.E.C. did not measure any loss. In Monday’s settlement with the S.E.C., Illinois agreed to a cease-and-desist order without admitting or denying the accusations.

In reaching the settlement, the agency said, it considered “remedial acts” by the state, which hired disclosure counsel in 2009 and made extensive corrections and amplifications in its financial reports.

“Municipal investors are no less entitled to truthful risk disclosures than other investors,” said George S. Canellos, acting director of the S.E.C.’s Division of Enforcement. “Time after time, Illinois failed to inform its bond investors about the risk to its financial condition posed by the structural underfunding of its pension system.”

Because the states are legally sovereign, federal securities regulators have limited jurisdiction over their activities and can take action only when there has been a fraud. The first state to be accused of securities fraud by the S.E.C. was New Jersey, in 2010. The commission found that New Jersey had also deceived the municipal bond market about the risks posed by its shaky pension system.

In his budget address on Friday, Gov. Pat Quinn of Illinois, issued a clear warning that the pension system had to be fixed.

“Without pension reform, within two years, Illinois will be spending more on public pensions than on education,” said Mr. Quinn, a Democrat. “As I said to you a year ago, our state cannot continue on this path.”


NYC Main Post Office above.
And they did!
Post Office Nears Historic Default on $5B Payment
NYTIMES
By THE ASSOCIATED PRESS
July 30, 2012

WASHINGTON (AP) — The U.S. Postal Service is bracing for a first-ever default on billions in payments due to the Treasury. That's adding to widening uncertainty about the mail agency's solvency as first-class letters plummet and Congress deadlocks on ways to stem the red ink.

With cash running low, the Postal Service says it will not make two legally required payments for future retiree health benefits — $5.5 billion due Wednesday, and another $5.6 billion due in September.

The defaults won't stir any kind of short-term catastrophe — post offices will stay open, mail trucks will run, employees will get paid.

But postal analysts point to longer-term harm, as the mail agency finds it increasingly preoccupied with staving off bankruptcy.

The Postal Service estimates that it is now losing $25 million a day.



“If you’re a hedged investor, this is great,” Mr. McNamara said.  Never say never.
Daniel F. McNamara, president of the Detroit Fire Fighters Association, described the city’s economic growth as “small little pockets.”  Fire protection supplied by too few w/shuttered fire houses.  Mayor Dave Bing know this is not slam dunk...

Fear of art sale sparked by Detroit emergency manager asking for appraisal
Reuters
By Steve Neavling
Fri, May 24 2013

DETROIT (Reuters) - As part of his efforts to solve Detroit's financial crisis, the city's emergency manager Kevyn Orr has asked for an appraisal of the collection at the Detroit Institute of Arts, sparking fears in artistic and philanthropic circles that he means to auction off the city's artistic jewels.

Orr was appointed in March by Michigan's Republican Governor Rick Snyder to tackle the shrinking city's long-term debt problem, which the emergency manager estimated at $15 billion in a recent report on the state of Detroit.

Orr's spokesman Bill Nowling insists that the appraisal is not about having an artistic fire sale, but more about being ready when bondholders and their insurers, who will be asked to absorb considerable losses, inquire about the artwork.

"If we are going to ask creditors to get a big haircut, we have to look at how to rationalize all of the city's assets, including the artwork," Nowling told Reuters late on Thursday. "We obviously don't want to get rid of art."

Although Orr is seeking an appraisal for the collection, museum officials and local media claim it is worth several billion dollars. But recent prices at auction for pieces similar to those likely to be sold could not immediately be obtained. Several published sources have estimated the total annual value of fine art auctions by Christie's and Sotheby's at $8 billion, and estimates of the global art market top $60 billion.

The Detroit Institute of Art's collection features several works by Vincent van Gogh, including a self portrait, Auguste Rodin's "The Thinker," paintings by Henri Matisse, Edgar Degas, Rembrandt, Caravaggio, ancient sculptures, plus enormous and famous murals of Detroit by Diego Rivera.

Many of the works in the institute's collection have been gifted over the years by local noteworthy families from the city's glorious industrial and commercial past, such as scions of the Ford family.

The city's museum is funded by a regional tax, and a nonprofit operates the museum. So if the city wants to sell off the artwork, it could take a judge to decide whether Detroit has the authority to do so.
Bankruptcy Lawyer Is Named to Manage an Ailing Detroit
By MONICA DAVEY, NYTIMES
March 14, 2013

Rejecting an appeal by some Detroit leaders, Gov. Rick Snyder of Michigan said Thursday that his administration was proceeding with plans to send an emergency manager to run the state’s largest city, and that he favors a lawyer who worked on Chrysler’s bankruptcy proceedings for the job.

“In many respects it’s a sad day,” Mr. Snyder said Thursday afternoon during a news conference in Detroit, which has been strained by annual cash shortages and $14 billion in long term liabilities even as residents have complained of fading, insufficient services. “But again I like to say it’s an opportunity.”

Mr. Snyder said he was recommending Kevyn D. Orr, a Washington lawyer and partner at Jones Day who has focused on restructuring businesses, to become Detroit’s first emergency manager. The governor’s recommendation all but ensures that Mr. Orr, who was part of the team that represented Chrysler in bankruptcy proceedings in 2009, will be chosen. Under state law, a board of leaders from several state departments formally hires emergency managers, and that board was preparing to meet later on Thursday.

Members of Detroit’s City Council, who are expected to lose power under a state-appointed manager, have contested the notion that the city requires an intervention and have denounced the plan as undemocratic. Earlier this week, they asked Mr. Snyder to reconsider his finding, but his announcement Thursday does not close the possibility for other avenues of appeal, including in the courts.

Mr. Orr was lauded by some observers for his long experience with financially troubled businesses, overseeing bankruptcies and guiding restructurings, as well as earlier posts at federal entities like the F.D.I.C. Mr. Orr, 54, who received his law degree from the University of Michigan, is also African-American — a fact that some in Detroit, which is nearly 83 percent black, said was likely to temper a racial backlash that was expected when Mr. Snyder, who is white and a Republican, announced state oversight.

For any arriving emergency manager, though, the challenges in Detroit will be intense, given the frustrations of local leaders who disagree with any state intervention; a time frame for restructuring that could turn out to be as short as 18 months; and the depth of the city’s financial problems, which some people suggest can be solved only through an eventual bankruptcy filing.

Municipal bankruptcies are extremely rare, but it was lost on no one that the state has selected an expert in bankruptcy law for Detroit, as opposed to a financial accountant, for instance, or a former city manager or elected leader, which have been picked for emergency management roles in some smaller Michigan cities. Under Michigan law, a city can file for bankruptcy only under certain conditions, including if an emergency manager has attempted other measures and concluded that such a move was needed.
For Detroit, a Crisis of Bad Decisions and Crossed Fingers
NYTIMES
By MONICA DAVEY and MARY WILLIAMS WALSH
March 11, 2013

DETROIT — This city was already sinking under hundreds of millions of dollars in bills that it could not pay when a municipal auditor brought in a veteran financial consultant to dig through the books. A seasoned turnaround man and former actuary with Ford Motor Co., he was stunned by what he found: an additional $7.2 billion in retiree health costs that had never been reported, or even tallied up.

“The city must take some drastic steps,” the consultant, John Boyle, warned the City Council in delivering his report at a public meeting in 2005. Among the options he suggested was filing for bankruptcy.

“I thought all hell would break loose — I thought the flag would finally be raised,” Mr. Boyle recalled in an interview last week. But his warning drew little notice. “It was utterly astounding,” he said.

The financial crisis that has made Detroit one of the largest cities ever to face mandatory state oversight was decades in the making, a trail of missteps, of trimming too little, too late, of hoping that deep-rooted structural problems would turn out to be cyclical downturns that might melt away as the economy picked up.  Some factors were out of the city’s control. As auto industry jobs moved elsewhere over the decades, for example, Detroit lost much of its affluent tax base. Lower than expected state revenue sharing did not help, nor did corruption allegations in the administration of Kwame M. Kilpatrick, a mayor who resigned in 2008 and was convicted on Monday of racketeering and other federal charges.

But recent findings from a state-appointed review team and interviews with past and present city officials also suggest a city that over the years was remarkably badly run.

The state review team found in recent months that the city’s main courthouse had $280 million worth of uncollected fines and fees. No one could tell the team how many police officers were patrolling the streets, even though public safety accounted for a little more than half the budget. The city was borrowing from restricted funds and keeping unclaimed property that it was required to turn over to the state. In some city departments, records were “basically stuff written on index cards,” as one City Council member put it.

“This was bad decisions piled on top of each other,” Gary Brown, the Detroit City Council president pro tem, said the other day. “It has all been a strategy of hope. You keep borrowing where every piece of collateral is already leveraged. You have no bonding capacity — you’re at junk status. You’re overestimating revenues and not managing the resources. Now the chickens have come home to roost.”

Once the nation’s fourth-largest city, Detroit had grown up around the auto industry, booming right along with it in the 1950s. City workers gained ground with pay increases intended to keep pace with those the United Auto Workers won for its members, analysts said.

“It was easy to do so back in the 1950s,” said Joseph L. Harris, Detroit’s former auditor general. “The city had 1.8 million residents then.”

But as auto jobs moved elsewhere and the region aged, Detroit’s labor costs — retiree health care costs, especially — ballooned.

At the same time, officials papered over growing deficits with more borrowing. Finally Detroit’s legal debt limit, which is linked to the total value of real estate in the city, fell when the mortgage bubble burst and property values plunged. Today the city says its debt limit is $1 billion, and it has effectively lost its ability to issue debt in the name of its taxpayers.

When a city cannot borrow, it cannot function; New York City showed that in 1975, Cleveland in 1978. But even as Detroit has approached the critical limit, some city leaders have seemed unaware, quarreling over smaller, symbolic issues like whether to lease a city-owned park to the state.

“It is peeling an onion,” Mayor Dave Bing said of his growing understanding after he took office in 2009 of the depths of the city’s financial woes. “You dig and you dig and you dig, and you really start to find out how bad the problem was. “

Mr. Bing knew plenty about the city’s struggles before taking office and ran on a platform of reversing the spiraling finances. Still, within his first six months in office, the city came close to not making payroll.

“That’s a scary moment,” he recalled in an interview. “You’ve got people living from paycheck to paycheck, week to week, and you’re about to run out of cash. You can only imagine what kind of impact that that’s going to have just on the life of the average person.”

The big structural imbalance was hard to see building up, because until 2008, when a new accounting rule took effect, cities like Detroit were not required to keep track of their workers’ lifelong health care bills. That is why Mr. Boyle found a $7.2 billion promise that no one knew about. Detroit’s general-obligation debt to its bondholders, by contrast, was a little less than $1 billion that year, safely within the city’s legal debt limit, then $1.4 billion.

But while the numbers are particularly grim here, the basic story line is hardly unique. The same path, long and slow, can be found from Providence, R.I., to Stockton, Calif.  To preserve cash, the city resorted to increasing its workers’ future pensions at contract time, instead of raising their pay. That helped balance the immediate budgets, but set up a time bomb sure to explode as more workers retired.  The cost of the retirees’ pensions also grew because of an inflation-protection feature that compounds every year. Detroit cannot renege on paying the benefits, at least outside of bankruptcy, because the State Constitution makes it unlawful to reduce pensions after public workers earn them.

By the 2000s, Detroit was borrowing to solve budget shortfalls. Meanwhile, property tax revenues fell, not just because of departing residents, but also as values fell and some people quit paying. The city has reported collecting 84 percent of property tax levied, but a Detroit News analysis suggests a collection rate closer to half of property owners.

In recent years, city officials have made deep cuts in staff and operations, leaving residents complaining of darkened streetlights, slow police response times and bus delays. But while cutting workers can help reduce the current year’s costs, it moves many of those people into the ranks of retirees, putting heavy long-term pressure on Detroit’s two public pension funds.  By late 2011, a sense of crisis descended on Detroit. In November, Mayor Bing, a Democrat, addressed the city on live television, warning that Detroit would run out of money without concessions from unions, layoffs and privatization. A month later, Gov. Rick Snyder, a Republican, called for a review of Detroit’s finances, a first step in cases where the state is preparing to send an emergency financial manager.

City officials held off further intervention by committing to a legal agreement with the state in 2012 that laid out measures to save money. By fall, a board overseeing the agreement said progress was moving too slowly. While City Council members are contesting the matter during a hearing in Lansing on Tuesday, Mr. Snyder’s administration is preparing to name an emergency manager within days. Mr. Bing says his administration has drawn up a plan to spare the city, though he acknowledges that it has yet to be fully put into effect.

Under Michigan law, the emergency manager would ultimately have the authority to remove local elected officials from most financial decision making, change labor contracts, close or privatize departments, and even recommend that Detroit enter bankruptcy proceedings, a possibility that experts say raises the prospect of the largest municipal bankruptcy in the nation’s history, at $14 billion worth of long-term obligations.

None of the decisions, experts here say, will be simple, and some wonder whether Detroit can be saved at all. Some 700,000 residents now live in this vast 139-square-mile city that once was home to nearly two million people. That number may fall to close to 600,000 by 2030 before the population begins to rise again, one regional planning group projects. By pushing costs into the future while its population is shrinking, Detroit has left the people least able to pay with the biggest share of its bills.

“Detroit is a microcosm of what’s going on in America, except America can still print money and borrow,” Mr. Boyle said.
A Private Boom Amid Detroit’s Public Blight
By MONICA DAVEY, NYTIMES
March 4, 2013

DETROIT — Private industry is blooming here, even as the city’s finances have descended into wreckage.

In late 2011, Rachel Lutz opened a clothing shop, the Peacock Room, which proved so successful that she opened another one, Emerald, last fall. Shel Kimen, who had worked in advertising in New York, is negotiating to build a boutique hotel and community space. Big companies like Blue Cross Blue Shield have moved thousands of workers into downtown Detroit in recent years. A Whole Foods grocery, this city’s first, is scheduled to open in June.

On Friday, just as Michigan’s governor, Rick Snyder, was deeming an outside, emergency manager a necessity to save Detroit’s municipal finances, the once-teetering Big Three automakers were reporting growing sales.

“It’s almost a tale of two cities here,” said Ms. Lutz, who is 32. “I tripled my projections in my first year.”

Around the country, as businesses have recovered, the public sector has in many cases struggled and shrunk. Detroit may be the most extreme example of a city’s dual fates, public and private, diverging.

At times, the widening divide has been awkward, even tense. As private investors contemplated opening coffee bean roasters, urban gardening suppliers and fish farms, Detroit firefighters complained about shortages of equipment, suitable boots and even a dearth of toilet paper.

“You’ve got to walk before you run, and for many years we weren’t even walking,” William C. Ford Jr., executive chairman of the Ford Motor Company, said of the developments of late within Detroit’s private sector. “But now it’s really interesting. Even as the political and financial situations continue to deteriorate, in spite of that, there is very hopeful business activity taking place.”

In the eyes of some, the signs of a private sector turnaround have only served to accentuate divisions: a mostly black city with an influx of young, sometimes white artists and entrepreneurs; a revived downtown but hollowed-out neighborhoods beyond; an upbeat mood among business leaders even as the city’s frustrated elected officials face diminished, uncertain roles under state supervision.

“There’s been way too much focus on the corporations and not enough on the residents,” said Krystal Crittendon, a candidate for mayor and a critic of government incentives, including tax breaks, that have helped encourage some of the projects. “Private businesses are coming in and basically purchasing properties for a penny, but meanwhile there’s no concentration on the neighborhoods and the common folks. We have to be sure everyone participates in this recovery.”

Daniel F. McNamara, the president of the Detroit Fire Fighters Association, described the city’s economic growth as “small little pockets” in an otherwise painful cityscape where services like fire protection have shrunk to too few firefighters and too many shuttered fire companies.

“If you’re a hedged investor, this is great,” Mr. McNamara said. “There are lots of attempts at tremendous things going on. But for you and me, has our world changed any? Not so much. There are so many individual tragedies going on.”

No doubt the picture here remains murky and unfinished. For all the talk of a private sector renaissance, demographers say that much of the economic growth remains mostly around the downtown and midtown sections, a small fraction of a vast 139-square-mile city that is otherwise wrestling with vacant homes, empty blocks, darkened streetlights, crime fears and overburdened police officers. While businesses have returned to Detroit, some others have left, and this city’s most essential problem, its swiftly dipping population, demographers say, has yet to reverse itself.

This city grew up around the automobile, becoming home to more than 1.8 million residents by 1950, before the population began sinking along with a decline of manufacturing, wide-scale flight to the suburbs, and the travails of the American automobile industry. From 2000 until 2010, Detroit’s population dropped by 25 percent, the biggest percentage loss during that decade for any American city with more than 100,000 people, aside from New Orleans, which had been pummeled by a hurricane. About 707,000 people live here now, by recent estimates, though some demographers say the city has already lost more residents.

But so much misery also brought newcomers: out-of-town investors who learned of properties for sale at prices unimaginable in other cities and young entrepreneurs, artists and musicians who said they valued Detroit, in part, for its grit and its seemingly wide open spaces, the very elements that had made some people flee. Business incubators, like TechTown, began emerging, and Michigan business executives began reinvesting in the city, among them figures like Dan Gilbert, the founder of Quicken Loans, who has bought building after building downtown.

Meanwhile, Detroit’s car companies have experienced what had once seemed like the unlikeliest of comebacks after the financial crisis. General Motors and Chrysler emerged from bankruptcy filings and government bailouts to far more upbeat signs — and with investments in Detroit. Not long ago, Chrysler moved its regional marketing team into a downtown building here, and an assembly plant in the city, Jefferson North, was retooled to produce a new version of the Jeep Grand Cherokee sport utility vehicles, among the company’s hottest sellers.

Governor Snyder’s announcement last week that the city had reached the point of financial emergency drew new, widespread awareness to the crisis, but business leaders here said they had been well aware of the government’s misery — and defiantly moving on in the face of it — for years. In a way, some viewed the announcement as merely a public acknowledgment of a long-held truth, raising the prospect that the public sector might eventually be sorted out and catch up to industry.

“Everything has sort of been operating on separate tracks,” said Kurt Metzger, director of Data Driven Detroit, a nonprofit organization that tracks demographic, economic and housing trends in the region. “The business and philanthropic communities had basically just decided to go ahead in spite of government.”

Still unanswered, though, is how a shifting government alignment may change the business climate. Mr. Snyder’s decision would shore up Detroit’s finances with a state-assigned manager granted sweeping powers to merge or eliminate city departments, call for the sale of city assets, and adjust contracts with labor unions. That move has created new uncertainty for some entrepreneurs about what exactly that may mean for business.

“The honest answer is, I just don’t know,” said Ms. Kimen, the hotel and community space developer, whose plans for the Eastern Market neighborhood include something like a cross between a museum and a public library. She said she had at various points considered Maine, Memphis, even Alaska before she left New York City in 2011 for Detroit. “I’m here and I’m committed,” she said, adding, “This city has had so many heartbreaks.”
Snyder to name emergency financial manager in Detroit, has candidate in mind
Detroit Free Press
1 March 2013

Citing runaway deficits and long-term debts Detroit could never repay on its own, Gov. Rick Snyder today pulled the trigger and announced he will appoint an emergency financial manager for the state’s largest city. The decision means Motown will soon have a new boss in charge of restructuring Detroit’s dire financial mess, likely to include drastic cuts in public services and a top-down rethinking of the type of government a shrunken city with a dwindling tax base can afford.
State Control Draws Closer for Detroit After Fiscal Review
By MONICA DAVEY, NYTIMES
February 19, 2013

DETROIT — A review team appointed by the state of Michigan has concluded that Detroit is mired in a serious financial problem, a step that draws the city ever closer to emergency oversight by a state-assigned financial manager.

If Gov. Rick Snyder concurs with the findings in the coming days, state officials will appoint an emergency financial manager who would attempt to solve the city’s financial woes, or could ultimately urge Detroit to enter into bankruptcy proceedings.

In a way, the review team’s conclusion, announced on Tuesday, seemed inevitable in a city that has wrestled with more than $14 billion in long-term liabilities, nearly annual projections of imminent cash shortfalls and a population — and accompanying tax base — that has plunged to 713,000 residents from 1.8 million decades ago. Still, it is an outcome many of this city’s political leaders have fought for years to avoid, racing in recent months to cut costs and collect more revenue as proof that Detroit can solve its own problems.

The team’s findings called new, undesired attention to the dismal financial circumstances of government operations in Detroit, a city which, by some other measures, has experienced a period of renaissance and private investment in recent years. It also raised the prospect of growing political and racial tension between the city, where the population is about 83 percent black and many leaders are Democrats, and the state, where the population is nearly 80 percent white and where Republicans, including Mr. Snyder, control the capital.

Along the streets here on a blustery, frigid day, Detroiters expressed a mix of views about the prospect of state intervention. Some suggested that the notion violated the role of the city’s elected leaders, while others seemed unconcerned about who fixes the city’s problems as long as someone does.

On Tuesday, it remained conceivable that Detroit might yet avoid a state-appointed emergency financial manager, though many here suggested that the odds of that now appeared slim and Mr. Snyder has in recent days been studying a pool of possible candidates for the job.

Under a Michigan lawaimed at sparing the state’s most financially troubled cities from failure, Mr. Snyder could within 30 days reject the conclusion that Detroit’s situation is dire. Or, should he agree with that conclusion, Detroit officials could still appeal the decision. The city could also enter into a legal agreement with the state, laying out plans for remaking the city’s finances with no emergency manager. However, just such an agreement was enacted last April, and some state officials say it has failed to go far enough to solve the city’s crisis.

“We believe there’s a financial emergency in the city, and there’s no plan in place to correct the situation,” said Andy Dillon, Michigan’s state treasurer and a member of a six-person review team that examined Detroit’s finances over the past two months.

The review team found a city troubled for years with cash shortfalls — including one expected to reach $100 million by June — as well as repeated general fund deficits, year after year, dealt with mostly by issuing long-term debt. In fiscal year 2012, that general fund deficit reached more than $326 million.

But the city’s long-term liabilities — more than $14 billion — may be the larger problem, the review team’s report suggested.

Detroit’s problems are by no means simple or new, and some have questioned whether even an emergency manager — someone meant to have few political considerations and an unsentimental perspective on the city’s operations — will be able to turn things around.

In only the last four years, the number of city employees has been reduced to 9,696 from more than 13,400 to save money, and some argue that the only way to financial stability will be through more cuts, furloughs and benefit reductions. Yet at the same time, residents here complain about slow city services and a significant increase in killings in 2012.

The city’s geography is itself another puzzle. The cradle of the American auto industry and once the nation’s fourth most populous city, Detroit remains vast at 139 square miles — a city suited to a larger population and city services to match — but is now left with pockets of empty lots, shuttered homes and a continuing foreclosure problem in the face of high unemployment.

If an emergency financial manager is ultimately appointed here, that person will have relatively broad powers to reshape Detroit’s budget, but will be unable, at least temporarily, to throw out existing labor contracts, as had been permitted under a sweeping emergency manager law that voters statewide rejected last November. Since then, the governor and legislators have passed new provisions for emergency managers, which take effect in late March and grant such managers more control over labor contracts.

Under Michigan law, an outside manager could eventually help lead the city into bankruptcy proceedings — an outcome that few in Detroit or Lansing see as wise or likely but that some have come to talk about as a real consideration. Municipalities rarely wind up pursuing such a course, known as Chapter 9, and if Detroit were to do so, it would be the nation’s largest municipal bankruptcy in terms of size of debt as well as the most populous city to do so.

Around the nation, states have long used a variety of approaches, including appointed receivers and oversight boards, to step in when cities are teetering toward failure. The role and authority of such bodies range widely, as do views about whether they ultimately work. A financial control board helped New York City regain its footing in the 1970s. In Michigan, five cities and three school districts are already under the supervision of an emergency financial manager, but the prospect of outside oversight for Detroit, given its size and history, draws especially pointed reactions.

Mayor Dave Bing, a Democrat who has spent much of his four years in office focused on trying to solve Detroit’s financial woes and has yet to announce whether he will seek re-election this year, has in the past said the city needs no takeover by an emergency manager. Still, even during discussions of cost-cutting in recent months, Mr. Bing and Detroit’s City Council have sometimes clashed over what to do. And earlier administrations — including that of Kwame Kilpatrick, a former mayor accused of corruption whose fate was being weighed here by a federal jury on Tuesday — have left behind a financial crisis, Mr. Bing has said.

On Tuesday, Mr. Bing said even he was unsurprised by the review team’s conclusion. “My administration has been saying for the past four years that the city is under financial stress,” he said, adding, “If the governor decides to appoint an emergency financial manager, he or she, like my administration, is going to need resources — particularly in the form of cash and additional staff.”
Detroit fights to keep control of its finances;  State may impose emergency manager
The Washington Times
By Andrea Billups
Sunday, December 25, 2011

DETROIT — In the Motor City, the fight over who gets the keys is becoming increasingly intense.

Detroit city officials and activists such as the Rev. Jesse Jackson are stepping up their campaign to retain local control as Gov. Rick Snyder, a Republican, nears a decision on whether to appoint an emergency manager to keep the financially crippled city from going under.

Hammered by foreclosures, 20 percent unemployment and governmental malfeasance, the city is facing a $47 million shortfall by June - a deadline that has residents concerned that services including fire, police and even garbage pickup would go off the rails unless the state intervenes.

The situation pits Detroit leaders struggling to maintain the city's independence against outsiders pressing for reform.

"They don't want someone from the outside running their city. They have a long history of that," says Doug Roberts, a former state of Michigan treasurer who directs Michigan State University's Institute for Public Policy and Social Research. "The best scenario is that the governor keeps pushing and says, 'I'm coming,' and they begin to make serious and quick progress internally, because they all agree they don't want the option of an emergency financial manager."

Currently, the state has begun the process of a 30-day preliminary review — a precursor to forming a formal review team that could set in motion the appointment of an emergency manager. The governor, however, has stressed that he would rather the city work matters out, and that he has no interest in the state running Motown.

As the situation in Detroit comes down to the wire, several members of Michigan's congressional delegation have approached the governor about reviewing the emergency financial manager law itself. They question its constitutionality, which has been used successfully in other Michigan cities, and they hope to meet with Mr. Snyder to discuss not only the constitutional issue, but also the emotional ramifications of the state taking over a major city.

"We are deeply concerned about how this law is igniting tensions in our local communities and dividing our state," said Sens. Carl Levin and Debbie Stabenow, both Democrats, in a letter to the governor. "This law runs counter to this cooperative spirit and is sending the wrong message to the rest of the country about what our state stands for."

Rep. John Conyers Jr. — whose wife, a former Detroit City Council member, is serving time in federal prison for her role in a bribery scandal - has taken the matter one step further. He is seeking Justice Department review of the Michigan emergency manager law and asking U.S. Attorney Gen. Eric H. Holder Jr. to intervene.

Meanwhile, as lawmakers seek to assuage tensions about a possible takeover, momentum is building behind a petition drive to gather 161,000 signatures to repeal the current Public Act 4, which gives the state power to put in place an emergency financial manager for schools and governments.

"I've got real doubts that they will be able to get them," says Bill Ballenger, the publisher of Inside Michigan Politics. "If they do, they will be fought tooth and nail by the state and everybody else in the courts."

A native of Flint, where an emergency financial manager is in place, Mr. Ballenger says that if Detroit can't fix its problems, it shouldn't be immune to a takeover.

"Why is Detroit different? Why do they get a pass?" he says of the public outrage. "It's absurd. They are either going to have to have a consent agreement between the mayor and council" or get an emergency manager.

"Frankly, I am on Snyder's side and his approach to this. It's the only way Detroit is ever going to get out of this mess is through this mechanism. The petitioners are just totally irresponsible."

Last week, the GOP-led Michigan Senate, in its closing days before the holidays, approved what has been described as a stopgap bill that allows the governor to create a transition board for cities currently under emergency revision, along with a new emergency manager in places where the problems have yet to be fixed. Democrats were angered by the measure that they said would fly in the face of the petition drive's success.

"This legislation is an end-run around the last constitutional step left to our citizens to stop bad legislation passed by the Legislature, that being the petition initiative," state Sen. Glenn Anderson, a Democrat from Westland, said in a statement. "This action by the Republican-controlled Senate and House ignores the will of the people and subverts their right to place the emergency financial manager legislation before a vote of the people."

The possibility has put Detroit Mayor Dave Bing in a tough position. He has attempted to negotiate with the city's 48 employee unions. He has asked for concessions in wages and benefits to stop the state takeover. The City Council last week approved 10 percent pay cuts for the few nonunion city workers.

The mayor is also in the process of laying off about 1,000 city employees, a painful process for city police, firefighters and bus drivers along with many from the white-collar ranks. If spending is not stemmed, the city faces a budget shortfall by April and could not cover payroll and essential city services.

Former Mayor Dennis Archer, speaking on WJR-AM radio's Frank Beckmann show Dec. 19, says union pension and retiree health care costs have been the 100-pound weight on the city for many years. Detroit, he added, cannot keep up the heavy payment burden, and he called on the current council and government to find their own solutions now on these legacy costs, something he thinks can keep the state away from Detroit's door.

Mr. Roberts, the former treasurer, however, calls it not just a Detroit problem, but an issue that affects everyone in the state. He dubs Mr. Bing's efforts "sincere," but says if an emergency manager is ultimately put in place, "the single biggest loser would have to be the mayor."

He compared the city's legacy woes with what ultimately sunk General Motors Corp. into bankruptcy protection - a move that ultimately gave the company a chance to turn its fortunes around.

"I think everyone here is trying to walk a little gingerly because they know every step is fraught with difficulties," he said. "The union could take a step that says we disagree and we understand and will come to work and sue you in court. Or, the other step is they say we disagree and are not showing up. That is a serious issue."

He said he hopes Detroit's leaders will use the little bit of time they now have to work on a mutual solution, but he is not optimistic.

"I think ultimately an [emergency financial manager] is going to have to be appointed," he said. "Some people in Detroit already support [the move], and that is not the same ones who necessarily show up for mass rallies."

© Copyright 2011 The Washington Times, LLC. Click here for reprint permission.
Looking Up, Detroit Faces a New Crisis
By MONICA DAVEY, NYTIMES
December 23, 2011

DETROIT — For a city that some have declared dead again and again, the talk of late here was of renaissance — of auto industry jobs growing, new companies moving into empty buildings downtown, urban gardens blooming in vacant lots.

Then came the revelation that Detroit is poised to run out of money by April and fall deep into debt by June. Now a place that had seemed to be finding its balance is reeling once more.

A formal state review of Detroit’s books — a step that could lead to the appointment of an outside emergency manager to take over the city’s finances — was announced this week. City leaders are conducting urgent meetings with labor union leaders and financial consultants in a race to cut costs and head off further intervention.

The possibility that an outside manager could come in — one who would have broader than ever powers under a rewritten state law — has stirred new concerns among financial ratings agencies and business leaders who have fresh investments in the city. City government, meanwhile, is finding itself forced to re-examine services it provides — including buses, health care and street lighting — and shed what it can no longer afford.

The crisis could not have come at a worse time.

“This state is starting to come back, the economy is starting to come back, and as long as you are out there promoting all this negativity, it’s no good for any of us,” Mayor Dave Bing said in an interview. “You don’t need Detroit against the state.”

Still, Mr. Bing, a former basketball star who built an auto-parts manufacturing company, says he also knows the risks — symbolically, financially and politically — if a city of this size reaches a point where it cannot pay debts.

“If Detroit would ever go into default, it would kill the state,” he said, quickly adding that he did not think the situation would come to that.

Already, though, Detroit is the only major American city with credit that sits beneath investment grade, experts say. With 11,000 city employees and 139 square miles of increasingly vacant land to tend to, it has struggled, year by year, deficit by deficit, to pay its bills. Once the nation’s fourth-largest city, it has seen its population drop since a high of 1.8 million in 1950 to a low last year of 714,000.

In the eyes of some leaders, this financial crisis, despite the recent positive signs from the private sector, was decades in the making: the city never shrank its operations enough to match a shrinking tax base, and it delayed its woes with borrowing, exaggerated revenue estimates and accounting shifts.

This fall, Mr. Bing warned that Detroit would run out of cash without major cuts, particularly layoffs and deep salary reductions.

Within days of Mr. Bing’s announcement, state officials said they were starting a preliminary review of the city’s finances, which concluded this week with the announcement of a deeper state look at the books and an alarming snapshot of Detroit: more than $12 billion in long-term debt, an estimated general fund deficit of $196 million and no sufficient plan for dealing with the shortfall.

The state’s moves have set off an uproar. Under Michigan law, a formal review must precede a state finding that a city’s financial circumstances are so dire as to require an outside manager to take over — and many here view that as the state’s ultimate intent. Mr. Bing, a Democrat, and even groups he has sparred with — the City Council and leaders of the city’s 48 unions, whose contracts are the target of much of the cuts — have pushed back, as have residents. The refrain: Detroiters can take care of Detroit just fine, thanks.

For Gov. Rick Snyder, a Republican and businessman elected in the wave of Republican statehouse victories in 2010, Detroit’s crisis comes at a complicated moment. Earlier this year, Mr. Snyder and the Republican-dominated Legislature passed a law adding vast powers to the emergency managers sent to troubled Michigan cities, including the ability to throw out union contracts.

Critics said the law was an attack on democratic principles and an assault on labor unions. A lawsuit is pending. A campaign to repeal the law is under way, raising the possibility that the current emergency manager law could be suspended until the vote — even as the state’s most significant city may be on the verge of being assigned one.

State officials insist that the steps taken do not mean that an outside manager will necessarily be appointed in Detroit. For his part, Mr. Snyder, who had never held political office before, seems put off at suggestions that he hopes to step in.

“Why would I want an emergency manager?” Mr. Snyder said in an interview. “I’ve got plenty to do as it is. It’s best if we’re a supporting resource and they resolve their own issues with support.”

That said, Mr. Snyder, a former computer company executive and venture capitalist who is trained as a certified public accountant, seems unlikely to back away without firm evidence — perhaps a consent agreement between the state and the city — that Detroit is taking steps to repair itself. Mr. Bing says he opposes such a commitment.

A financial control board helped pull New York City from the brink in the 1970s, and some have begun speaking of Detroit in similar terms.

“An emergency financial manager might be a blessing at this point,” said Peter Karmanos Jr., who founded the Compuware Corporation, which moved its headquarters to downtown Detroit from the suburbs almost a decade ago.

Mr. Bing said he believed a solution was within reach. Significant concessions by the city’s labor unions, whose contracts do not expire until June, would have to be a part of that, city officials say, though no agreements have been announced. Mr. Bing has called for 1,000 layoffs, a 10 percent pay cut for employees and privatization of some services, though City Council members have said cuts will have to go far deeper.

The one thing that is certain is change is coming.

“Privatization, outsourcing has always been a dirty word,” Mr. Bing said. “But we’re talking about survival. And we can’t allow our 11,000 employees that we have to dictate the future of over 700,000 people here in this city.”

On the streets here, Detroiters sound frustrated — at the mayor, at the state, and at the possibility that more cuts might mean a further diminishment of their shrinking city.

“Are we going to survive?” Mr. Bing says constituents are asking. “What are we going to look like when all of these changes are implemented? Should I stay? Should I run? You hear all of that. But I think the base in this city, in terms of citizens, are fighters, and don’t want to give up.”


Not bankrupt yet...
Scranton mayor slashes pay for all city workers—including police and firefighters—to minimum wage
By Dylan Stableford, Yahoo! News, Senior Media Reporter
10 July 2012

Cash-strapped Scranton, Pa., has slashed pay for all city employees—including police and firefighters—to minimum wage, sparking furor among unions that now say they plan to sue in federal court.

A lawyer representing three unions told Scranton's Times-Tribune he will file several motions, including one to hold Mayor Chris Doherty in contempt of court for violating a judge's order to pay full wages.

The lawyer, Thomas Jennings, said he also expects to file a pair federal lawsuits on behalf of the unions—International Association of Firefighters Local 60, the Fraternal Order of Police E.B. Jermyn Lodge 2 and the International Association of Machinists and Aerospace Workers Local Lodge 2305—alleging the city failed to pay proper wages and overtime, and cut benefits for disabled police and firefighters without a proper hearing.

"Pick a law," Jennings told the Times-Tribune. "They violated it."

Last week, Doherty abruptly cut pay for all 398 city employees to $7.25 per hour, saying it was the only way to keep Scranton solvent.

According to the paper, Scranton—which faces a $16.8 million budget deficit—had $133,000 in cash on hand as of Monday, but owed $3.4 million in various vendor bills, including health insurance.

Roger Leonard, a city employee, told NPR he typically gets a $900 check for two weeks of work. On Friday, it was $340.

"I have two children and a wife, and my wife is a stay-at-home mom,"  Leonard told NPR. "If the savings gets drained, we won't be OK."

The mayor, meanwhile, blamed the City Council for Scranton's financial woes.

"If they'd gone with my budget, we wouldn't be having this discussion," Doherty said. "The taxes would have been raised. The bills all would have been paid because we would have had a dedicated revenue stream."
Scranton's police, fire and DPW unions will sue in federal court;  Federal suit likely to be filed against Doherty
Times-Tribune
By Jim Lockwood (Staff Writer)
Published: July 10, 2012

Scranton's police, fire and DPW unions not only again will ask a Lackawanna County judge to hold Mayor Chris Doherty in contempt of court for paying minimum wages to employees, but they also expect to sue him in federal court and file a workers' compensation complaint, their attorney said Monday.

The trio of unions - International Association of Firefighters Local 60, the Fraternal Order of Police E.B. Jermyn Lodge 2 and the International Association of Machinists and Aerospace Workers Local Lodge 2305 - expect to soon file several new legal actions, said their attorney, Thomas Jennings. Those actions would include:

n A motion in Lackawanna County Court to hold the mayor in contempt, due to paying 398 city employees minimum wages in their paychecks Friday, even though a judge on Thursday and Friday ordered full wages.

n A lawsuit in U.S. District Court in Scranton under the Fair Labor Standards Act alleging the city has failed to pay wages on time and failed to pay overtime.

n Another federal complaint alleging violations of the Heart and Lung Act, because benefits of disabled police and firefighters also were cut to minimum wages without first having a required hearing.

n A penalty petition with the state workers' compensation commission over the minimum wages.

"Pick a law. They violated it," Mr. Jennings said.

Mr. Doherty said, "If I had the money, I'd pay them (employees). Again, it's the council's budget" that has not provided enough funding to pay all of the city's bills.

Efforts to reach council President Janet Evans were not successful.

Regarding legal matters, Mr. Doherty deferred comment to city solicitor Paul Kelly, who represented the city Thursday and Friday in court on the unions' lawsuit. Efforts to reach Mr. Kelly also were unsuccessful.

With more legal battles looming, the city's financial crisis remained at a stalemate Monday: the city was still running on fumes while an agreement between administration and council on how to get out of the jam remained elusive, the mayor said.

"Nothing's changed," Mr. Doherty said.

It remains to be seen whether the city would have enough cash on hand to make a full payroll on the next payday of July 20, the mayor said.

As of Monday, the city had $133,000 in cash, but owed $3.4 million in various vendor bills, one of which was health insurance, said city Business Administrator Ryan McGowan.

That was more than either Thursday and Friday, when the city's bottom lines were $5,000 and $83,000, respectively, he said. The daily amount fluctuates depending on how various tax revenues come in and bills are paid, he said.

For example, the city began Monday with $373,000, paid $190,000 to Blue Cross of Northeastern Pennsylvania and $50,000 to the DPW union's pension fund, which had threatened to sue if a payment was not made, Mr. McGowan said.

An expected influx of wage taxes in August, from second-quarter-of-the-year collections, would bolster city coffers, but only temporarily as the city still projects a $16.8 million deficit for the year, he said.

A payroll every two weeks amounts to $1 million, officials said. To free up cash to pay overdue bills, particularly health coverage, the mayor on June 27 announced he was indefinitely cutting salaries of all non-federally funded employees to the federal minimum wage of $7.25 an hour. This way, the payroll every two weeks would amount to $300,000, though he pledged to pay all back wages once the crisis is resolved.

The three unions sued on July 2 and Lackawanna County Court Judge Michael Barrasse issued injunctions Thursday (temporary) and Friday (preliminary permanent) ordering full wages, despite administration testimony that the city is nearly broke.

Payroll processing began July 3 in preparation of Friday's paychecks, which contained only minimum wages. Despite Thursday's temporary injunction, the mayor saying Thursday that only minimum wages would be paid Friday prompted the unions to seek to hold him in contempt of Thursday's ruling. However, the judge on Friday said he would not hold the mayor in civil contempt Friday because such a move would have been premature. After that hearing, however, the employees learned their paychecks indeed contained only minimum wages and they vowed to again seek to hold the mayor in civil contempt.

Under questioning by Mr. Jennings, witnesses testified Friday that the administration negotiated with vendors regarding extending credit or accepting partial payments, but did not attempt any negotiations with the unions regarding lowering of their salaries.

Mr. Kelly also unsuccessfully argued in court that the lawsuit was flawed because a key party to the dispute - the council - was missing.

The unions' lawsuit named as defendants only the City of Scranton and Mr. Doherty, in his capacity as mayor. Though the lawsuit faults both mayor and council for months of "squabbling" and "internecine political warfare" that led to gridlock and victimization of employees, the lawsuit did not specifically name council as a defendant or seek to hold council members in contempt. Mr. Jennings said that was because Mr. Doherty was the one who unilaterally decided to slash salaries to minimum wages and signed the June 27 letter that was given to heads of the city's four unions informing them of his decision.

The city's remaining employees' union, the International Association of Machinists and Aerospace Workers Local 2462 that represents clerical workers, was not a plaintiff in the unions' lawsuit.


24 October 2011 Last updated at 18:24 ET
Pennsylvania declares Harrisburg in fiscal emergency
12 October 2011

The governor of the US state of Pennsylvania has declared a fiscal emergency in the capital, Harrisburg, beginning a state takeover of the city's finances.
The takeover comes after Harrisburg's city council rejected calls to implement a financial recovery plan and declared bankruptcy.  The city faces debts of $458m (£291m) and has struggled to pay for services.

Critics of the takeover law say it is unconstitutional.  Mr Corbett signed the takeover law last week, after it was passed by the Pennsylvania legislature.

'Destitute for decades'

Debt woes have plagued the city of 50,000 since 2010, when an incinerator project funded by municipal bonds failed to raise expected cash. A takeover plan is likely to include renegotiating labour deals, cutting jobs and putting most of the city's valuable assets up for sale or lease, correspondents say.  That would include the incinerator, as well as parking garages.  The city council has said it chose bankruptcy over a rescue plan which would benefit creditors at the expense of the city.

"I think [bankruptcy] is the only real option that we had," said City Controller Dan Miller. "They wanted to sell all of our assets and make Harrisburg destitute for decades to come."

Harrisburg's bankruptcy declaration is opposed by the city's mayor, Linda Thompson, who challenged the legality of the vote.  According to Ms Thompson, city law requires the mayor and the city solicitor to sign off all hiring of outside lawyers, as well as having city solicitors approve all ordinances and resolutions considered by the council.

"They have been dishonest with the entire community for months," the mayor said about the council. "I am ashamed of the behaviour."

Harrisburg's federal petition for Chapter 9 bankruptcy lists six pending legal actions by creditors.

Pension pitfalls
Lavish retirement benefits create economic crisis for state and local governments
Washington Times
Nita Ghei
Friday, Sept. 9, 2011

Ongoing economic stagnation has hit state budgets hard. The pain inflicted by the market's downward spiral has been made more acute by mounting deficits in state pension plans. Five years ago, 40 percent of these government-run retirement systems were underfunded. Now only four states are fully funded. The problem is so serious that Rhode Island was forced to call a special legislative session to address the crisis.

Closer to home, both Maryland and Virginia are facing about $17 billion in unfunded pension liabilities. It's a story repeated through the country. Without significant reform, municipalities, counties and state governments will be forced into bankruptcy by the crushing obligations.

For years, the problem of underfunding has been carefully concealed from public view. States have borrowed cash to paper over the shortfalls. They've preserved benefits for retirees while cutting benefits for new hires in an attempt to limit the future damage. They've even resorted to bookkeeping gimmicks. State pension plans have broad leeway over the accounting methods they use, and, unsurprisingly, they take advantage of wildly optimistic projections of market earnings while downplaying life expectancy.

Most public pension funds, for example, assume their investments will grow between 7.5 and 8.5 percent annually. The Dow Jones Industrial Average grew at an average annual rate of 5.3 percent over the 20th century; any long-term predicted return above that rate is unrealistic, to say the least. At the same time, cost pressures mount because we are living longer, and health care expenses are on the rise. A California study predicted that its retiree health costs would jump from $4 billion in 2008 to $27 billion in 2019.

The problem is obvious. Pension funds get their money from three sources: employee contributions, government payments and the returns from investing this money. These funds are supposed to pay annual pensions and health benefits to retirees for their lifetimes. But generous terms allow employees to retire young - sometimes after showing up at the office for as little as 28 years, as is the case in Rhode Island. Pensions can even exceed the amount of a full salary. In one Ocean State town, retired firefighters were actually paid more than those doing the hard work of putting out fires.

Municipalities and states are rapidly realizing the mess they've made. Faced with tax-weary residents, Rhode Island is already contemplating what was previously unthinkable - reducing benefits for retirees. Courts in Colorado and Minnesota have already upheld benefit cuts implemented in those states. Other states might well follow.

Other reforms, such as requiring state pension plans to adhere to the same accounting standards as private plans, must be adopted immediately. This will clarify the true extent of the problem. Above all, the states must stop the gravy train and switch to defined contribution plans - just like the ones that private-sector employers offer.

The Central Falls Success
By JOE NOCERA, NYTIMES
January 2, 2012

Central Falls, R.I., is a speck of a city, one square mile of triple-decker houses and tired storefronts a few miles up the road from the state capital, Providence. It is the poorest city in Rhode Island, with 27 percent of its residents below the poverty line, according to the Census Bureau. Earlier this year, it started bankruptcy proceedings. Its mayor, who is the subject of a state police investigation, has been pushed aside in favor of a receiver, who has taken control of the city’s finances.

Central Falls, though, also has one of the most promising reading experiments in the country. The Learning Community, a local charter school, and the Central Falls public elementary schools have joined forces in a collaboration that has resulted in dramatic improvements in the reading scores of the public schoolchildren from kindergarten to grade 2. Given the mistrust of charter schools by public schoolteachers, creating this collaboration was no small feat. And while the city’s bankruptcy now threatens it, the Central Falls experiment not only needs to be preserved, it should be replicated across the country. I haven’t seen anything that makes more sense.

When I last wrote about public schools, it was through the prism of Steven Brill’s book, “Class Warfare: Inside the Fight to Fix America’s Schools.” Though a fan of the charter school movement, Brill concluded that, by themselves, charters were never going to fix what ails the nation’s public schools; you couldn’t possibly scale them to encompass 50 million public school students.

As it turns out, Meg O’Leary and Sarah Friedman, the co-founders of The Learning Community, had gotten there a whole lot earlier. Before starting The Learning Community in 2004, they spent three years working with the Providence school system on a pilot program designed to come up with ways to “transform teaching practices and improve outcomes,” says Friedman. During a time of upheaval in the school system, a small corps of great teachers were the real anchors in the schools. In setting up The Learning Community, O’Leary and Friedman wanted to apply the best practices they had learned during the Providence project — and, eventually, to use their knowledge to help public school districts in Rhode Island.

They got their chance in 2007, when Frances Gallo became the Central Falls Schools superintendent. After she got the job, Gallo stopped in on several families just as they had learned that their children had won a spot (via lottery) in The Learning Community. “They were so excited,” recalls Gallo. She wanted to understand why.

So Gallo began spending time at The Learning Community — where she, too, became excited. The school drew from the same population as the public schools. It had the same relatively large class sizes. It did not screen out students with learning disabilities. Yet the percentage of students who read at or above their grade level was significantly higher than the public school students. When Gallo asked O’Leary and Friedman if they would apply their methods to the public schools, they jumped at it.

Did everything go smoothly at first? Not even close. “At first it was, ‘Oh, here comes another initiative,’ ” recalls Friedman. There were plenty of “venting” sessions at the beginning, along with both resentment and resistance. But The Learning Community invited the teachers to visit its classrooms, where the public school teachers saw the same thing Gallo had seen. And very quickly they also began to see results. Most public schoolteachers yearn to see their students succeed — just like charter schoolteachers do. Most of the resistance melted away.

There is another important element to this collaboration: The Learning Community advisers who work most closely with Central Falls teachers haven’t just done a fly-by. They have worked hand in hand with their public school colleagues for three years. They have been a constant, encouraging presence. They have developed relationships. And they have treated the public schoolteachers with respect. It makes a huge difference.

Early on, O’Leary and Friedman convinced Gallo to hire reading specialists for Central Falls. (The Learning Community’s methods call for a great deal of one-on-one instruction, especially when a teacher sees a student beginning to lag behind.) Ann Lynch, a Central Falls elementary school principal, told me that budget cuts have already forced her to cut back from two specialists to one. Everybody is worried about more cuts: the combination of the bankruptcy and a new state funding formula — which will cut back some state financing for the Central Falls School District — has people fearful that The Learning Community’s project will be pared back, too.

Let’s hope it doesn’t happen. What is happening between this one charter school and this one school district offers an all-too-rare chance for optimism — not just about Central Falls’s public schools, but America’s.
Sweeping Rhode Island pension system overhaul passes
DAY
By DAVID KLEPPER Associated Press
Article published Nov 18, 2011

Providence - Despite jeers and the threat of a union lawsuit, Rhode Island lawmakers on Thursday approved sweeping changes to one of the nation's most underfunded public pension systems.

The state's heavily Democratic General Assembly defied its traditional union allies to pass the landmark changes. The legislation is designed to save billions of dollars by backing away from promises to state and municipal workers that lawmakers say the state can no longer afford.

Lawmakers said Thursday's vote was one of the most wrenching they've had to cast, though the fight might not be over if unions follow through with promised lawsuits.

"It would certainly be a lot easier to walk away from this reform," said Senate President Teresa Paiva Weed, D-Newport. "However, it is clear that doing nothing only puts our retirees' and our active members' benefits at greater risk. We owe it to them, as well as to all other taxpayers, to attack this challenge head on."

Gov. Lincoln Chafee, an independent and one of the bill's original authors, said he will sign the bill.

Public workers said they felt betrayed and some interrupted Thursday's debate with jeers.

"They should be ashamed of themselves," said Dean Brockway, a Cranston firefighter with 28 years on the job. "These were Democrats voting to do this. They're trying to solve a 40-year-old problem in one day. They didn't have to do this."

The landmark legislation could have big implications around the nation. Nearly every state is confronting the same problem, caused by escalating pension costs, huge investment losses and recession-induced budget deficits. The Pew Center on the States released a report earlier this year that found that states face a collective gap of $1.26 trillion between what they've promised public workers and what they've set aside to meet those promises.

Rhode Island needs $7 billion to fully fund the pension fund that covers state workers and many municipal employees - roughly the same amount as the state's entire annual budget. Under the current system, the state must pour more and more into the pension system annually, from $319 million in 2011 to $765 million in 2015 and $1.3 billion in 2028.

The pension system covers 66,000 active and retired public teachers, state employees, judges and police and firefighters. Fifty-eight percent of retired teachers and 48 percent of retired state workers receive more money in their pensions than they did in their final years of work. Their benefits are set by state law and not collective bargaining.

The legislation passed Thursday would suspend automatic, annual pension increases for retirees for five years and then award them only if pension investments perform well. The bill also raises retirement ages for many workers and creates a benefit plan that mixes pensions with 401(k)-style accounts. The changes wouldn't apply to municipal pension plans.

The measure is projected to reduce the state's unfunded pension liability by $3 billion immediately and save taxpayers $4 billion over 25 years.

Passage of the bill is a political victory for legislative leaders, Chafee and Treasurer Gina Raimondo, a Democrat who was the main architect of the legislation.

For months, Chafee and Raimondo warned that unless the state reined in pension costs, lawmakers would have to raise taxes and slash funds for education and other services.

"Rhode Island has demonstrated to the rest of the country that we are committed to getting our fiscal house in order," Chafee said.

Leaders of public-sector unions aren't giving up and vow to overturn the legislation in the courts.

"The attorneys are going to make a lot of money," Philip Keefe, president of Local 580, which represents social service, administrative and technical workers. "If this is overturned, it will be you, me and every other taxpayer that is on the hook for billions."

Opponents of the bill pushed unsuccessfully to weaken its impact, but the bill passed easily nevertheless. The Senate passed its version of the legislation 35-2, with the House voting 57-15 a few hours later.
Frustrated opponents of the bill warned that it would prompt a long and potentially expensive court battle.

"What we are about to do is a crime," said Rep. Scott Guthrie, D-Coventry, a retired firefighter. "You want this thing to linger around for 10, 15 years? You want to go through 10 years of litigation? You want to spend God knows how much money on legal fees?"

Several lawmakers said they supported the bill with great reluctance, noting that they were voting to withhold money that retired workers were counting on. Rep. Donna Walsh, D-Charlestown, said it was the "most heart-wrenching, gut-wrenching vote" she has cast in 12 years in the General Assembly.

"It may be necessary, but it certainly is not fair," said Rep. John Savage, R-East Providence. "Can we honestly say to our state workers, to those who educate our children, to those who protect us... that this bill is fair? I don't think so."

Lawmakers said the state's stubbornly high unemployment rate of 10.5 percent helped convince them of the need for change. The state has intervened in the financial struggles of two cities, and a state-appointed receiver sought bankruptcy protection last fall for the insolvent city of Central Falls.

Raimondo said it's not fair to ask taxpayers to pay for ever-increasing pensions for public workers when they may not be able to find a job themselves.

"The average Rhode Islander is worse off than the average public employee," she said. "The average Rhode Islander is pretty strapped right now."

The changes in the legislation would not apply to locally run pension funds, many of which are in even worse shape than the state-run system. Chafee said he will introduce legislation in January to give cities and towns greater authority to curb their pension costs.
Faltering Rhode Island City Tests Vows to Pensioners
NYTIMES
By MARY WILLIAMS WALSH and MICHAEL COOPER
August 13, 2011

When the small, beleaguered city of Central Falls, R.I., filed for bankruptcy this month, it sought to cut the pension checks it has been sending its retired police officers, firefighters and other workers by as much as half. All the city promises now is that its retirees, many of whom do not get Social Security, will not have their benefits cut to less than $10,000 a year.

But investors who bought the city’s bonds could do much better: Rhode Island recently passed a law intended to make sure that they would be paid in full, even in bankruptcy.

Retirees are wondering how the city can cut what they believed was a guaranteed benefit. “We put our time in, we put our money in,” said Walter Trembley, 74, a retired Central Falls police officer. “And the city, through their callousness and everything else, just blew it. They were supposed to put money in and they didn’t.”

Cities and local governments make lots of promises: to their citizens, workers, vendors and investors. But when the money starts to run out, as it has in Central Falls, some promises prove more binding than others. Bond lawyers have known for decades that it is possible, at least in theory, to put bondholders ahead of pensioners, but no one wanted to try it and risk a backlash on Election Day. Now the poor, taxed-out city of Central Falls is mounting a test case, which other struggling governments may follow if it succeeds.

If Central Falls, a city of about 19,000, is able to reduce the benefits its retirees now get — something they will fight — it would not only unsettle the millions of public workers and retirees across the country, but also reshape the compact between governments and their workers. Most public workers now pay a portion of their salaries toward their pensions, but they may balk if they see those pensions can be cut when they retire. And governments that, like Central Falls, have not enrolled all their workers in Social Security as a money-saving measure may have to rethink that strategy.

Millions of teachers, police officers, firefighters and other government workers have long believed that their pensions were untouchable, thanks to provisions in state laws and constitutions. But some of those promises are unclear or untested, said Amy B. Monahan, an associate professor at the University of Minnesota law school who has studied the myriad laws protecting public pensions in different states.

Just how those promises would stack up against promises made to others, like bondholders, is unclear. It is also unclear how those state laws would hold up in federal bankruptcy court, which has its own ranking of creditors.

“This will all be up to a court to decide,” Professor Monahan said.

But many cities and states have already signaled that their bondholders take priority.

When Jefferson County, Ala., was poised on the brink of bankruptcy this summer after defaulting on more than $3 billion of bonds to finance a new sewer system, the state moved to help. Alabama’s new governor, Robert Bentley, proposed a plan to replace the defaulted bonds with new ones issued with state backing, which could lower the borrowing cost and avert what would otherwise be the biggest municipal bankruptcy in American history. Bondholders would forgive some of the debt they are owed.

Mr. Bentley’s move contrasted with the lack of action by his predecessor two years ago when the city of Prichard’s pension fund ran out of money and it simply stopped sending retirees their checks. Despite a state law saying that the pensions must be paid, no one in state government moved to enforce the law or propose a rescue plan.

“I’m a little ticked about it,” said Mary Berg, 62, a retired assistant city clerk from Prichard, who said she had sent news accounts of the proposal to help Jefferson County to local officials, asking why the state had never helped her and her fellow retirees. “The state didn’t even look at Prichard.”

Teachers in New Jersey likewise got a cold shoulder when they tried to make the state comply with a law that it contribute a required amount to their pension fund each year. A judge ruled that their plan was not yet unsound, despite the state’s failures to make the payments. The teachers, who argued that by the time the plan qualified as “unsound” it would have collapsed, lost on appeal last year. But the state always sets aside enough money to pay bondholders.

Illinois has some of the strongest bondholder protections anywhere, which explains how a state that began its fiscal year with $3.8 billion in unpaid bills from last year — and whose pension system has less than half of the money it needs — is able to keeping selling bonds.

State law requires Illinois to make “an irrevocable and continuing appropriation” of tax revenues into a special fund every month that can be used only to pay bondholders. Illinois’s pension system claims to have a “continuous appropriation” too, but it does not have meaningful deadlines and has proved much more porous over the years.

The federal bankruptcy code says pensioners and general-obligation bondholders are both unsecured creditors, stuck at the back of the line and treated as equals. But there is maneuvering room in the welter of state and federal laws. After Vallejo, Calif., declared bankruptcy three years ago, it cut payments to bondholders, but let workers bear their loss in lower pay and skimpier retiree health benefits. Pensions were untouched.

In Central Falls, the pension plan for the police and firefighters is projected to run out of money in October. But officials there say short-changing the bondholders will not bring relief. The next time the city needs to borrow money, investors will simply demand more in interest, and they might decide all Rhode Islanders were a bad risk and charge all cities more.

“The last thing we want to do is increase borrowing costs for all our cities and towns, and therefore cause tax rates to go up across the state, because one city has fiscal problems,” said Robert G. Flanders Jr., the state-appointed receiver for Central Falls, explaining the new state law putting bondholders first in line.

After going 20 months without their pension checks, the 141 retirees of Prichard decided a third of a loaf was better than nothing and settled with the city. Their average benefit, which had been $1,000 a month, is now about $350. But they also get Social Security. Ms. Berg, the retired clerk, said she worried about the retirees of Central Falls, many of whom do not.

“I can’t imagine telling them that they have to take this 50 percent cut,” she said. “These are retirees, elderly people. They can’t go out and get new jobs.”

Kentucky’s Runaway Pensions:  Nonprofit groups have been living well off the taxpayer, too.
Wasington Times
By Kevin D. Williamson
April 6, 2013 12:00 A.M.

Government pensions have long been a sweet deal for government employees — and, in Kentucky, for some non-government employees, too. Seven Counties is the name of a nonprofit corporation that provides mental-health services in the Louisville area, and it was just bankrupted by the Kentucky state pension system.

Though it is not a state agency, Seven Counties joined the state pension system, Kentucky Retirement Systems (KRS), in 1979. It must have sounded like a good idea at the time, and it was in fact a great deal for many years. Like practically every other government-run pension system in the country, KRS provided generous benefits to state workers, and employees of Seven Counties, too. At the same time, they have done very little to secure its ability to meet the attendant profligate financial promises. It’s a win-win for the political class: Public-sector employees earn inflated retirement benefits, but taxpayers don’t get dinged for it immediately, because that compensation is pushed off into the future. And then the bill comes due.

Seven Counties alone is now responsible for a $227 million shortfall in its pension funding, an amount that the organization’s president, Anthony Zipple, says it could not pay in “200 years.” That is not quite true: The nonprofit’s three highest-paid employees take home nearly $1 million a year by themselves, almost enough to cover the deficit over the period of time stated. Chew on that for a second: As I argued in The Dependency Agenda, the real beneficiaries of the welfare state are the high-income contractors who provide government-funded social services. Here we have a nonprofit that is funded mostly by Medicaid, supplemented by other taxpayer-derived sources, with an employee paid more than $325,000 a year. Who says Medicaid is a program for poor people?

It will not surprise you that Mr. Zipple said that his biggest concern about health-care reform is that it would prove “too timid,” nor will it surprise you that 100 percent of the 2012 political donations from Seven Counties employees disclosed at OpenSecrets.Org went to Barack Obama, or that 100 percent of their donations in earlier years went to Democratic candidates and Emily’s List.

Mr. Zipple expects KRS and the state to make good on that $227 million.

Kentucky enacted a sham pension reform in 2008, which consisted mainly of a promise to start fully funding pensions . . . in 2025. Another, more robust pension-reform bill was signed in March, and it requires agencies to start making pension-fund payments that more closely reflect their underlying liabilities. That means that Seven Counties will see its annual pension payments rise from $9.5 million to $15.5 million. Faced with that reality, the nonprofit announced Friday that it would file for bankruptcy.

Kentucky’s pension system is a veritable horse-trading operation. Its managers are currently the subject of an SEC investigation of its payments to investment agents with ties to the pension board. KRS has unfunded pension liabilities of around $37 billion, while the separate teachers’ system has another $11 billion in unfunded liabilities. Kentucky’s unfunded pension liabilities are growing at a rate of $500 million a year, while the unfunded obligations of its retiree health-care plans are growing at $600 million a year. Which is to say, Kentucky needs to cough up more than $1 billion a year just to keep the situation from deteriorating further. As Professor Brian Strow of the BB&T Center for the Study of Capitalism at Western Kentucky University notes, the 2013 round of “reform” will add only about $100 million a year to the pension system, with a great deal of that money diverted from road repair and maintenance. The center also notes that Kentucky already has cut education spending by 26 percent in real terms since 2008. The roads and the schools get shortchanged, but the pensions of the political class are inviolable.

And what of the structure of those reforms? Professor Strow explains: “New state workers in Kentucky are moved to a hybrid retirement plan. Rather than have a defined-benefit plan, they are guaranteed a 4 percent rate of return on their defined-pension contribution. Where does one guarantee a 4 percent return on investments these days? Not in U.S. government bonds.”

Some of Kentucky’s counties and municipalities, which by law have been obliged to be more fiscally responsible than the state, want out of the state system, or at least a measure of independence. But there is no escape: Whether they are managed locally or at the state level, those liabilities are not going away. As recently as 2002, pension payments accounted for only 6 percent of the city of Louisville’s spending. Today they account for 15 percent of the city’s outlays, and that number will continue to grow. Every household in New York City is $35,000 in debt to retiring city workers — and that is beyond the billions they’ve already put in the pension funds. As Professor Joshua Ruah of the Kellogg School of Management calculates, “If states wanted to remedy this situation over the next 10 years with supplemental contributions, total contributions would have to rise by $75 billion annually, again assuming 8 percent investment returns. For comparison, total 2008 state tax revenues were $781 billion, and annual contributions in 2008 were approximately $100 billion. Thus, annual contributions would have to rise by 75 percent during the coming decade.” And that 8 percent seems very optimistic.

If you think that your schools or roads need more funding, ask yourself where the money is going. By the time a child born today finishes high school, pension costs in Ohio will be eating up more than half of all projected tax revenue. That isn’t a compensation package, it’s a Viking raiding party on taxpayers, carried out by government workers — and, in the case of Kentucky, with some berserkers from the nonprofit sector joining in too.


Birmingham, Alabama, in Jefferson County.

Judge clears way for record bankruptcy in Alabama
YAHOO
By JAY REEVES | Associated Press
March 5, 2012

BIRMINGHAM, Ala. (AP) — A judge has cleared the way for an Alabama county to move forward with the largest municipal bankruptcy in U.S. history, overruling Wall Street claims that state law didn't allow the county to file the case.

U.S. Bankruptcy Judge Thomas Bennett issued his order late Sunday, allowing Jefferson County, the state's largest county, to remain in bankruptcy as it attempts to sort out more than $4 billion debt linked to borrowing for the county's sewer system.

Bennett's decision could be reviewed by the 11th U.S. Circuit Court of Appeals, which already has been asked to consider another question in the case.

Home to the state's largest city of Birmingham and more than 650,000 people, Jefferson County filed the largest municipal bankruptcy ever in November after three years of negotiations failed to result in a settlement to pay off the debt. Lenders asked Bennett to throw out the case during a hearing December, arguing that Alabama's 1901 Constitution doesn't allow Jefferson County to file a municipal bankruptcy.

Trying to stop the bankruptcy in a move that could have resulted in more negotiations, a dozen lenders led by trustee The Bank of New York Mellon claimed Alabama law permits bankruptcy only for bond debt. Jefferson County has a different type of debt called warrants, they argued.

The county argued that bankers were misapplying state law in hopes of getting the case dismissed, and that any government in the state can go bankrupt no matter what kind of debt it has.

Bennett ruled Jefferson County is an insolvent municipality under state law and negotiated in good faith to resolve its debts, so the bankruptcy can move ahead.

Jefferson County cited $4.15 billion in debt when it filed Chapter 9 bankruptcy, far exceeding the previous record set in 1994 by Orange County, Calif., over debt totaling $1.7 billion. Jefferson County's financial problems resulted from a mix of outdated sewer pipes, the economy, court rulings and public corruption.

County officials say higher sewer rates will result from the debt. Faced with budget shortfalls after courts threw out a separate job tax, the county has cut staff, reduced services and closed outlying courthouses as it attempts to balance its books. Residents routinely wait in lines for hours to conduct simple business like renewing their car tags.
In Alabama, a County That Fell Off the Financial Cliff
By MARY WILLIAMS WALSH, NYTIMES
February 18, 2012

ONE county jail here is so crowded that some inmates sleep on the floor, while the other county jail, a few miles down the road, sits empty.

There is no money for the second one anymore.

The county roads here need paving, and the tax collector needs help.

There is no money for them, either.  There is no money for a lot of things around here, not since Jefferson County, population 658,000, went bankrupt last fall. There is no money for holiday D.U.I. checkpoints, litter patrols or overtime pay at the courthouse. None for crews to pull weeds or pick up road kill — not even when, as happened recently, an unlucky cow was hit near the town of Wylam.

“We don’t do that any more,” E. Wayne Sullivan, director of the roads and transportation department, said of such roadside cleanup.

This is life today in Jefferson County — Bankrupt, U.S.A. For all the talk in Washington about taxes and deficits, here is a place where government finances, and government itself, have simply broken down. The county, which includes the city of Birmingham, is drowning under $4 billion in debt, the legacy of a big sewer project and corrupt financial dealings that sent 17 people to prison.

If you want to take a broad view, the trouble really began with the Constitutional Convention of the State of Alabama in 1901. The document that emerged there — written to empower business interests and disenfranchise African-Americans and poor whites — gives towns and counties little authority over local issues. Local taxing power rests with the state, though state lawmakers are loath to wield it today, in an age of anti-tax populism. Last summer, the Supreme Court of Alabama struck down a tax that was a crucial source of revenue for Jefferson County, finally pushing the county over the brink.

Officials here have only begun to grapple with the implications of life under Chapter 9 of the federal bankruptcy code, a municipal form of debt adjustment, rather than reorganization or liquidation. Until now, the most famous example was Orange County, Calif., which filed for Chapter 9 in 1994, after risky investments went horribly wrong. Many local governments are struggling to pay their bills these days, but hardly any have filed for bankruptcy. Notable exceptions include Harrisburg, the capital of Pennsylvania, Vallejo, Calif., and Central Falls, R.I.

“This is really a journey without a road map,” said John S. Young, the civil engineer who was appointed by an Alabama court to figure out how to fix Jefferson County’s sewer system. Today he is that project’s official receiver in name only: a federal bankruptcy court has suspended his powers, ruling that the federal bankruptcy law trumps state laws that protect bondholders.

Ordinary citizens can’t do much at this point. Jefferson County has even canceled municipal elections scheduled for this August. It seems that there’s no money for voting booths, either.

IN late 2010, a Wall Street analyst, Meredith Whitney, caused a stir during an appearance on “60 Minutes.” The $4 trillion market for municipal bonds, Ms. Whitney said, was headed for trouble. Within 12 months, 50 to 100 sizable defaults, possibly more, would rattle the market, she predicted.  The reaction was stunning. In a blink, billions of dollars flew out of the muni market. Mutual funds that specialized in such bonds were hit especially hard.

Ms. Whitney’s prediction hasn’t come to pass, and the muni market — usually a dull-as-dishwater corner of Wall Street — has since recovered.

Many muni experts called Ms. Whitney an alarmist, but she clearly touched a nerve. States, counties, cities and towns issue many billions of dollars worth of new munis every year, and those bonds pay for all sorts of things. Government bodies nationwide can borrow those billions at a low cost because munis are traditionally considered among the most conservative of investments. Without quick and easy access to this market, local government as we know it would fall apart.

That’s why the developments in Jefferson County are so unnerving. About 300 municipalities nationwide are in default on their debt, but most of them are so tiny that they draw little attention. What is more, after New York City ran into financial trouble in the ’70s, and Cleveland fell into a hole in the ’80s, the federal bankruptcy code was changed to ensure that certain types of muni bonds would keep paying interest and principal even if the issuing government authority sought bankruptcy.

Yet Chapter 9 bankruptcies have been so rare, and Chapter 9’s involving lots of bonded debt rarer still, that there is almost no legal precedent for what is happening in Jefferson County. Its lawyers are negotiating with roughly 4,000 creditors, from suppliers to hedge funds. The federal bankruptcy judge in the case is exerting enormous influence. By the time this is over, the lines between state and federal power may be redrawn when it comes to who, if anyone, can force a community to make good on its promises.

“It could set a precedent for the whole market,” said Matt Fabian, a managing director at Municipal Market Advisors, a research firm.

One possibility is that bonds backed by revenue from a particular public works project — fees from a sewer system like Jefferson County’s, for instance — will come to be viewed as riskier investments in general. Until now, many municipal bond investors assumed that they would be paid back almost entirely in the event of a bankruptcy. Orange County ultimately set a reassuring example; although it postponed a debt repayment, it made up for the delay by paying a higher rate of interest.

Now, who knows? Officials in places like Harrisburg are watching the developments in Alabama closely. Harrisburg’s Chapter 9 filing was rejected by a federal bankruptcy court, but officials in that city still hope to wrest some concessions from creditors. Pennsylvania has passed a law that prevents Harrisburg from filing for Chapter 9 again, but that law expires on July 1.

NOT long after Jefferson County went bust, John S. Young was sitting under the arched windows of the Yale Club in Midtown Manhattan, trying to explain how all this started. Mr. Young, 58, had been brought to New York City by the Municipal Analysts Group of New York, a professional society, to give a briefing on the developments down south.

Mr. Young quickly recapped what just about everyone here knew: in 1996, the Environmental Protection Agency accused the county of dumping raw sewage into the Black Warrior and Cahaba rivers. Elected officials had to figure out what to do, and to figure it out fast.

Birmingham, which had thrived from Reconstruction to the mid-1960s as an iron and steel town, had been declining for years. Why not embark on a giant public works project, a Taj Mahal of sewage systems, to foster jobs and development?

Jefferson County began to borrow vast sums of money, but that money, it turned out, was a perfect medium for graft and contract-padding. Rather than replacing more than 2,000 miles of decrepit sewer pipes, the county dispensed contracts to build water treatment plants, pumping stations and administrative buildings, some on slag heaps left behind by closed steel mills.

All this debt was supposed to be paid off with revenue from the new sewer system — in other words, by fees the county would charge residents whose homes were hooked up to the system. As the debt grew, so did those fees — and the public outcry. By 2002, the average sewer bill in the county had doubled, to $18 a month.

One thing led to another. In an attempt to expand the system and add new ratepayers, the county tried to bore a giant tunnel beneath the Cahaba River, Birmingham’s main source of drinking water. But the tunnel was so unstable that the endeavor was abandoned. The county spent millions just to extract the boring machine, which had become entombed underground.

“That cost $19 million,” Mr. Young told the bond analysts. “Now it’s called ‘the Tunnel to Nowhere.’ ”

Despite all this, the county still hadn’t fixed its sewers, as the E.P.A. had required. It needed more money, but people were so angry that officials were afraid to raise rates further.

Desperate, Jefferson County turned to Wall Street, particularly to JPMorgan Chase. The bank was able to persuade the county to agree to a bond deal with terms that included complicated interest-rate swaps. Those swaps blew up during the financial crisis of 2008, leaving the county with even more debt than it had started with.  In addition, the project and its financing led to a variety of criminal and civil charges, with several officials and others receiving prison time. In one case, Larry Langford, a former president of the Jefferson County Commission and former mayor of Birmingham, was sentenced to 15 years in prison.

In another case, J.P. Morgan Securities dropped claims to $647 million in termination fees it had tried to make the county pay on the swaps, as part of a settlement that also called for J.P. Morgan to make payments of $25 million to the Securities and Exchange Commission and $50 million to the county.

As residents of the county saw more officials go to prison, public opinion hardened against paying the debt.

“I don’t accept the legitimacy of this debt,” said Allyn Hudson, 32, an Occupy Birmingham organizer camping near the bankruptcy court. “It shouldn’t ever have been issued, and therefore it shouldn’t exist. It shouldn’t have been spent. Since it shouldn’t have existed, we’re not going to pay it.”

Although JPMorgan, in its settlement, let the county out of its swaps deal, the county’s underlying debt remains outstanding. Today, the county is effectively shut out of the muni bond market and is coasting on reserves, further delaying work on sewers that don’t function properly. “I’ve never seen a utility that had such big financial needs, and no access to the financial markets,” Mr. Young said.

EVEN before the bankruptcy, the old industrial core of metropolitan Birmingham looked like a monument to urban blight. About a quarter of the people in Birmingham live below the poverty line. It’s different in the suburbs, where the money is, and where many homes have private wells and septic systems.

Downtown, at the courthouse, the line for car license tags snakes down a corridor. The county has shut its satellite courthouses, so everything now gets done here. Every department is short-staffed. The sheriff, Mike Hale, can’t afford to pay overtime. There is also outrage that the county paid Mr. Young, the court-ordered receiver, a little more than $1 million for 14 months’ work.

The county’s road crews are patching only big potholes; resurfacing can wait. The tax collector has laid off four agents, at a savings of $180,000. But the math of bankruptcy doesn’t always work well. Last year, those four agents collected $2.7 million from delinquent taxpayers, so it’s possible the county is losing money in this arrangement.

Down U.S. 11 from Birmingham is the city of Bessemer, where the second county jail, refurbished a few years ago at a cost of $11 million, sits empty and unused. The county can’t afford to pay for the guards. At the county jail in Birmingham, meanwhile, a 20-year-old program under which certain inmates were released pending trial, provided they wore electronic monitors and underwent drug tests, has been cut. That saved $2 million, but now the jail is overcrowded.

David Carrington, the president of the Jefferson County Commission, has floated the idea of freeing several hundred inmates. “We can’t be in contempt of court,” Mr. Carrington said.

Sheriff Hale refuses to consider that. The county, he said, has a duty to protect its citizens.

Here and there, new projects have sprouted up as if nothing has happened. The Logan family just broke ground on a $64 million ballpark for the Birmingham Barons, the minor league baseball team. Over in Hoover, a bedroom community that stretches over parts of Jefferson and Shelby counties, the police department bought 30 new Chevy Tahoes last year and sold a few of its old ones to Sheriff Hale.

And yet David Sher, a local businessman, said everyone wonders how the county will ever get out of this financial mess.

“People are desperate to think of anything they can to get the money,” he said.

The federal bankruptcy judge overseeing the case, Thomas B. Bennett, has already rendered a sobering appraisal. It is “highly unlikely,” he wrote in a decision in January, that “what was loaned can ever be repaid.”
Ala. County Votes to Settle Debt, Avoid Bankruptcy
NYTIMES
By THE ASSOCIATED PRESS
September 16, 2011

BIRMINGHAM, Ala. (AP) — Leaders of Alabama's largest county on Friday chose to settle with Wall Street over $3.1 billion in debt from a sewer system overhaul rather than go through with what would have been the largest municipal bankruptcy in U.S. history.

Jefferson County Commissioners voted to endorse the deal, but the state legislature must take action in a special session to complete the deal and commissioners said bankruptcy was still possible if that legislation doesn't go through.

Commissioner Jimmie Stephens, who oversees county finances, said there was no certainty legislators would approve the mix of local tax hikes and budget changes required to make the deal final. "It's a problem," he said.

Jefferson County has been trying to avoid filing bankruptcy over the sewer system debt since 2008. Its problems stem from a mix of outdated sewer pipes, the economy, court rulings and public corruption.

The main effect of a settlement for county residents would be higher monthly bills for sewer service. Jefferson County has about 658,000 residents and is home to both Alabama's largest city, Birmingham, and its medical and financial centers.

The settlement proposal with Wall Street investors led by JPMorgan Chase & Co includes the lenders agreeing to forgive about $1 billion in debt, the county refinancing about $2 billion, and a series of annual sewer rate increases.

The Alabama constitution gives state lawmakers a high level of control over county finances, so the legislature will have to take several steps to seal the debt deal. They will need to approve formation of a public corporation to take over the sewer system from the county, agree to fund the settlement if the county comes up short and pass legislation allowing the county to reallocate money already earmarked for other uses and to somehow replace lost revenues.

It was not immediately clear if there is enough support in the legislature. But Gov. Robert Bentley welcomed the deal and said he would work with lawmakers and the county so that the necessary laws can be passed.

"It may have been easier for the Commission to file for bankruptcy, but this settlement will result in a much better deal for the ratepayers and citizens of Jefferson County and for the state, with more than a billion dollars in debt reduction for the county," Bentley said in a statement.

A bankruptcy filing in this case would have overshadowed the record one filed by Orange County, Calif., in 1994 over debts totaling $1.7 billion.

JPMorgan welcomed the agreement. "We are encouraged by the county's decision to refinance the sewer debt and look forward to working toward a successful resolution in the coming months," a bank spokesman said.

A federal court forced Jefferson County to begin a huge upgrade of its outdated and overwhelmed sewer system to meet federal clean-water standards in the 1990s, and officials used bonds to finance the improvements. Outside advisers suggested a series of complex deals with variable-rate interest that were later shown to be laced with bribes and influence-peddling.

Loan payments rose quickly because of increasing interest rates as global credit markets struggled, and the county could no longer afford its payments. Meanwhile, a string of elected officials, public employees and business people were convicted of rigging the transactions that helped put the county in so much trouble.

Those convicted in the graft investigation include then-Birmingham Mayor Larry Langford, a former president of the Jefferson County Commission; and ex-Commissioner Chris McNair, whose daughter was one of the four black girls killed in an infamous Ku Klux Klan church bombing in Birmingham in 1963. Langford and McNair both are in federal prison.

The sewer debt isn't Jefferson County's only problem, though. It already has laid off about 550 of its 2,300 workers and reduced government services because courts struck down an occupational tax and business license that provided more than $74 million annually for its operating budget. The county has closed satellite offices and reduced hours, and long benches now line a hall in the main courthouse where residents often have to wait hours for the simplest of transactions, like getting a new car tag.
Debt Crisis? Bankruptcy Fears? See Jefferson County, Ala.
NYTIMES
By CAMPBELL ROBERTSON and MARY WILLIAMS WALSH
July 29, 2011

BIRMINGHAM, Ala. — A few hundred miles north of here, politicians are fighting over debt. It is a spirited debate, full of discussions about what kind of country will be left for future generations and pledges not to kick the can down the road.

But one does not have to go far to see that possible future. Welcome to Jefferson County. This is the end of the road, where the can cannot be kicked any farther.

There are lessons for everyone here, and they are all painful: lessons for those who are not concerned about the prospect of mounting debt, for those who insist that steep cuts can be relatively painless, for those who think the bill for big spending can safely be put off into the future, for those who have blind faith in the market and for those who think the government can always be relied upon to protect the interests of the people.

All of these beliefs have led to a place where the government can no longer borrow and the little cash on hand is being demanded by creditors, where the Sheriff’s Department cannot afford to respond to traffic accidents and hundreds of county workers are sitting at home, temporarily or possibly permanently out of work. They have also led to a widely held conclusion among residents that no one is on their side.

“I get tired of them dumping on the little people,” said Deb Passmore, 58, who had to shut down her Laundromat several years ago when the sewer and water bills reached $500 a month.

The prospect of county bankruptcy, which would be the largest of its kind in United States history, has gone from being an unwelcome mark of distinction to something that many residents insist should have happened a long time ago.

It still stings to think about how things got this way, how county residents are stuck with the tab from a reckless binge by Wall Street bankers, middlemen and crooked politicians, a greed-fueled spree that none of the voters actually wanted or even knew was happening. But residents know that complaints about fairness have not made that debt, all $3.2 billion of it, go away.

“What are you going to do?” said Steve Mordecai, 50, who was eating lunch at Ted’s, a meat-and-three place here that is somewhat less crowded than usual on Fridays, given that so many county employees are no longer working. “The county created the mess,” Mr. Mordecai said. “Now we have to pay it back.”

The story that ends in overspending excess began in neglect: in 1996, the federal government accused Jefferson County of sending raw sewage into area rivers and demanded that it rebuild its dilapidated sewer system. Such a project would be costly, but officials hoped to avoid unpopular rate increases first by pushing that cost into the future, and then by adding a maze of derivatives that were supposed to shield the county from interest-rate increases.

But the bond deals were fraught with pay-to-play scandals. Four county commissioners were convicted of taking bond-related bribes. Two bankers are fighting federal accusations that they made secret payments, and in 2009 J.P. Morgan forfeited $752 million to settle a complaint by the Securities and Exchange Commission.

The complicated bond-and-derivative structures failed during the financial turmoil of 2008, leaving the county with a $3.2 billion debt to pay, faster than planned. Sewer revenues that were pledged to pay the debt cannot keep up. The problems keep compounding: federal prosecutors have taken a derivatives consultant to court on bid-rigging charges. And the Internal Revenue Service is investigating whether the sewer bonds really should have been marketed as tax exempt.

But the fiscal crisis went from a simmer to a full boil in April, when the Alabama Supreme Court declared a major county tax unconstitutional. Shortly afterward, with the county reeling from the severe shortfall in general funds, a court-appointed receiver recommended a steep increase in county sewer rates, and also laid claim to the county’s only cash reserves, saying they were needed to bolster the sewer system’s finances.

At the end of June, Gov. Robert Bentley declared a shaky truce while negotiations took place. On Thursday, the County Commission announced that it was entering a seven-day standstill period to consider a settlement offer from the creditors, an announcement that was met with grumbles across most of the county.

“They should have filed for bankruptcy 10 years ago,” said Howard Faulk, an owner of Sophie’s Deli across the street from the county courthouse, where the lines for county business are hours long but the parking is free because the county cannot afford parking attendants. “If you’re standing in water this deep,” Mr. Faulk asked, his hand at his neck, how much deeper can it get?

But any residents who think a bankruptcy will simply wipe the debt clean are probably in for a bleak surprise. Chapter 9 of the federal bankruptcy code, the one local governments use, does not work like Chapter 11, where corporations restructure and bondholders routinely suffer losses.

In fact, Chapter 9 was amended in 1988 with the specific goal of making clear that certain types of municipal bonds would keep on paying even in bankruptcy, said James E. Spiotto, a bankruptcy specialist with the firm of Chapman Cutler. The bonds issued to finance Jefferson County’s giant sewer project are this type.

“The whole purpose is to assure the market that in times of distress, the bonds will be paid,” Mr. Spiotto said in an interview.

Many citizens of the county speak bitterly of a perception that other parts of Alabama think of the county as unworthy of help. Even one of the county’s own state senators blocked a plan to allow Jefferson to raise revenue to replace some of what was taken away by the April court decision, thus forcing layoffs.

“In Alabama, Jefferson County is Chinatown,” said David Mowery, a Montgomery political consultant, using the metaphor for hopeless inscrutability from the Roman Polanski film of the same name. “Forget it,” he said, summing up the general attitude toward the county. “There’s nothing you can do about it.”

But as Alabama’s own governor learned over the spring and summer, you cannot just forget Jefferson County, where Birmingham is the county seat. If it goes down, it takes the state — and the state’s credit — with it. This realization prompted the governor to intervene when the county was near declaring bankruptcy at the end of June.

Still, little of this reassures the people slogging through here, who realize that life will get harder before it gets better. The only consolation is gallows humor and signs they might not be alone.

“I used to think what awful leadership we have in Jefferson County,” said Phillip Winette, 58, who runs a printing company. “But now I’m watching the debate on a national level. It’s an epidemic.”
Ala. county readies for possible record bankruptcy
YAHOO
AP
By JAY REEVES - Associated Press
July 26, 2011, 4pm

BIRMINGHAM, Ala. (AP) — Alabama's largest county began laying the groundwork Tuesday for what would be the largest-ever U.S. municipal bankruptcy after three years of trying to work out a solution with Wall Street to more than $3 billion in debt linked to a massive sewer rehabilitation project tainted by corruption.

Officials in Jefferson County hope to avoid new layoffs but may have to raise sewer rates or trim public services. On Tuesday, county commissioners approved resolutions to hire prominent bankruptcy lawyers and to sell bonds later in case money is needed to emerge from a Chapter 9 bankruptcy, the type that can be filed by governments.

Two of the five commissioners said there's an 80 percent chance the county will file bankruptcy, and a vote could come at a meeting scheduled for Thursday in Birmingham, the county seat and Alabama's largest city.

The commission president, David Carrington, said other possibilities include extending talks with creditors led by JPMorgan Chase & Co. or accepting a settlement offer. But something must be done to resolve a crisis that has cast a shadow over the county for so long, hurting economic development and industrial recruiting amid the uncertainty, he said.

"This county deserves a resolution to this problem. We cannot let this thing go on another three years," said Carrington. "We will do what we were elected to do."

Jefferson County's bankruptcy filing would be nearly twice as large as the record one filed by Orange County, Calif., in 1994 over debts totaling $1.7 billion. One of the attorneys retained by Jefferson County had a leading role in representing Orange County.

Jefferson County Commissioner Jimmie Stephens said he favors bankruptcy unless there's "meaningful progress" in talks with creditors, and quickly.

The county already has laid-off hundreds of workers and reduced services because of problems unrelated to the bankruptcy threat, and commissioners said they did not anticipate additional immediate reductions should the county file for bankruptcy.

But Andrew Bennett, who works in a courthouse annex in Bessemer, said he worries that the county will repay lenders at the expense of needy people who cannot afford to pay more for sewer service and would be harmed by any possible cuts in county services.

"It's always the poor people who get left behind," he said.

The county — Alabama's historic economic hub with some 658,000 residents — has been trying to avoid filing bankruptcy since 2008. The deal it offered last week to JPMorgan Chase and other creditors would erase more than $1 billion of its debt with the promise of repaying the remaining amount through a combination of modest sewer rate increases and loans. But lenders have yet to respond to what amounted to a last-ditch effort to avoid bankruptcy.

"The fact that we have not received a counteroffer speaks volumes to me," said Commissioner Joe Knight.

JPMorgan Chase declined comment.

A court-appointed official last month recommended a 25 percent rate hike for sewer customers, whose average residential bill would increase from $37.74 a month to $46.88, calling it a necessary step toward financial viability. Commissioner Sandra Little Brown said the 25 percent increase is too high, and she prefers filing bankruptcy since cost increases could be limited to the single digits.

The county's problems result from a mix of outdated sewer pipes, the rough economy, court rulings and public corruption.

A federal court forced Jefferson County to begin a huge upgrade of its outdated and overwhelmed sewer system to meet federal clean-water standards in the '90s, and officials used bonds to finance the improvements. Acting at the suggestion of outside advisers in a series of deals that were later shown to be laced with bribes and influence-peddling, the county borrowed money for the project in a complex and risky series of transactions.

Loan payments skyrocketed because of increasing interest rates as global credit markets struggled, and the county could no longer afford to repay the money. In the meantime, a string of elected officials, public employees and business people were convicted of rigging the sweetheart deals that helped put the county in dire straits.

Those convicted in the graft investigation include then-Birmingham Mayor Larry Langford, a former president of the Jefferson County Commission; and ex-Commissioner Chris McNair, whose daughter was one of the four black girls killed in an infamous Ku Klux Klan church bombing in Birmingham in 1963. Langford is in federal prison, and McNair's lawyer is now asking President Barack Obama to pardon him for his crimes.

As if the sewer debt wasn't enough, the county has another major problem: Jefferson County already has laid off about 550 of its 2,300 workers and scaled back government services because courts struck down an occupational tax and business license that provided more than $74 million annually for its operating budget. Callers to a main county telephone number now get a recording telling them the automated system has been taken out of service because of the budget and to look up department numbers the old-fashioned way, in a phone book.

Commissioner Stephens, whose duties include overseeing county finances, said residents wouldn't immediately feel any fallout from a decision to file bankruptcy, but it is unclear what would happen in the coming weeks or months.

Likewise, a decision to file bankruptcy in Jefferson County may not affect the broader municipal bond market.

Matt Fabian, managing director at research firm Municipal Market Advisors, said a filing by Jefferson County was not likely to rattle investors across the country since many have been anticipating the move for years and already have factored it into their risk assessments of municipal bonds in general.

"Probably half the muni market thinks Jefferson County is in bankruptcy already," he said. "It's been so well telegraphed."



Well, we're even-handed in our shortfall (l)...Connecticut one of 50 states: here's how we measure up...

Report Details CT’s Fiscal Challenges
CTNEWSJUNKIE
by Christine Stuart | Apr 19, 2013 9:30am

An accountant and an economist tossed cold water on Connecticut’s financial outlook this week when they released a report detailing the “deep fiscal hole” policymakers have dug the state into over the past few decades.

The report by Fred Carstensen, an economist and director of the Connecticut Center for Economic Analysis, and former U.S. Comptroller David Walker who heads the Comeback America Initiative, found that Connecticut has “some of the highest — if not the highest — total liabilities and unfunded obligations per taxpayer of any state in the nation.”

According to the report if you add up the unfunded pension liabilities, retiree health care, and bonded debt, the cost per taxpayer in Connecticut is $37,693. The only other state that comes close to that is New Jersey where the per-taxpayer liability is $36,480. According to Truth in Accounting Connecticut’s per-taxpayer burden increased to $50,900 in 2011. That’s the when all the debt and assets are combined on a per capita basis. Click here to find out how they did their calculation.

“Beginning in the 1990s, state employee retirement programs were expanded considerably,” the report released this week found. “For several years now, elected officials have not made the necessary contributions to fund the promised benefits.”

That changed last year when Gov. Dannel P. Malloy implemented a plan he hopes will get the funds to achieve 80 percent funding in 2025 and 100 percent in 2032. In order to get there he’s increasing the actuarially required contribution by about $125 million.

But Carstensen and Walker pointed out that Malloy’s plan may not be enough.

“These steps were much too modest and came at the price of a four-year, no-layoff commitment to state employees,” the report says. “In addition, the state’s major labor contract, covering benefits, is not scheduled to reopen until 2022. This appears unrealistic because Connecticut’s current fiscal path is unsustainable.”

Unfunded pension debt isn’t the only thing making Connecticut less competitive as a state. There’s also the tax burden.

Carstensen and Walker pointed out that while Connecticut is perceived as being a high-tax state, that’s not entirely fair or accurate.

At the state level, Connecticut ranks 18th in the nation in state taxes collected as a percent of personal income. If local government taxes are factored in, Connecticut’s tax burden ranks 13th in the nation, below that of New York, New Jersey, and Rhode Island.

The report found that the state has relied too heavily on certain industries over the past two decades, which may have caused higher unemployment rates than the national average.

“For the past several decades Connecticut’s economy has been heavily reliant on the financial, insurance, and real estate industry (FIRE), with approximately 32 percent of its economy in the industry, compared to 21 percent of the nation as a whole,” according to the report. “Thus, Connecticut was disproportionately impacted by the financial crisis. But even before 2007, the industry did not experience employment growth, due in part to accelerating productivity resulting from increased use of information technology.”

Also the lack of meaningful participation in the information technology revolution by the manufacturing industry hurt the state’s competitiveness.

“These two issues, overreliance on financial services and a decline in key industries, contribute to a relatively weak small business sector, with very few young and innovative firms, which are the primary engines of job creation,” the report concludes.

Carstensen and Walker said they wrote the report not to “criticize current or past policymakers’ decisions, or to dwell on negative aspects of the state’s challenges. Rather, the purpose is to present information to facilitate a productive discussion about how to create a better future in Connecticut.”

To that end, the two offered a series of recommendations.

The first is that Connecticut must put its finances in order, especially with regard to restructuring pension and healthcare plans to make them fair, affordable and sustainable. The second is that the state must take steps to attract businesses in the sectors that can grow Connecticut’s economy in the future — such as digital technology, biomedical innovation, and pharmaceuticals. The third is the need to create a culture of transparency, accountability, and transformation at all levels of government in order to address economic inefficiencies and disparities that arise, in part, from the fact that Connecticut is one of only two states without county government.
Report: State economy headed for crisis
Keith M. Phaneuf, CT MIRROR
April 17, 2013

Connecticut's massive long-term debt, deep pockets of poverty and more than 20 years of stagnant job growth threaten to sink the state's economy for decades unless major reforms are enacted, according to a report Wednesday from a national fiscal responsibility group and the University of Connecticut's economic think-tank.

Comeback America Initiative founder David M. Walker and UConn economics Professor Fred V. Carstensen, who outlined their report at the Hartford Marriott, called for dramatic new reductions on public worker retirement benefits, deeper investments in transportation, education and economic marketing, and an enhanced "culture of transparency" that will drive greater efficiencies in state spending.

Each CT resident owes more than $50,000

Though Connecticut has one of the highest bonded debts, per capita, of any state in the nation, that represents just a fraction of the crippling debt taxpayers must answer for the in near future, said Walker, a Bridgeport resident and former U.S. comptroller general under President Clinton. He launched his Comeback America campaign for fiscal responsibility in 2010.

The picture goes from bad to scary, the report says, when one considers state employee and public school teacher pension funds that have less than half the resources they need to meet future obligations, as well as a state retiree health care program for which government has saved almost nothing..

Connecticut ranked dead last among states in 2011 when all debt is combined and assessed on a per capita basis. Each man, women and child effectively owed $50,900 here.

The second-worst state, Illinois, had per capita debt of $38,500. Ohio and Washington ranked in the middle with $7,700 and $8,200 owed, respectively. Six states, particularly those rich in energy resources, topped the list with positive balances, led by Alaska with an average per person credit of $34,100.

And even though interest is not charged on retirement benefit debt, it ultimately translates into state budget deficits that often are financed with bonding -- and interest charges.

Though interest rates have been kept low artificially, largely by the Federal Reserve System, that cannot continue much longer, Walker said, adding that it represents a crippling financial blow for Connecticut somewhere down the road.

"It's not a matter of if," he said. "It's a matter of when, how much, and how fast."

Though state employees did agree to some restrictions on retirement benefits in 2009 and 2011, Walker said the reforms simply didn't go far enough, and retiree health care in particular may need to change dramatically -- both for existing and future state workers.

The existing benefits contract between state government and employee unions runs through 2022, but Walker predicted severe budget crises would spring up well before then. "That cannot stand," he said.

Both Walker and Carstensen acknowledged that the huge cost of providing public-sector benefits stems largely from poor planning. State government provided very generous benefits for decades without saving anything to cover them over the long-term.

In addition, past governors and legislatures routinely raided worker pensions -- with union permission -- to close budget deficits.

No job growth and pockets of overty

Unfortunately while this was going on in the 1990s and 2000s, Connecticut "hit the wall" in terms of growing private-sector jobs, said Carstensen, who is director of the Connecticut Center for Economic Analysis. "We have a terrible track record in terms of employment."

Though the state's shrinking manufacturing sector grabs plenty of media headlines, Connecticut largely has stabilized that segment of its economy through business innovation and efficiency, he said.

But the financial services, insurance and real estate sectors, which dominated the economy in the 1980s, have been on a two-decade-long plunge and "we don't have a coherent strategy overall about how we're going to address that issue," Carstensen said.

Further complicating matters, the pain of that 20-year slide wasn't felt equally, the UConn professor said, adding that Connecticut's urban centers faced the worst of lost jobs, businesses and declining earnings. This, in turn, drove up local property taxes, which then accelerated the cities' economic decline.

Connecticut has become one large suburb that maneuvers around economic sink holes in its big cities, a disparity that costs money. "Doughnuts do not succeed," he said, adding that this poverty creates much greater costs for government, particularly with education.

"We've been trying to treat the symptoms too long. It's time we started trying to treat the disease," Walker said, adding that any so-called solution to fiscal woes that only relies on slashing all government spending will exacerbate urban poverty -- and ultimately weigh down the whole state.

The first step in reversing these trends, Walker said, is for voters to demand a change in culture at the Capitol that demands greater transparency and accountability in all programs -- which is the best way to weed out unnecessary spending and waste.

Carstensen noted that a recent restriction on worker health care negotiated by Gov. Dannel P. Malloy two years ago -- a $35 co-payment for emergency room visits that don't lead to a patient being admitted to the hospital -- has cut ER visits by 40 percent since then.

But both Walker and Carstensen said state officials also will need to raise more revenue. Some should come from taxpayers with a revised system that asks the state's wealthiest to pay more.

But Connecticut also should become more creative with tolls and other types of user fees that require those who heavily use public services and other resources to pay more.

"There's no way we're just going to cut our way out of this," Carstensen said.
Unfunded Liabilities Loom Just Down The Road
Hartford Courant
By DAVID M. WALKER | COMMENTARY
7:57 PM EDT, July 20, 2012

In just the past month, three California municipalities — Stockton, Mammoth Lakes and San Bernardino — have filed for Chapter 9 bankruptcy. Consider this a warning shot for state and local governments across the country, especially in Connecticut.

The Institute for Truth in Accounting, for which I am an adviser, just released its annual financial rankings for the 50 states, and it's bad news for the vast majority. When you consider current liabilities, underfunded pension and unfunded retiree health obligations, a mere six states have sufficient assets to cover their liabilities and obligations per taxpayer. That leaves 44 states with more liabilities and obligations than assets per taxpayer, with Connecticut at the very bottom. (The ranking of all states is at http://keepingamericagreat.org/new-2010-state-of-the-states-report/.)

Those numbers are bad in many cases as well for Connecticut's cities and towns. For example, the total liabilities and unfunded promises per taxpayer in Bridgeport were about three times as high as Stockton as of June 30, 2010. Although Stockton's financial problems are more immediate, Bridgeport's overall financial condition is worse.

A major cause of these disturbing numbers is the amount of unfunded pension and retiree health care obligations that state or local governments have amassed. These burdens were a key factor behind the recent gubernatorial recall election in Wisconsin and those California bankruptcy filings. They're taking Connecticut toward a fiscal crisis, too.

Time is against us. Demographic trends — and basic math — mean that the finances of Connecticut, Bridgeport, and most states and localities will continue to deteriorate, absent meaningful structural reforms. Their financial situation will be further complicated when the Government Accounting Standards Board's recently issued pension accounting standards are implemented.

More damaging will be the effect when the federal government finally restructures its finances. Among other things, the federal government will need to significantly reduce its spending, including support to state and local governments. In 2011, Connecticut received almost 40 percent of its revenue from the federal government. The restructuring "bad news" will flow downhill and add to the fiscal challenges of states and localities.

Governors, mayors and other government officials, along with legislatures, need to recognize reality and put their financial houses in order. A critical step will be restructuring pension and retiree health care obligations. In doing so, elected officials must recognize that fairness is a two-way street. Government employees should receive compensation and related benefits that are reasonable compared with those offered by major private employers. Fairness to taxpayers, however, requires that these plans be affordable and sustainable over time.

These determinations must be made by comparing the public and private sector plans (e.g., participation requirements, benefit levels and formulas, employee contributions, retirement ages, indexing provisions).

At a minimum, the following reforms need to be considered:

•Pension and retiree health care plans for new government workers should be competitive with current plans of major private employers. This will result in revising the type of plans and limiting their promises.

•Plans for current workers should be revised to eliminate abuses and better control costs. For example, overtime, vacation and sick pay should not be included in calculating pension payments. In addition, individuals should not draw a government pension when they are working for that entity as an employee or a contractor.

•Pension payments for current employees should not be reduced, but they should be capped. Annual pension indexing should be limited so that retirees cannot make more than a stated percentage of the pay of a current employee in an equivalent position. This percentage should vary based on the retiree's years of service.

•Individuals who are eligible for employer related health coverage should not be eligible for government funded retiree health care benefits. Those retirees who are receiving such benefits should stop getting them upon becoming eligible for Medicare. In addition, eligibility standards for retiree health care should be tightened.

Government officials and legislatures should reform public employee retirement plans to get the power of compounding working for them rather than against them. Although Connecticut made retiree health care reforms within the past year, they were far short of what is needed.

Government workers deserve competitive plans; however, it's neither reasonable nor equitable to expect taxpayers to pay significantly higher taxes in the future to fund retirement benefits that are much more generous — for jobs that are much more secure — than they will ever have.

The time for truth, transparency, taxpayer activism and action by responsible public officials is now. Connecticut and Bridgeport can either lead the way to a brighter future or face their own day of reckoning.

David M. Walker is former U.S. comptroller general and CEO of the Comeback America Initiative based in Bridgeport.

Two different takes on state's finances, economy
Keith M. Phaneuf, CT MIRROR
February 22, 2012

Cromwell -- Leaders of Connecticut's small towns were left to read the fiscal tea leaves Wednesday as state leaders offered two starkly contrasting views of Connecticut's finances.

Gov. Dannel P. Malloy and his fellow Democrats leading the House and Senate declared fiscal stability and pledged to continue trying to bolster municipal budgets, but GOP legislative leaders cited projected deficits, a bond rating downgrade and cash flow problems as evidence of another impending fiscal crisis.

"What a difference a year makes," Malloy said to open a 16-minute address at Wednesday's annual council meeting at the Cromwell Plaza Hotel and Conference Center.

"A year ago we were literally standing at a cliff, looking over that cliff and making a decision whether we would do what other states were doing," Malloy said, adding that nearly all states except Connecticut attacked state budget deficits but ordering deep cuts to municipal aid and to social service programs, passing burdens onto property taxpayers and the poor. "We went a different way. Our economy is beginning to grow, and we are taking on other, systemic issues."

The governor reminded municipal leaders that he inherited a budget with a built-in deficit that topped $3.6 billion in the 2011-12 fiscal year, a gap equal to nearly one-fifth of all spending. "We promised not to balance our budget on your backs and we didn't," he said, adding it probably was a "daunting fear" in many communities that town aid would be slashed.

The administration is committed to "maintaining a level of fiscal discipline that was not present in state government a short while ago," Malloy said, adding that this, coupled with the tax hikes and spending cuts ordered one year ago, now leave his administration poised to focus even more strongly on economic development.

Malloy said he plans to build on new programs that offer companies incentives to add jobs,  and to move to or expand in Connecticut. "If we don't get that pipeline going again, if we don't rebuild our economy, ... then we are going to be far worse in the coming years."

Connecticut was one of just three states, along with Michigan and Rhode Island, that created no net new jobs over the 22 years before his administration began in January 2011, Malloy said.

Besides promoting job growth, the administration also is working to dramatically reform Connecticut's education system, the governor said, noting that 42 percent of 8th graders in the Hartford school system are not proficient at reading.

"If we are going to grow jobs, we have to have a workforce prepared to take those jobs," Malloy said.

Besides refocusing the educational agenda, Malloy said the current fiscal stability also is enabling him to fix the cash-starved state employee pension system. Though that means hundreds of millions of dollars in additional spending on pensions in the next few years, starting in the mid 2020s Connecticut will begin saving on pensions annually, with cumulative savings topping $5.8 billion by 2032.

"What would happen to state aid to municipalities" in two decades if the system isn't fixed? Malloy asked. "What it would mean, in the out years ... is you would have people trying to balance their budgets on your backs again."

Shortly before Malloy's address, Democratic legislative leaders offered a similarly optimistic outlook on the state budget.

"We did what we had to do to stabilize our state," House Speaker Christopher G. Donovan, D-Meriden, said, adding that lawmakers remain determined not to balance state finances on the backs of cities and towns. "I think we want to keep that cooperation going."

Senate President Pro Tem Donald E. Williams Jr., D-Brooklyn, predicted state government would finish this fiscal year with either a small surplus or a small deficit, adding that legislators' focus has moved on to doing more to stimulate the economy. "It's time to do more to lift up our Connecticut businesses, he said.

But Republican legislative leaders said the signs point to something considerably less rosy than Democrats would have town leaders believe.

"We were hopeful we would be able to come before you this year and say things are different," said House Minority Leader Lawrence F. Cafero, R-Norwalk.

But Cafero said several recent developments have demonstrated that Connecticut's fiscal outlook is at risk:
 "What it means, in short folks, is we are not bringing in the money we thought we would bring in, we are not achieving the savings we thought we would achieve and we have not controlled spending the way we thought we would," Cafero said. "We're still unstable. We're still unsure. It was not supposed to be this way. We have to prepare for the worst."

Further complicating matters, the administration's own numbers show its new budget proposal is in balance for just one year, noted Senate Minority Leader John P. McKinney, R-Fairfield. The plan is projected to fall $424 million in deficit, and to exceed the constitutional spending cap by $650 million in 2013-14.

"What I hope to accomplish over the next session is to communicate that we're spending too much money," McKinney said, adding that Malloy's budget proposal would raise spending more than 8 percent in total over the next two fiscal years.

"It's not easy" to discern where state finances are going, Bart Russell, director of the Connecticut Council of Small Towns, said.

"On the one hand, we are extremely pleased that the governor presented a budget for the second year in a row that towns can take to the bank and develop their budgets around," Russell said, referring to the $20.7 billion state spending plan Malloy proposed two weeks ago for the fiscal year that starts July 1.

That plan not only spares the $2.9 billion municipal aid package from any major cuts, but also includes a $50 million increase in the Education Cost Sharing program, the single-largest municipal grant.

Malloy and the legislature approved a budget last spring that closed a historic budget deficit without cutting municipal aid. That package also gave towns nearly $50 million in new assistance by sharing state sales and other tax revenues.

Russell called for, and received, a round of applause from the audience for Malloy for his record on municipal aid. "For that governor, I want to thank you," he said.

But Russell also noted during an interview Wednesday that when COST's oversight board met last week to develop an agenda for the coming year, "there was quite a bit of discussion about the future and even some fear about the future some of the assumptions state policy makers are making about the economy."

Municipal leaders from both sides of the aisle also said that while they believe state finances are better off than they were 12 months ago, they aren't convinced everything is stable.

"It does look like things are starting to turn around," said Sprague First Selectwoman Cathy Osten, a Democrat. "But does that mean we should stop being fiscally conservative? No."

Osten said that despite the ECS increase proposed by Malloy, she has asked her local school board to reduce its budget request for 2012-13. Local education officials are seeking a 2.6 percent hike, but Osten said teachers have agreed to accept a wage freeze and she now is trying to keep the school budget increase under 1 percent.

East Lyme First Selectman Paul Formica, a Republican, said that while he also appreciates the support Malloy and the legislature have shown for town aid, "we still need to control our spending. Just given the economic environment, it is clear that our residents don't have an appetite for any tax increases."

Then there is Greenwich, Connecticut..."neither a borrower nor a lender be" used to be the town motto - on the road to economic perdition?

Looking for low interest loan, Greenwich digs deep...will RTM makes this into a high drama?  Can they put out the fire of wildly increasing debt?
Construction of structures now to be paid for by bonds, just like the rest of the 169 towns - this is really big news - of course, their comptroller used to work for Weston!

Town borrows $56 million, reaps low interest rates
Neil Vigdor, Greenwich TIME
Updated 10:59 p.m., Wednesday, February 15, 2012

 The town recently took advantage of its sterling credit rating to borrow $56.6 million at what finance officials are characterizing as bargain-basement interest rates.

Of that total, $23 million is considered "new money," with the town having already committed in prior years to borrowing the $33.6 million balance.  The money will help pay for a host of capital projects, including the construction of a new high school auditorium and a central fire station, paving and sewer work.

"This is a super deal," said Peter Mynarski Jr., the town's comptroller. "These are the lowest rates I've ever seen."

The town issued $40 million in one-year bond anticipation notes on Jan. 18, borrowing the money from Bank of America Merrill Lynch at an interest rate of 0.13 percent through a competitive bidding process.

"So for one year, we're paying $52,000 to borrow $40 million. I think that's pretty remarkable," said Larry Simon, a former member of the Board of Estimate and Taxation.

The town borrowed another $15.6 million from UBS Financial Services Jan. 18 through a combination of five-year and 20-year general obligation bonds. The blended interest rate on those bonds is 1.52 percent.

"We should always be so fortunate to have those kind of rates," said Bill Finger, the Democratic caucus leader of the BET.

Of the $15.6 million, $1.3 million is for the architectural and engineering phase of an upcoming renovation project at the town-owned Nathaniel Witherell nursing home that is expected to cost $22 million.  Budget officials attributed the low interest rates to the town's AAA credit rating, saying that the cost controls implemented by the town enable it to borrow money on the cheap without saddling taxpayers with huge debt-service payments.

"By doing this, we've saved the town an enormous amount of money," said Michael Mason, chairman of the BET.

Bond anticipation notes, or BANs, are instruments that allows the town to extend the window of debt service. With a BAN, the town has the option to pay off the balance after one year, roll over its obligation to a second year or spread the payments out over an even longer period by issuing five-year general obligation bonds.  Fiscal stewards have turned to short-term borrowing to augment tax revenues to pay for capital items in recent years, resorting to long-term bonds for sewer improvements and other projects in which the town will get a guaranteed return on its investment through fees.

Simon said the ability to borrow money without burdening the town with excessive interest payments is a testament to the work of the finance board.

"I think it shows how strong we are as a town financially," Simon said.


GE Takes Constitution Plaza Building In Foreclosure
The Hartford Courant
By KENNETH R. GOSSELIN, kgosselin@courant.com
5:34 AM EST, January 19, 2012

The owners of the former Travelers Education Center on Constitution Plaza in downtown Hartford have lost the five-story office building to foreclosure.

The 132,000-square-foot building at 200 Constitution Plaza, near the clock tower, has been empty for about a year but was covered by a master lease that guaranteed rent payments until the lease expired a few months ago.

GE Asset Management took control of the building, whose ownership is separate from other structures on the plaza, in late December, according to a filing with the city dated Jan. 13. GE declined to comment Wednesday about its plans for the building.

The former owner — U.S. Bank, National Association, the trustee of the Walters Connecticut Venture Trust, couldn't be reached for comment.

The building at 200 Constitution Plaza is the latest high-profile office building in the city's central business district to get mired in foreclosure trouble. Two others -- CityPlace II and Goodwin Square -- appear to be in the final stages of foreclosure, both owned by Northland Investment Corp. Northland last year lost Metro Center One, also in downtown.


VOLCKER IS CORRECT - 4
How many economists does it take to figure out that we are on a downward trend to financial free fall?
More pension perfidy
NYPOST
Last Updated: 12:14 AM, November 24, 2012
Posted: 11:11 PM, November 23, 2012

Get set for some big-time pain in the classroom — and in the pocketbook: A bulletin from the New York State Teachers Retirement System suggests that taxpayers andstudents are in for a nasty one-two punch.

Schools, the retirement system recently announced, will have to fork over as much as 16.5 percent of their payrolls next year — a whopping 40 percent jump — to keep the pension fund sound.  That means less money for upstate and suburban students. (New York City runs its own pension system for teachers; its turn will come soon enough.)

And because some of the costs — as the Empire Center’s E.J. McMahon has noted — can be recouped through property-tax hikes (even above the state’s 2 percent cap), taxpayers will be hit hard, too.  Put it this way: It’s going to hurt.  And then, hurt some more.

“We recognize this rate has a significant impact on school-district budgets,” said the NYSTRS bulletin.

Uh, gee — ya think?

And it’s going to get worse, McMahon predicts: Just since 2009 alone, teachers’ pension costs have doubled.  Much of the pain could have been avoided. True, part of the problem is poor performance by the markets; nearly half of NYSTRS’ assets are parked with publicly traded US corporate stocks.  But also fueling costs is a double-whammy of runaway benefit payments, growing an average 8 percent a year, and unrealistically rosy assumptions of investment returns — with taxpayers forced to cover any resulting shortfalls.

NYSTRS, you see, still uses the once (but no longer) standard figure of 8 percent to project its funds’ yearly growth. Yet since 2000, actual returns have averaged only 4.4 percent, McMahon reported. Last year, they came in at a paltry 2.8 percent.  Thus, gaps have been building for years.

Eventually, taxpayers (and students) pay.

And it’s not just teacher pensions squeezing budgets; public employees of every stripe, in the city and throughout the state, have won generous retirement packages for years. Those pricey perks are now helping to bankrupt local governments.  Yet the pols, who set pension terms, have done next to nothing to curb costs. This year, for example, Gov. Cuomo signed a wholly inadequate pension reform that won’t provide meaningful relief for years.

Why hasn’t Albany done more?  Consider a report last month by the Thomas B. Fordham Institute, which ranks New York’s teachers unions ninth versus those in other states in terms of their grip on lawmakers.

Notably, the report found, “a full 63.5 percent” of school funds goes for teacher salaries and benefits — the highest percentage in America “by a considerable margin.”

New York’s pols, in other words, help make sure the unions — and their members — are well taken care of.  And to hell with everyone else.  Which explains why teacher wages and benefits remain high, and pension costs are out of control.

Will this sad cycle never end?
Fiscal Crisis in States Will Last Beyond Slump, Report Warns
By MARY WILLIAMS WALSH and MICHAEL COOPER, NYTIMES
July 17, 2012

WASHINGTON — The fiscal crisis for states will persist long after the economy rebounds as states confront financial problems that include rising health care costs, underfunded pensions, ignored infrastructure needs, eroding revenues and expected federal budget cuts, according to a report issued here Tuesday by a task force of respected budget experts.

The severity of the long-term problems facing states is often masked by lax state budget laws and opaque accounting practices, according to the report, an independent analysis of six states released by a group calling itself the State Budget Crisis Task Force. The report said that the financial collapse of 2008, which caused the most serious fiscal crisis for states since the Great Depression, exposed a number of deep-set financial challenges that will grow worse if no action is taken by national policy makers.

“The ability of the states to meet their obligations to public employees, to creditors and most critically to the education and well-being of their citizens is threatened,” warned the two chairmen of the task force, Richard Ravitch, the former lieutenant governor of New York, and Paul A. Volcker, the former chairman of the Federal Reserve.

The report added a strong dose of fiscal pessimism just as many states have seen their immediate budget pressures ease for the first time in years. It also called into question how states will be able to restore the services and jobs that they cut during the downturn, saying that the loss of jobs in prisons, hospitals, courts and agencies had been more severe than in any of the past nine recessions. “This is a fundamental shift in the way governments have responded to recessions and appears to signal a willingness to ‘unbuild’ state government in a way that has not been done before,” the report said, noting that court systems had cut their hours in more than a dozen states, delaying actions including divorce settlements and criminal trials.

The report arrived at a delicate political moment. States are deciding whether or not to expand their Medicaid programs to cover the uninsured poor as part of the new health care law — an added expense some are balking at even though the federal government has pledged to pay the full cost for the first few years and 90 percent after that. Many public-sector unions feel besieged, as states and cities from Wisconsin to San Jose, Calif., have moved to save money on pensions. And Washington’s focus on deficit reduction — and a series of big budget cuts scheduled to take place after the fall election — has made cuts to state aid inevitable, many governors believe.

If federal grants to the states were cut by just 10 percent, the report calculated, the loss to state and local government budgets would be more than $60 billion a year — which it said would be nearly twice the size of the combined tax increases that states enacted from 2008 to 2011 in response to their deepest fiscal crisis in more than 50 years.

Things are worse than they appear, the report contends.

Even before the recession, Medicaid spending was growing faster than state revenues, and the downturn has led to even higher caseloads — making the program the biggest single share of state spending, as many states have cut aid to schools and universities. States do not have enough money set aside to cover the health and retirement benefits they owe their workers. Important revenue sources are being eroded: states are losing billions of sales tax dollars to Internet sales and to an economy in which much consumer spending has shifted from buying goods to buying lightly taxed services. Gas tax revenues have not kept up with urgent infrastructure needs. And distressed cities and counties pose challenges to states.

While almost all states are required by law to balance their budgets each year, the report said that many have relied on gimmicks and nonrecurring revenues in recent years to mask the continuing imbalance between the revenues they take in and the expenses they face in the short term and long term — and that lax accounting systems allow them to do so. The report focused on California, Illinois, New Jersey, New York, Texas, and Virginia, and found that all have relied on some gimmicks in recent years to balance their budgets.

California borrowed money several times over the past decade to generate budget cash. New York delayed paying income tax refunds one year to push the costs into the next year and raided state funds that were supposed to be dedicated to the environment, wireless network improvements and home care. New Jersey borrowed against the money it received from its share of the tobacco settlement and, along with Virginia, failed to make all of the required payments to its pension funds. Texas delayed $2 billion worth of payments by a month — pushing those expenses into the next fiscal year. Illinois has billions of dollars of unpaid bills and borrowed money to invest in its severely underfunded pension funds.

When desperate budget officials go looking for money to balance their budgets, they often see public pension funds as an almost irresistible pool of money. One common way of “borrowing” pension money is to not make each year’s required government contribution. Most places use actuaries to calculate how much money they must set aside each year to cover future payments — a number known as the “annual required contribution.” But despite the name, there is usually no enforceable law that the state or locality must pay it.

As a result, the task force found that from 2007 to 2011, state and local governments had shortchanged their pension plans by more than $50 billion — an amount that has nothing to do with the market losses of 2008, which caused even more harm.

When money is withheld from a pension fund, the arrears can start to snowball, because most states count on the money compounding at a rate of about 8 percent. Eventually the unfunded liability grows unmanageable, given all the other fiscal pressures on states and cities. In addition to pensions, America’s states and municipalities are estimated to have promised well more than $1 trillion in health benefits — that most have not started saving for — to their retirees. (The health costs became apparent only a few years ago, when an accounting rule was changed.)

Mr. Ravitch became deeply concerned about the fiscal problems of the states in 2009, after he won an emergency appointment as New York’s lieutenant governor during that year’s budget impasse. As he dug into financial records to devise a fiscal plan, he said, he began to see the extent to which officials had been using one-offs and accounting gimmicks year after year to make the budget seem balanced. His plan was rejected.

Mr. Ravitch spent the remainder of his 17-month term investigating New York State’s finances on his own and trying to compare what he found with the problems emerging in other states. But he could not find what he considered an adequate source of information to document the problem, so he and Mr. Volcker decided to raise money to create one of their own. Last week, Mr. Ravitch was in Washington, presenting the task force’s initial findings and recommendations to Treasury Secretary Timothy F. Geithner, Federal Reserve chairman Ben S. Bernanke, and others.
How Taxes Drive Down Home Values:
What state and local officials can do to help the housing market recover.
National Review
Nicole Gelinas
Dec. 1, 2011

Standard & Poor’s released the latest Case-Shiller data on house prices on Tuesday, and the results weren’t pretty. In the past five years, house prices have declined to 2003 levels, and the average home declined in price by 3.9 percent over the last year alone. National politicians are scrambling to reverse the trend. But the remedy lies in state houses and town halls.

Two weeks ago, both Republicans and Democrats in Congress cited the struggling housing market as their reason for extending an “emergency” subsidy for homebuyers. The taxpayer-backed Federal Housing Administration will continue to guarantee mortgages on houses worth as much as $729,500, something it has done for three years. No middle-class family can afford such a home. But the home-builders lobby argued that a reduction in the guarantee would mean less demand and thus lower home prices not just at the top, but throughout the market. If you can buy an “expensive” bottle of wine for cheap, why buy the cheap bottle? The same thing goes for houses: When expensive houses become cheaper, there is less demand — and thus lower prices — for even cheaper houses.

No matter how hard Washington tries, though, it can’t legislate away reality. And the reality is that even half a decade into a housing slump, Americans still have good reasons to be wary of plunking down their hard-earned cash and signing up for a long-term mortgage. These reasons are closer to, well, home, than to Washington.

A house is worth what a buyer is willing to pay for it in monthly costs. That’s why if mortgage interest rates go down, house prices go up (or at least fall less than they would have otherwise). When a potential homeowner has to spend less on mortgage interest, he can devote more money to paying principal, and therefore is willing to make higher bids. So the house is “worth” more — at least until interest rates rise again.

But when you buy a house, you’re not just committing to a mortgage. You are also promising to pay the future property taxes on that house. What drives those local property taxes are the future costs of paying state and local workers and retirees, particularly retirees’ pensions and health care. These costs are going in one direction: up.

Unless state and local governments take steps now to reduce future costs, or unless they plan on suddenly repudiating their promises to their public-sector work forces one day, every dollar in unfunded pension and health-care costs is up to a dollar less in the future value of a house.

Take one example, New York’s Westchester County, the highest-taxed county in the nation. According to the Tax Foundation, property taxes in Westchester average $9,044 annually — up by $1,707, or 23 percent, in the five years from 2005 to 2009. Inflation accounts for less than half of the increase.

What if property taxes in Westchester were to increase by another 23 percent, to $11,124, in the next half decade, or even the next decade? That’s an extra $2,080 in annual costs per house, or nearly $175 every month. Even after deducting these levies from his federal tax bill, a homeowner would end up losing $1,456 a year. Families that considered buying a house would sensibly lop that extra amount off the price they are willing to pay — and the seller would lose about $23,500 in investment value.

When houses prices were skyrocketing, nobody cared. The force of the bubble seemed strong enough to overcome such cash outflows. But now that the bubble has burst, these costs are much more real.

Westchester may be an extreme case. But in New York State, counties, villages, towns, and school districts (excluding New York City) have made about $28.7 billion in health-care promises to future retirees without setting aside any money to pay these bills. That money has to come from somewhere.

A home buyer should consider part of this projected burden to be a call on the future resale value of his house. New Jersey, California, and other states have made similar promises with their residents’ home equity.

Yes, it’s true that New York and New Jersey recently enacted caps on property-tax hikes, and California has long had such a cap. But unless state and local governments rein in costs, local governments will have no choices but to find a way around these caps. The New York and New Jersey caps already feature generous loopholes, allowing local governments to increase taxes above the cap to pay pension and some debt costs.

Moreover, if local governments can’t pay their bills through property taxes, they’ll try to get the money from taxpayers by some other route, likely state income taxes. In the past few days, New York governor Andrew Cuomo has seemed to be backing away from a pledge to allow a “temporary” income-tax surcharge on six- and seven-figure earners to expire.

Higher state income taxes similarly mean less discretionary income for taxpayers — and thus less money available to spend on housing. Less money in a future taxpayer’s pocket means less money for today’s homeowner when he wants to sell his house tomorrow.

Washington can continue to take extraordinary measures to prop home prices up. But forces at the state and local level are pulling prices down.
Municipal 'millionaires'
NYPOST
By LAWRENCE MONE
Last Updated: 3:38 AM, December 1, 2011
Posted: 10:27 PM, November 30, 2011

Gov. Cuomo, under enormous pressure from public-employee unions and Democrats in the Legislature to extend New York’s “millionaires’ tax,” is considering at least some higher taxes on higher incomes. The big irony here is that much of the money raised from any “millionaire” tax hikes would go to fund the growing phenomenon of public-sector millionaires.

How’s that? Well, most dictionaries define a millionaire as someone with wealth (i.e., assets) of $1 million. By that definition, many New York teachers and the vast majority of police and firefighters are millionaires, because the “net present value” of their retirement benefits is well in excess of $1 million.

That is, if they had to fund their retirements from their own savings, they’d have to set aside seven figures today.

Few who don’t work for the government sector have comparable assets. Over the last several decades, the private sector has moved increasingly to the 401(k)-style “defined contribution” model, which yields a retirement nest egg based on what both employers and employees have contributed to individual accounts.

Public-sector workers, on the other hand, still rely on “defined benefit” pensions, which provide a guaranteed stream of income based on career longevity and late-career peak salaries.

A New York City public-school teacher earning $100,000 can retire at 55 with a pension of $60,000. A private-sector worker would need $1.2 million to buy an annuity with the same yield and starting at the same (relatively young) age, according to the online pension calculator developed by the Manhattan Institute’s Empire Center.

It would take an even larger nest egg to replicate the pension income of city police officers, who typically retire in their 40s. According to data posted at SeeThroughNY, an Empire Center Web site, the average newly retired city cop collects a pension of $58,563 — plus a $12,000 annual supplement.

(Of course, public-sector workers also receive lavish health-care retirement benefits.)

Few private-sector workers have anything close to $1 million socked away in their retirement accounts. According to the Federal Reserve, the average worker in his late 50s has a balance of $85,600 in his retirement account, and a net worth of $222,300 overall.

To be sure, most public employees do contribute a small portion of their salaries to their pension funds, but the state and city contribute many times more. By contrast, private employers and employees more commonly do a one-to-one match.

And private-sector workers assume all the risk of these investments, while public-sector workers enjoy generous rates of guaranteed return. As former New York City Schools Chancellor Joel Klein quipped when he discovered his city pension offers a guaranteed 8 percent annual return, “Who but Bernie Madoff guarantees” such a return “permanently?”

Let me be clear: Many public-sector employees — especially frontline employees like teachers, cops and firefighters — have difficult, important and often dangerous jobs. They deserve to be well-compensated. And, for the most part, they are. After six years, police and firefighters can earn more than $90,000, excluding overtime.

Another irony: Salaries for public employees — math and science teachers, for example — could be raised if so much of their compensation wasn’t backloaded in pension costs.

In the popular 1950s TV show “The Millionaire,” a fictional character would hand out checks for a million dollars. Over the last few decades, we’ve developed a public-sector retirement system that basically does the same. It’s a system New York’s beleaguered taxpayers can simply no longer afford.

City pension costs have jumped from about 4 percent of city tax revenues to 20 percent over the past decade, crowding out other vital public investments. If New York is to avoid the fate of cities like Central Falls, RI, which have been driven into bankruptcy and are slashing promised retiree benefits, we must begin to fix the system now. Ideally, for new employees, by switching to the same type of “defined-contribution” retirement system now used by virtually everyone in the private sector.

There simply aren’t enough private-sector “millionaires” to support all the new public-sector millionaires being created every day.
Funny finance and the pension puzzle
NYPOST
By NICOLE GELINAS
Last Updated: 4:16 AM, November 21, 2011
Posted: 10:28 PM, November 20, 2011

Future city pensioners might wonder whether Comptroller John Liu, a guy who isn’t being up-front about his own funds, is being truthful about the disposition of their retirement benefits.

You’d think that the person responsible for New York’s finances would be meticulous about the money he oversees for his own benefit. Not so.

Last week, the feds charged a Liu campaign fund-raiser, Xing Wu Pan, with fraud. An undercover agent tricked Pan into thinking he was a businessman offering $16,000 for Liu’s re-election. To get around the city’s contribution limit, Pan said he could split the money into smaller “donations” from fake contributors. Pan told the donor that Liu would know where the cash came from.

Friday, Liu said the charges were “quite embarrassing, as the chief financial officer of the city.” But he still won’t release the names of his top fund-raisers, as the law demands, saying it’s not so easy.

How hard can it be? It looks as if Liu is just buying weeks, or months, to avoid harsher scrutiny.

Yet a true picture of the comptroller’s finances will inevitably emerge. Delaying gains him nothing.

Political shenanigans are a dime a dozen here, but city workers should pay attention in this case. Liu has built his reputation on one issue: public-pension benefits. His position, laid out in three reports over eight months, is that they’re fine the way they are.

Last month, Liu’s latest report concluded that New York taxpayers are getting a great deal on pensions, even as:

* Uniformed workers continue to retire after 20 years with oodles of overtime baked into their benefits.

* Other workers retire in their 50s with guaranteed benefits for life.

* Annual pension costs have more than octupled under Mayor Bloomberg, from $1 billion a decade ago to $8.4 billion.

In one year, New Yorkers spend four times on pensions what they’ve spent over five years to build the mayor’s signature infrastructure project, the No. 7 subway extension to Manhattan’s far West Side.

Future retirees are risking that Liu is playing just as fast and loose with their old-age security as he is with the campaign-finance rules. And it’s all about him: Just like he needs campaign money, he also needs union votes.

Unlike with the campaign-finance case, Liu likely will be long gone before a reckoning of pension costs can take place.

Liu’s not the only recent regional pol whose stance toward the public fisc has proved disastrous.

In New Jersey, back in 2006, the state’s new governor, Jon Corzine, said that much of that state’s pension problem could be solved if pension-fund managers would just take more risk. One union leader, Rae Roeder, fretted that “just like you’re sitting at the craps table, you can lose it all. And it’s not his money — it’s our members’.”

Yes. This year, former Gov. Corzine used the same strategy at the small brokerage firm he went on to manage, MF Global. He bet it all — and the company’s shareholders and employees lost everything three weeks ago. Investigators are probing whether Corzine’s firm used “segregated customer funds” to bet more than the legal limit. That is, they’re looking into whether Corzine’s firm stole customer money.

In the Corzine case, just as in Liu’s campaign-finance kerfuffle, the facts will come out — fast. But it will take years for Jersey public workers and retirees to understand the extent of their potential problems.

Many observers say that public workers shouldn’t care: Public pensions are guaranteed, so it’s the taxpayers’ problem.

But, absent serious reform, elected officials are going to have to choose among paying pensions, paying bondholders and keeping cops on the street. That’s happening in such poorer cities as Central Falls, RI, where current pensioners face big benefit cuts.

People say it can’t happen here because New York is rich. But it’s thinking like that that could make New York poor. The thinking that mortgages were safe, for instance, made them risky.

Future retirees had better look out for themselves. The pols — and today’s union leaders — figure they’ll be long gone before the bill comes due.

Nicole Gelinas is a contributing editor to the Manhattan Institute’s City Journal.


Gov.Paterson came to office after scandal sank Gov. Spitzer.

Weston CT's Board of Finance sets up funding mechanism for O.P.E.B.
To Pay New York Pension Fund, Cities Borrow From It First
By DANNY HAKIM, NYTIMES
February 27, 2012

ALBANY — When New York State officials agreed to allow local governments to use an unusual borrowing plan to put off a portion of their pension obligations, fiscal watchdogs scoffed at the arrangement, calling it irresponsible and unwise.

And now, their fears are being realized: cities throughout the state, wealthy towns such as Southampton and East Hampton, counties like Nassau and Suffolk, and other public employers like the Westchester Medical Center and the New York Public Library are all managing their rising pension bills by borrowing from the very same $140 billion pension fund to which they owe money.

Across New York, state and local governments are borrowing $750 million this year to finance their contributions to the state pension system, and are likely to borrow at least $1 billion more over the next year. The number of municipalities and public institutions using this new borrowing mechanism to pay off their annual pension bills has tripled in a year.

The eagerness to borrow demonstrates that many major municipalities are struggling to meet their pension obligations, which have risen partly because of generous retirement packages for public employees, and partly because turbulence in the stock market has slowed the pension fund’s growth.

The state’s borrowing plan allows public employers to reduce their pension contributions in the short term in exchange for higher payments over the long term. Public pension funds around the country assume a certain rate of return every year and, despite the market gains over the last few years, are still straining to make up for steep investment losses incurred in the 2008 financial crisis, requiring governments to contribute more to keep pension systems afloat.

Supporters argue that the borrowing plan makes it possible for governments in New York to “smooth” their annual pension contributions to get through this prolonged period of market volatility.

Critics say it is a budgetary sleight-of-hand that simply kicks pension costs down the road.

“You’re undermining the long-term solvency of these funds and making the pension fund even more of a gamble than it already is,” said Josh Barro, a senior fellow and pension expert at the Manhattan Institute, a conservative research organization. The state, he said, is betting that the performance of the financial markets will improve over the next decade and bail the system out.

“If performance continues to be weak, then contribution rates will be even higher than the rates we’re trying to avoid now, and you’ll produce even more fiscal pain down the road,” he said.

Nationwide, the cost of public retiree benefits has soared in recent years, and states including California, Connecticut and Illinois have been borrowing to pay, or even deferring, their pension bills. Many states are worse off than New York. New Jersey is still paying off bonds issued in 1997 to close a hole in its pension system.

And governors and lawmakers across the country have been trying to take steps to reduce future pension costs, with limited success.

But New York appears to be unusual in allowing public employers to borrow from the state’s pension system to finance their annual contributions to that system.

The state’s borrowing mechanism, approved in 2010 under Gov. David A. Paterson, was backed by public sector unions and by the state comptroller’s office, which oversees the pension fund and prefers to call the borrowing a form of amortization, or paying a debt gradually, with interest. The public employers that borrow from the pension system essentially contribute less than they owe in a given year, and agree to repay the difference, with interest, over a decade.

Contributions to the pension system, which covers more than one million members, retirees and beneficiaries, are due annually from the state and municipal governments. As they struggle to pay their obligations under the current system, municipalities are borrowing $200 million this year, up from $45 million last year, the first year the borrowing plan was available, according to the state comptroller’s office.

“I don’t think any financial manager likes to see the can kicked down the road, and would prefer to see all costs paid for in the years that they are incurred,” said Tamara Wright, the comptroller of Southampton. Southampton, on the East End of Long Island, recently borrowed a fifth of its pension bill — $1.2 million of $6 million — by decision of the town board.

“I certainly am sensitive to the board’s concerns about the current economic times,” she said.

The state is borrowing too — $575 million in the current fiscal year, and $782 million in the next, under a budget proposed by Gov. Andrew M. Cuomo.

The state’s comptroller, Thomas P. DiNapoli, said in a statement, “While the state’s pension fund is one of the strongest performers in the country, costs have increased due to the Wall Street meltdown.” He added that “amortizing pension costs is an option for some local governments to manage cash flow and to budget for long-term pension costs in good and bad times.”

The comptroller’s office noted that only a part of the overall pension contributions owed by the state and municipalities was being borrowed. And it said the number of borrowers had risen partly because the borrowing plan only recently became available.

“It would not be fair to draw a characterization about statewide municipal finances from these numbers,” said Kevin Murray, an executive deputy in the comptroller’s office.

But it is clear that a number of major public employers are having trouble affording the state’s current pension system.

“Sharp increases in pension costs are unsustainable and are devastating state and local governments,” Robert Megna, Governor Cuomo’s budget director, said in a statement.

Mr. Cuomo, a Democrat, is proposing changes that would require future state employees to share a greater portion of their pension costs, and would allow them to opt into a 401(k)-style retirement plan. The proposal is known as Tier VI because it would be added to five existing pension benefit categories.

The governor’s proposal has been met coldly by labor unions, as well as by many state lawmakers and Mr. DiNapoli, also a Democrat and an ally of the labor movement. The proposal is supported by Mayor Michael R. Bloomberg of New York as well as other municipal leaders, and by business groups.

“It’s the most significant rising cost that we have,” Scott Adair, the chief financial officer of Monroe County, said of pensions.

In Poughkeepsie, which is contributing $3.6 million into the state pension system this year and borrowing nearly $800,000, Mayor John C. Tkazyik, a Republican, said rising pension costs and new federal accounting requirements for retiree health coverage could have dire consequences.

“It could bankrupt the city,” Mr. Tkazyik said, adding that the city had cut its work force, to 367 from 418 employees, in four years as it struggled to compensate.

The New York Public Library is borrowing nearly $2.9 million of a $14.7 million pension bill this year. A library spokeswoman said the decision to borrow came at the urging of the city, which finances a majority of the library’s budget. The city has its own pension system, separate from the state, which has undergone its own fiscal stresses because of sharp contribution increases.

“After a strong recommendation from the city, the library decided to amortize its pension payments because of the cost savings to both the library and the city, which reimburses more than half of our pension costs,” said Angela Montefinise, the library spokeswoman.

But the Bloomberg administration played down its role.

“The library system decides how to manage their finances,” said Marc LaVorgna, a Bloomberg spokesman, adding, “The decision was made by the libraries.”

CALIFORNIA: Almost like weather systems, everyting seems to begin in the West and move East, and "so goes the nation...eventually"...

California is a larger place than...Costa Rica (Wikipedia).  Oakland a city close to brink...of chaos in time for political conventions?  A column by Stanford prof on "The Two Californias"
Wikipedia:  San Bernadino County fits the 4 smallest states it!  Growth trend for San Bernadino County:  U.S. Census.  For localtion of any good-sized California place, click here.  Oakland's Occupy a threat?

California city council finds it can't afford to quit Calpers
By Tim Reid
Thu, Apr 25 2013

(Reuters) - The City Council of San Jose, in the heart of California's Silicon Valley, wants to quit the state's public pension fund - which covers its current and former members - because it fears it can't afford the rising contributions.  There's just one problem. It also can't afford the "astonishingly high" termination fee of up to $5.7 million that the California Public Employees Retirement System is demanding.

The catch-22 situation comes at a time when cities and states are struggling to manage budgets because of soaring pension costs.

The San Jose City Council voted unanimously in January 2012 to explore terminating its relationship with Calpers, America's biggest pension system with $256 billion in assets. It asked for a termination figure for the 30 current and former council members subscribed to the plan. In January 2013, Calpers pegged the cost at between $5 million and $5.7 million, a figure just made public.

"I was astonished," said Mayor Chuck Reed. "It was a shock." One year ago, he said, the city council's unfunded liability figure estimated by Calpers was about $500,000. "I was expecting at most two or three times that as a termination figure," Reed said.

He said the quit fee was so high that the city, America's 10th biggest with a population of nearly 1 million, had little option but to keep paying into Calpers for the current and former council members. Newly elected members are already offered a different pension plan with lower costs and benefits, and will not pay into Calpers, Reed said. The city's general workforce pays into different pension funds not managed by Calpers.

Brad Pacheco, a Calpers spokesman, said that when a termination fee is paid, cities get fully funded and guaranteed lifetime pension payments for all members in the plan.

"We are committed to helping the city find solutions to reduce their pension costs and would be happy to meet with the Mayor or any other stakeholders to discuss options," Pacheco said.

San Jose is not the only California city looking for a way out of Calpers or a way to renegotiate their obligations to the system.  The tiny southern California city of Canyon Lake served formal notice to quit Calpers earlier this month, and Pacific Grove, another small city, on the state's central coast, says it wants to quit the plan but cannot because of the high termination fee.

James Spiotto, a municipal bankruptcy specialist and a partner at law firm Chapman and Cutler in Chicago, said the San Jose city council is just a small example of a wider problem in California where cities simply cannot afford their current pension obligations to Calpers. Something has to give, he said.

"If municipalities can't pay, then they have to be able to negotiate" with Calpers, Spiotto said. "You cannot have a situation where a city says they can't do it, but Calpers says they have to do it. That's an impossibility."

Calpers serves many California cities and counties, including the cities of Stockton and San Bernardino, which filed for bankruptcy last year under the pressure of rising costs for wages and pensions.

RATE OF RETURN A BONE OF CONTENTION

Calpers calculated the San Jose council's termination fee based on annual return rates of 2.37 to 2.5 percent -- compared with a the 7.5 percent return rate it uses to calculate future liabilities for members in the plan.

The higher the estimated rate of return, the less an employer has to pay into the plan. But when a pension fund is closed, contributions from cities and workers stop.

"Calpers can no longer go back to employers to make up shortfalls," Pacheco said. "This is why we adopted a much more conservative investment strategy for the terminated agency pool where the assets are moved."

Critics say that Calpers' 7.5 percent long-term projected return rate, as well as similar rate of returns adopted by public pensions across the country, is artificially high. Some economists suggest that pension funds, including Calpers, should be using a lower rate to reflect risk-free investments such as the yields paid by U.S. Treasury bonds.

When a pension fund's returns do not meet its projected rate, a shortfall is created. The costs are generally passed onto member cities. This month Calpers' board approved accounting changes requiring state agencies, cities and counties to pay rate hikes of up to 50 percent to cover the fund's shortfall over 30 years.

Critics say the low discount termination rate produces a huge one-time figure that makes it impossible for cities to quit Calpers, and there is little that a single city can do.

"There has to be a number between 7.5 percent and 2.5 percent, but there is no means for a city to challenge that," said Karol Denniston, a bankruptcy attorney with Schiff Hardin in San Francisco who helped draft California's bankruptcy process law.

In San Jose, the council was worried about its rising monthly contribution costs and a growing unfunded liability to Calpers. Last year the city council paid Calpers $130,700 in annual contributions, and this year it paid over $147,000. Next year's projected annual contribution is nearly $165,000, the city said.

Outside of the council, the city's workforce does not pay into Calpers but into a separately administered municipal plan - similar to other large California cities, including Los Angeles. San Jose's workforce has had significant salary and pension reductions imposed by the city council because of rising city debt.

The council decided to look at terminating its own pension plan with Calpers to show the city's wider workforce that it was interested in reining in elected officials' pension costs.

(Reporting by Tim Reid in Los Angeles; Editing by Tiziana Barghini and Leslie Adler)

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Rating pressure still on for California cities: Fitch
YAHOO
19 September 2012

SAN FRANCISCO (Reuters) - Cities in California face ongoing financial challenges from rising employee compensation and restrictions on their ability to raise revenue, which will maintain pressure on their credit ratings, Fitch Ratings said in a statement on Wednesday.

"Even as the broader economy shows signs of stabilization, California cities face state-specific uncertainties based on their diverse economic profiles, and revenue raising environment," Karen Ribble, senior Director in Fitch's Public Finance group, said in the statement.

"California cities facing the most fiscal stress are those with limited options to address budget imbalance, reinforcing the divide between the strong and the weak," Ribble added.

Fitch downgraded nine California cities last year and three this year, representing 30 percent of its portfolio of cities in the state. Concerns about municipal bankruptcies were stoked this year by Chapter 9 bankruptcy filings by the cities of Stockton and San Bernardino.

"While the costs of bankruptcy - both financial and reputational - remain high, some cities may see bankruptcy as worthwhile depending on how the outcome of current cases affects incentives," Fitch said in its statement.

"Stockton and San Bernardino are concerning because in both cases management suggested bondholders accept delayed, and perhaps reduced, payments rather than significant reductions in labor costs, though San Bernardino does provide for full debt service in its current budget," Fitch said.

Moody's Investors Service last month noted the potential for other financially distressed cities in the most populous U.S. state to seek Chapter 9 bankruptcy protection from their creditors in the wake of San Bernardino's bankruptcy filing.

"San Bernardino's bankruptcy is not a sign of systemic risks in the municipal market, but the filing does signal the level of distress and potential for an increase in bankruptcy filings, particularly among California cities," Moody's said in a report.

Fitch rates 40 of 482 cities in California with an average unlimited tax general obligation rating (ULTGO) of 'AA,' which the rating agency said is consistent with its ULTGO rating for municipalities nationwide.
Exclusive: California city could face SEC lawsuit
YAHOO
By Ronald Grover and Tim Reid | Reuters
26 July 2012

LOS ANGELES (Reuters) - In a case that illustrates the mounting risks facing cash-strapped California cities and their lenders, the desert city of Victorville is bracing for possible litigation amid allegations that it improperly shifted funds among different city-controlled entities.

The Victorville city council was told by its attorney last week that it faced "significant exposure to litigation" relating to a little-publicized Securities and Exchange Commission investigation into its financial practices, the city attorney acknowledged in a statement to Reuters.

City attorney Andre de Bortnowsky denied that Victorville had violated any laws, and said "it almost appears as if the SEC is on a fishing expedition."

The exact focus of the SEC investigation is not known. The SEC declined to comment.

In late June, a civil grand jury report alleged that Victorville may have violated state laws by transferring property taxes dedicated to its sanitation department to its general fund budget. Civil grand juries are investigative bodies that are not empowered to bring charges.

Harvey M. Rose Associates, a San Francisco-based public sector management consulting firm, said in its report to the civil grand jury that Victorville had mismanaged projects, made poor decisions on contracts and loaned $38 million to its municipal utility and its local airport. The report said repayment of those loans was "highly questionable."

The report said the utility is insolvent, with $32 million in assets and $108 million in liabilities.

Bortnowsky, in an email to Reuters, said the city "takes issue with respect to many of the statements contained in the Grand Jury report, especially those pertaining to purported violations of state and local laws and resolutions."

He said a full response to the grand jury allegations would be "forthcoming shortly."

Victorville, with a population of about 115,000, had a total of $407 million in bond debt as of June 30, 2011.

The city's auditors said in February that there "was substantial doubt about the city's ability to continue as going concern" due to "recurring losses" in its general fund and lack of liquidity in funds for its utility and the airport.

The city council in late June adopted a $47 million budget for its general fund that included a $74,992 surplus.

Three California cities have filed or said they would file for bankruptcy since June 28, when Stockton filed for Chapter 9 protection to restructure more than $700 million in debt.

On July 2, the city of Mammoth Lakes filed to shield itself from a $43 million court judgment. The San Bernardino city council voted on July 18 to seek bankruptcy protection.

In both Stockton and San Bernardino, poor financial controls and shuffling of money among different city entities appear to have contributed to their respective financial crises.

Red flags over cities' bankruptcy filings
Wyatt Buchanan, STGate
Published 10:35 p.m., Saturday, July 14, 2012

Sacramento --

San Bernardino's stunning news last week that it was broke and needed to file for bankruptcy protection has some observers wondering who's next.

San Bernardino is the third California city, after Stockton and Mammoth Lakes (Mono County), to declare bankruptcy within the past three weeks. And while Stockton's June 28 filing wasn't surprising - city officials had talked publicly about the problem for months - the moves by San Bernardino and Mammoth Lakes were.  Part of the reason, finance experts say, is that it's not in a city's best interest, financially, to bring up the possibility of bankruptcy: Talk of bankruptcy alarms credit rating agencies, which can use the public discussion as a reason to downgrade a city's rating, leading to increased borrowing costs for the city.

"It's in the public interest for them to be very, very careful about it," said Chris McKenzie, executive director of the League of California Cities.

While city bankruptcies are rare, California cities are increasingly struggling with the slow economic recovery, smaller budgets, state budget cuts and the dissolution of redevelopment agencies.

This year, officials in the city of Hercules said they averted pursuing bankruptcy protection by settling a $4.1 million lawsuit from a bond insurer who filed suit after the city defaulted on a bond interest payment. The Contra Costa County city's financial troubles were exacerbated by the loss of redevelopment funding, and it continues to struggle.

Warnings from 8 cities

An additional eight California cities, including Fairfield, which declared a fiscal emergency in April, have officially notified the municipal bond market this year that they are facing significant financial hardship, according to Matt Fabian, managing director of Municipal Market Advisors, which conducts independent research on the municipal bond industry.  The notifications don't necessarily mean these cities are headed for bankruptcy court, but they do signal real adversity.

Along with Fairfield, the other cities include Arvin (Kern County), El Monte (Los Angeles County), Grover Beach (San Luis Obispo County), Lancaster (Los Angeles County), Monrovia (Los Angeles County), Riverbank (Stanislaus County) and Tehachapi (Kern County).

"I think people in our market are certainly getting more concerned," Fabian said. "San Bernardino came out of nowhere, which makes you worry that there are others in a similar situation that you don't know about."

In Fairfield, officials said the city is not in danger of declaring bankruptcy but that it faces a deficit of almost $8 million in the 2013-14 fiscal year, which they said is because of the state swiping local dollars for its budget and the elimination of redevelopment agencies.

David White, director of finance and assistant city manager for Fairfield, said that after years of cutting back on services, the declaration of a fiscal emergency was necessary to place a sales tax increase on the November ballot.

"We are at the point now where we cannot cut any more from our budget without severely impacting services and the quality of this community," White said. "I've never worried about going down the bankruptcy road."
Tax revenue plummets

The unusual occurrence of three bankruptcy actions in such a short amount of time has raised red flags, though.

In Stockton, which filed for Chapter 9 bankruptcy protection, tax revenue plummeted with the national mortgage crisis, which hit the city particularly hard. Bad financial practices, overspending on civic structures and generous retiree benefits also brought the city to fiscal distress.

Mammoth Lakes filed for bankruptcy July 3 entirely because of a $43 million judgment against the city in favor of a developer who sued and won for a breach of contract for a hotel development near the airport. The action has been viewed as an outlier compared with the other two cities, whose financial problems are systemic and long term.

In San Bernardino, which faces a $45 million deficit for the current year, the situation is similar to Stockton. The city, home to 212,000 people, also was hard hit by the mortgage crisis and saw tax revenue plummet. Current officials say past city leaders mismanaged and misstated finances, perhaps intentionally, and that the city is overextended on employee costs. The elimination of redevelopment agencies by state leaders also blasted a hole in the budget.

"This city is in a dire financial situation. While many measures have been instituted over the last four years to balance the city's budget, our financial situation has continued to decline, and that has brought us to a critical point," said Andrea Travis-Miller, interim city manager.
Cities' common traits

Stockton and San Bernardino share three characteristics that could help people better forecast which cities might be in danger of heading to bankruptcy, said McKenzie of the League of California Cities.

Those include cities with tax revenue severely affected by the mortgage crisis, cities that are older and have a significant amount of deferred maintenance, and cities that are unable to persuade public employee unions to agree to deep cuts in salaries and benefits.

McKenzie said he does not think the recent spate of bankruptcy actions makes other cities see it as a less stigmatized and more palatable action. He pointed to Vallejo, which entered bankruptcy in 2008 and emerged in 2011 with fewer firefighters, police officers and public services. Officials there have cautioned that bankruptcy is a last-resort solution that's not only about numbers, but also about people and their jobs, quality of life and morale.

"Everybody remembers Vallejo. Everybody remembers sometimes the medicine is worse than the disease," he said.

Wyatt Buchanan is a San Francisco Chronicle staff writer. E-mail: wbuchanan@sfchronicle.com

California County Weighs Drastic Plan to Aid Homeowners
NYTIMES
By JENNIFER MEDINA
July 14, 2012

FONTANA, Calif. — Browning lawns surround the otherwise neat houses in these once-sparkling developments where foreclosures have become more common than neighborhood cookouts. Each patch of dead grass is a reminder of the inescapable truth: many homes here, as they are elsewhere around the country, are worth half what they were just five years ago.

Desperate for a way out of a housing collapse that has crippled the region, officials in San Bernardino County, where Fontana is one of the largest cities, are exploring a drastic option — using eminent domain to buy up mortgages for homes that are underwater.

Then, the idea goes, the county could cut the mortgages to the current value of the homes and resell the mortgages to a private investment firm, which would allow homeowners to lower their monthly payments and hang onto their property.

Although the county has a long way to go before it could put the policy in place, the mere idea has already rankled the banking community, whose leaders say it would set a dangerous precedent of allowing a government entity to act as a lender and would discourage banks from granting loans in the area.

A decade ago, Fontana and other cities here in the Inland Empire — the vast suburban sprawl east of Los Angeles — were just beginning to boom, with new subdivisions opening seemingly every weekend.

Now, San Bernardino County, the largest county in the country, has cities with some of the nation’s highest foreclosure rates.

“Sooner or later,” said Mayor Acquanetta Warren of Fontana, who has seen the value of her own home cut in half, “all these people who are upside down on their homes are just going to leave the keys out on the door and say forget it. This was supposed to be the promised land, and now we have people waiting in some kind of hellish purgatory. The people who were so eager to give us money before now won’t even talk to us.”

The idea to use eminent domain to seize mortgages first came from a group of venture capitalists in San Francisco, Mortgage Resolution Partners, who would collect a fee for each of the restructured loans. The firm is also trying to persuade officials in Nevada and Florida to try the idea. San Bernardino County officials were immediately intrigued, given that roughly half the homes in the area are underwater and the unemployment rate remains at nearly 12 percent. (Last week, the City of San Bernardino voted to file for bankruptcy, saying it would not be able to cover payroll costs through the summer.)

Officials in Suffolk County, N.Y., where about 10 percent of the homes are valued at less than their loans, are also considering the mortgage plan.

“Nobody else is addressing this adequately, and we’re still stuck,” said Regina Calcaterra, the chief deputy county executive in Suffolk County. “If Washington or the private sector was able to address this, there wouldn’t be a need and we wouldn’t even have this conversation.”

Scott Larson, 42, moved to his current home in Upland, in the western part of San Bernardino County, in 2003. A couple years later, when his three-bedroom home was appraised at more than $500,000, he refinanced to renovate his backyard. Now, he says, banks will not even consider modifying his loan.

“I always look for other places to cut so I can do right and make the loan payment, but the odds are really against me doing that for a long time,” he said. “I’m willing to start over and take another 30-year loan to stay here, but I don’t know who is looking out to let me do that.”

San Bernardino County once relied on residents like Mr. Larson buying small starter homes and moving into larger properties, a dream that now seems quaint. But many community leaders here say the overall economy will not improve without housing construction starting again.

“We have what we regard as a systemic problem, but it’s felt most urgently at the local level,” said Steven M. Gluckstern, the chairman of Mortgage Resolution Partners. “We have all these people who want to be able to stay in their homes and keep that, but it is getting to be impossible. Until you fix this problem, you can’t fix any other problems.”

As for the group’s eminent domain idea, “if it works, every mayor of every city is going to want to do this,” Mr. Gluckstern said.

More than 20,000 homeowners in the county could ultimately be eligible for the program, which would first focus on Fontana and Ontario, two of the largest cities in the county. The county is just beginning to consider how it could move forward with the proposal and officials say they will consider alternatives, but many banking and mortgage groups have already voiced skepticism or hostility about the plan.

Ken Bentsen, the executive vice president of the Securities Industry and Financial Markets Association, said the idea would almost certainly be challenged in court and would have a major impact on the local market.

“If the government has the ability to abrogate the contract at will and at the expense of the bond holder, the investor is going to do one of two things: require a tremendous premium for the risk they are incurring, or just not invest at all,” Mr. Bentsen said. “It would be a risk factor that would be impossible to underwrite.”

Under the current proposal, only homeowners who are current on their payments would be eligible for the program, a policy some have criticized because it does little to help the neediest people.

While Greg Devereaux, San Bernardino’s chief executive, has hardly been surprised that so many banking and mortgage lenders are against the plan, their level of opposition has angered him.

“There is no doubt that we have a major problem that we have to do something about, or it will probably be a decade, if not two, for our economy to recover,” he said. “It’s as if this can’t even be a discussion. If they want to come and talk and propose other solutions, great, but that’s not what is happening. Instead they are just trying to kill it because they have nothing but their own interest in mind.”

Steve Manos, the president of Inland Valleys Association of Realtors, said the housing market was already showing signs of improvement, with fewer homes on the market and bidding wars breaking out among some buyers.

“We are seeing a recovery, but it’s a fragile recovery,” Mr. Manos said. “This is the perfect example of something that could derail it quickly.”

Mr. Devereaux said he hoped to have a decision by December about whether the county will use eminent domain or some other strategy for helping homeowners. For now, he laughs and dismisses the notion that improvement is under way in the area.

“We’re seven years into things supposedly getting better and we have thousands more foreclosures?” he asked, answering with a quick bit of sarcasm. “My gosh, what an improvement.”

Not California’s last bankrupt city
By BEN BOYCHUK
Last Updated: 11:38 PM, June 27, 2012
Posted: 10:29 PM, June 27, 2012

Stockton, Calif., is bankrupt, but its troubles are no fluke.

In fact, California’s 13th-largest city — a former Gold Rush boomtown, and home to one of the largest inland ports in the world — has been broke for quite some time. The City Council just made it official this week.

How bad is it?

In the past three years, the city cut $90 million from its budget and laid off a quarter of its cops and about a third of its firefighters. Park upkeep and street sweeping went by the boards. Libraries slashed hours. Every city worker took a pay cut.

And that wasn’t enough. Not even close.

Sure, the lousy economy didn’t help. When the housing bubble burst, Stockton suffered more than most. Property- and sales-tax revenues plummeted. The city has one of the highest foreclosure rates in a high-foreclosure state.

But the big problem was the stupid decisions Stockton officials made when the economy was flush. Like so many other near-sighted local politicians, they assumed the good times would never end.

City Manager Bob Deis, who took his job in 2010 when the housing market was still in freefall, summed up the situation as well as any bureaucrat could: “Stockton overcommitted to long-term obligations that even under the best of times the city could not afford.”

And how. Today, Stockton strains under $700 million in bond debt the city borrowed to finance a sports arena, a fancy new waterfront — and to shore up pensions and benefits for retired city workers.

When Deis came on the scene, he dug into the city’s ledgers and could hardly believe what he found. Comparing Stockton’s finances to “a Ponzi scheme,” he discovered, among other things, that employees and their spouses receive free health care for life — a benefit some got after only a month on the job.

Truth is, the bankruptcy bomb should’ve gone off months ago. But under a state law that cunning legislators passed last year at the behest of their public-employee-union benefactors, Stockton had to “mediate” with its creditors for 90 days before seeking Chapter 9 bankruptcy protection.

Those negotiations were held behind closed doors, but the outcome is plain as day: Stockton’s public employees refused to renegotiate the generous benefits that drove the city over a fiscal cliff.

For the moment, Stockton holds the record as the largest US city to go bust. That dishonor previously belonged to Vallejo, Calif., a former Navy town up the road from Oakland.

Vallejo declared bankruptcy in 2008. The story there was much the same as Stockton’s now: mass layoffs affecting all but a few city employees. Police and fire protection slashed. Closed libraries and parks.

One thing Vallejo didn’t do was touch retirement benefits. Officials said they just couldn’t afford to fight the unions in court.

Vallejo emerged from bankruptcy on somewhat surer fiscal footing last year. But as long as the growth of retirement benefit costs remains unchecked, no city is safe.

Stockton is in immensely worse shape today than Vallejo was four years ago. Yet its problems pale in comparison to the crisis looming in Los Angeles.

LA Mayor Antonio Villaraigosa famously vowed the city wouldn’t go bankrupt “on my watch.” But his term happens to end next year, right about the time the city’s budget deficit is expected to jump from $222 million to $427 million — driven almost entirely by labor costs.

Delaying the inevitable didn’t help the people of Vallejo or Stockton, and it won’t save Los Angeles and other cities from a similar fate.

Stockton is a sensation and a cautionary tale — but the worst is yet to come.

Mediation Fails, Pushing Stockton Toward Bankruptcy
By MALIA WOLLAN, NYTIMES
June 27, 2012

STOCKTON, Calif. — The long, slow slide into financial collapse is nearly complete for this Central Valley community.

On Tuesday night, City Council members approved a new budget that will guide city operations during bankruptcy and amend a $26 million budget shortfall. With that vote out of the way, city officials could file for Chapter 9 bankruptcy as early as Wednesday, which would make Stockton the country’s largest city to go bankrupt.  The new budget will suspend debt payments, cut employee pay and reduce retiree benefits, allowing this city of about 292,000 residents to continue providing essential services through the bankruptcy process.

“This is not where any of us wanted to be,” Bob Deis, the city manager, said in a statement. “But absent restructuring agreements with our creditors, any other options would decimate the city.”

A year after nearby Vallejo, Calif., filed bankruptcy in 2008, state lawmakers passed AB 506, a bill requiring cities to hire a third-party mediator to negotiate with creditors before filing for bankruptcy. Stockton officials had hoped to avoid bankruptcy when the city became the first to enter into the new state-required mediation in March.  But on Monday night, after 90 days of mediation, the city and its 18 creditors failed to meet a midnight deadline for a deal.

“Bankruptcy is a terrible option until it’s the only option,” Marc Levinson, a lawyer representing the city, told the council. During Tuesday’s meeting, dozens of emotional residents and city retirees begged officials to avoid bankruptcy and preserve benefits.

The State Constitution required that the city address its $26 million general fund deficit, of a total budget of $521 million, to meet a July 1 deadline for cities to adopt balanced budgets. The city could continue informal negotiations with creditors with the new budget, but a bankruptcy filing appeared imminent.  Bankruptcy experts and officials at other fiscally wounded cities are keeping close tabs on Stockton as it unravels.

“Everyone is watching,” said Karol K. Denniston, a partner at the law firm Schiff Hardin who helped draft the AB 506 legislation. “It’s in the interest of every teetering city to make its bankruptcy process as short and cost effective as possible.”

Despite their failure to reach an agreement, three months of negotiation between the city and its creditors could make the bankruptcy process more efficient by shortening what can otherwise be a long and costly period in court, Ms. Denniston said. Protracted bankruptcy proceedings — like those in Vallejo — can push residents to leave, further eroding a city’s tax base.  Conventional wisdom has long held that large cities do not use bankruptcy court to restructure, said David Skeel, a law professor at the University of Pennsylvania.

“To me Stockton confirms that Chapter 9 bankruptcy is not just for small municipalities,” said Professor Skeel. “Here’s a substantial city going into bankruptcy at a point in time when there are dozens and dozens of cities across the country in comparable states of financial distress.”

Still, such municipal bankruptcies are rare. Stockton’s road from boomtown to insolvency has been a torturous one, riddled with missteps and unfortunate timing.  This city, some 80 miles east of San Francisco, was not so long ago a rapidly expanding bedroom community for commuters to the Bay Area. But in recent years, Stockton has been crushed by falling housing prices, foreclosures, the mounting costs of retiree pensions and hefty price tags for buildings paid for with taxpayer-guaranteed bonds, including a hockey arena.

Since 2009, the city has cut some $90 million in spending and eliminated 25 percent of its police officers, 30 percent of its fire department and 40 percent of all other city employees.  Earlier this year the city defaulted on several debt payments, and as a result Wells Fargo repossessed a downtown building bought in 2007 for $40 million. Officials had planned a new city hall there. The bank also repossessed three city-owned parking garages.

“We have hit the wall; we are insolvent,” Mayor Ann Johnston said in a statement issued in early June, after city officials authorized the city manager to file for bankruptcy if mediation efforts failed, as they now have.

“This is the action that we must take to keep the services that are important for the safety and health of our citizens.”

California facing higher $16 billion shortfall
YAHOO
Associated Press
By JUDY LIN
13 May 2012


SACRAMENTO, Calif. (AP) — California's budget deficit has swelled to a projected $16 billion — much larger than had been predicted just months ago — and will force severe cuts to schools and public safety if voters fail to approve tax increases in November, Gov. Jerry Brown said Saturday.

The Democratic governor said the shortfall grew from $9.2 billion in January in part because tax collections have not come in as high as expected and the economy isn't growing as fast as hoped for. The deficit has also risen because lawsuits and federal requirements have blocked billions of dollars in state cuts.

"This means we will have to go much farther and make cuts far greater than I asked for at the beginning of the year," Brown said in an online video. "But we can't fill this hole with cuts alone without doing severe damage to our schools. That's why I'm bypassing the gridlock and asking you, the people of California, to approve a plan that avoids cuts to schools and public safety."

Brown did not release details of the newly calculated deficit Saturday, but he is expected to lay out a revised spending plan Monday. The new plan for the fiscal year that starts July 1 hinges in large part on voters approving higher taxes.

The governor has said those tax increases are needed to help pull the state out of a crippling decade shaped by the collapse of the housing market and recession. Without them, he warned, public schools and colleges, and public safety, will suffer deeper cuts.

"What I'm proposing is not a panacea, but it goes a long way toward cleaning up the state's budget mess," Brown said.

Democrats, who control the Legislature, have resisted Brown's proposed cuts so far this year. Republican lawmakers criticized the majority party for building in overly optimistic tax revenues.

"Today's news underscores how we must rein in spending and let our economy grow by leaving overburdened taxpayers alone," said Assembly Republican leader Connie Conway in a statement.

The governor pursued a ballot initiative because Republican lawmakers would not provide the votes needed to reach the two-thirds legislative majority required to raise taxes.

Assembly Speaker John Perez, D-Los Angeles, acknowledged that lawmakers have "limited and difficult choices left to solve the deficit." Senate President Pro Tem Darrell Steinberg, D-Sacramento, said he wasn't surprised by the deficit spike given that state tax revenue have fallen $3.5 billion below projections in the current year.

"We will deal with it," Steinberg said Saturday. "And we know that more cuts are inevitable but we will do our very, very best to save more than we lose, especially for those in need."

Under Brown's tax plan, California would temporarily raise the state's sales tax by a quarter-cent and increase the income tax on people who make $250,000 or more. Brown is projecting his tax initiative would raise as much as $9 billion, but a review by the nonpartisan analyst's office estimates revenue of $6.8 billion in fiscal year 2012-13.

Supporters of the "Schools and Local Public Safety Protection Act of 2012" say the additional revenue would help maintain current funding levels for public schools and colleges and pay for programs that benefit seniors and low-income families. It also would provide local governments with a constitutional guarantee of funding to comply with a new state law that shifts lower-level offenders from state prisons to county jails.

A second tax hike headed for the November ballot is being promoted by Los Angeles civil rights attorney Molly Munger, whose initiative would raise income taxes on a sliding scale for nearly all wage-earners to help fund schools.

Anti-tax groups and Republican lawmakers say both tax increases will hurt California's economic recovery. State GOP Chairman Tom Del Beccaro has embarked on a statewide campaign to discuss alternatives to Brown's tax hikes.

The governor is expected to propose a contingency plan with a list of unpopular cuts that would kick in automatically if voters reject tax hikes this fall. In January, he said they would result in a K-12 school year shortened by up to three weeks, higher college tuition fees and reduced funding for courts.

Buffett cancelled municipal debt bet 5 years early: WSJ
YAHOO
Reuters
20 August 2012

(Reuters) - Berkshire Hathaway Inc terminated a large wager on the municipal-bond market five years early, the Wall Street Journal quoted a person familiar with the transaction as saying.

In a quarterly regulatory disclosure filed this month, the Warren Buffett-owned company terminated credit-default swaps insuring $8.25 billion of municipal debt.  The paper said the early termination is deepening questions among some investors about the risks of buying debt issued by cities, states and other public entities.  The WSJ quoted the source as saying that Buffett's bet that more than a dozen U.S. states would keep paying their bills on time had been made before the financial crisis.

The insurance-like contracts, which required Berkshire to pay in the event of bond defaults, were bought by Lehman Brothers Holdings Inc in 2007, more than a year before the firm filed for bankruptcy, the WSJ quoted the source as saying.

Buffett declined to comment on the details of the termination with the Lehman Brothers estate, the paper added. It is not clear if the move would leave the company with a profit or loss on the wager.

Berkshire was not immediately available for comment outside regular office hours.

Moody's downgrades $64 billion of U.S. muni debt
YAHOO
Reuters
By Joan Gralla and Michael Connor
Fri, Jun 22, 2012

NEW YORK/MIAMI (Reuters) - Moody's Investors Service on Friday cut ratings on $64 billion (41.06 billion pounds) of municipal bonds, including debt owed by 1,675 local and state governments, because the obligations rely on 15 global banks the Wall Street credit agency sees as less steady.

Moody's on Thursday downgraded big banks such as Citigroup that provided "letters of credit, standby bond purchase agreements, and other liquidity facilities" backing $45 billion of tax-free debt.  Separately, Moody's said it was also reducing ratings on $19 billion of pre-paid natural gas bonds issued by 24 utilities in Tennessee, Kentucky, Texas and elsewhere because the downgraded banks support certain payment obligations on the bonds.

Moody's cut the credit ratings of 15 of the world's leading banks by one to three notches to reflect rising risks of losses they face in volatile capital markets.  Such ratings cuts typically hurt prices of outstanding bonds and raise interest rate costs for issuers, but they had little effect on Friday on muni bond prices.

The lion's share of the state and local government debt downgrades - 1,163 - hit obligations that were rated solely on the support provided by the downgraded banks.  The short-term ratings of 152 U.S. municipal obligations that were rated based on standby bond purchase agreements and other third party supports also were cut.  Also downgraded were short-term ratings of 137 series of tender option bonds that relied on third party facilities. Tender option bonds typically have floating rates and carry a promise that the holder can sell the security at certain times.

The long-term ratings of 40 series of tender option bonds were cut if their underlying asset was a custodial receipt whose rating depends on support from one of the 15 banks.  Some 223 public finance sector obligations supported by letters of credit were downgraded because their long-term ratings were based on a joint default analysis, Moody's said.

The agency said the downgrades of the two dozen issues of gas prepayment bonds, a form of debt public utilities use to lock in discounted supplies of fuel, were also knock-on actions from Thursday's rating cuts.

Citigroup, Goldman Sachs Group, Inc, Credit Agricole Corporate & Investment Bank, JPMorgan Chase, Morgan Stanley, Royal Bank of Canada and Societe Generale were among the banks downgraded, Moody's said.  In addition, Moody's said it expected the bank downgrades to have relatively little effect on long-term bond ratings of variable-rate securities issued by U.S. cities, states and counties.  About 500 municipal issuers, including about 250 local governments, have outstanding variable-rate demand bonds that are supported by letters of credit or standby bond purchase agreements with banks, but the ratings of fewer than 5 percent may be affected, Moody's said in a statement.

"Those ratings will be placed under review for possible downgrade over the next few weeks. Moody's does not expect to place any state government ratings under review," the rating agency said.




Race to the Bottom
NYTIMES editorial
December 5, 2012

Competition among states and cities to lure businesses in hopes of creating jobs is not new, but it has become more fierce in recent years. An investigation by The Times found that state and local governments are giving out $80 billion a year in tax breaks and other subsidies in a foolhardy, shortsighted race to attract companies. That money could go a long way to improving education, transportation and other public services that would have a far better shot at promoting real economic growth.

Instead, with these giveaways, politicians and officials are trying to pick winners and losers, almost exclusively to the benefit of big corporations (aided by highly paid lobbyists) at the expense of small businesses. Though they promise that the subsidies are smart investments, far too often the jobs either don’t materialize or are short-lived, leaving the communities no better off.

The three-part series by Louise Story described how in places like Texas and Ohio, state and local governments have lavished millions of dollars in tax breaks on corporate giants like Samsung and the Big Three automakers — even as they faced budget deficits and were forced to cut spending on critical services. The tax revenues forgone in this giveaway frenzy should concern Congress deeply. After all, federal funds account for one-fifth of state and local budgets.

In one particularly egregious example in Pontiac, Mich., the State of Michigan gave $14 million in tax credits and a state pension fund guaranteed $18 million in bonds to a movie studio that created just 12 permanent jobs. In Texas, Amazon.com, the online retailer, received tax abatements, sales tax exemptions and other benefits totaling $277 million to open a warehouse that promises to employ 2,500 people. Those benefits were granted after the retailer closed another warehouse because of a dispute with the government involving sales taxes.

Many governments don’t know the full value of the subsidies they hand out in the form of tax refunds, rebates, loans, grants and more. And they don’t know if the jobs created would have been created anyway. The fact is, numerous studies show that such incentives result in only a small increase in jobs and that any gains usually come at the expense of other cities and states.

Local governments would be much better off investing tax dollars in education and public works that would deliver long-term benefits to both businesses and workers. California, for instance, is among the least generous of the larger states in doling out tax breaks. It gave out just $112 per capita compared with $759 in Texas, $672 in Michigan, and $210 in New York. Its experience leaves no doubt that investments made in public institutions like the University of California system can remain critically important to economic growth decades later.

The senseless race to give away billions in subsidies is, of course, hard to stop when elected leaders think a pledge of potential jobs might help in their next election. But even when attracting businesses is a legitimate goal, it has to be done in ways that are fair and transparent.

The trouble with targeted incentives is that they are little more than transfers of wealth to a handful of powerful corporations from all other taxpayers, including other businesses. If the problem is excessive tax burdens on businesses in general, then the solution is broad tax reform that also benefits small business owners, who are more likely to stick around if the regional economy weakens and who are unlikely to hopscotch around the country in search of a bigger tax break.
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Original story here