Michael Lewis in Vanity Fair – California and Bust:
At that point, if not before, [San Jose] would be nothing more than a vehicle to pay the retirement costs of its former workers. The only clear solution was if former city workers up and died, soon. But former city workers were, blessedly, living longer than ever.
This wasn’t a hypothetical scary situation, said Reed. “It’s a mathematical inevitability.” In spirit it reminded me of Bernard Madoff’s investment business. Anyone who looked at Madoff’s returns and understood them could see he was running a Ponzi scheme; only one person who had understood them bothered to blow the whistle, and no one listened to him. (See No One Would Listen: A True Financial Thriller, by Harry Markopolos.)
I ask [the San Jose mayor] what the chances are that, in this pinch, he could raise taxes. He holds up a thumb and index finger: zero. He’s recently coined a phrase, he says: “service-level insolvency.” Service-level insolvency means that the expensive community center that has been built and named cannot be opened. It means closing libraries three days a week. It isn’t financial bankruptcy; it’s cultural bankruptcy.
“How on earth did this happen?” I ask him.
“The only way I can explain it,” he says, “is that they got the money because it was there.” But he has another way to explain it, and in a moment he offers it up. “I think we’ve suffered from a series of mass delusions,” he says.
I didn’t completely understand what he meant, and said so.
“We’re all going to be rich,” he says. “We’re all going to live forever. All the forces in the state are lined up to preserve the status quo. To preserve the delusion. And here—this place—is where the reality hits.”
The stories from bankrupt Vallejo, California ain’t pretty. It’s like a scene from a zombie movie minus the zombies.
Welcome to vallejo, city of opportunity, reads the sign on the way in, but the shops that remain open display signs that say, we accept food stamps. Weeds surround abandoned businesses, and all traffic lights are set to permanently blink, which is a formality, as there are no longer any cops to police the streets. Vallejo is the one city in the Bay Area where you can park anywhere and not worry about getting a ticket, because there are no meter maids either. The windows of city hall are dark, but its front porch is a hive of activity. A young man in a backward baseball cap, sunglasses, and a new pair of Nike sneakers stands on a low wall and calls out an address:
“Nine hundred Cambridge Drive,” he says. “In Benicia.” The people in the crowd below instantly begin bidding. From 2006 to 2010 the value of Vallejo real estate fell 66 percent. One in 16 homes in the city is in foreclosure. This is apparently the fire sale, but the characters involved are so shady and furtive that I can hardly believe it.
The lobby of city hall is completely empty. There’s a receptionist’s desk but no receptionist. Instead, there’s a sign: to foreclosure auctioneers and foreclosure bidders: please do not conduct business in the city hall lobby.
Like Glenn Reynolds says, government cheerleaders like to pretend that all of your tax money goes to teachers, police, and firefighters. The reality is that cities like San Jose and Vallejo are paying so much to retired government workers of all kinds that they’ve had to lay off teachers, police, and firefighters.
That’s what happens when government becomes a pension fund that serves the unions instead of a civil agency that serves the taxpayers. The retired government workers become the zombies that terrorize the city.
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I would challenge anyone who claims it was the unions causing all these city funding issues to investigate further those who are supposedly living “high on the hog” (my approximation) with city-paid benefits. I’m sure you’ll find all sorts of other areas where money could have been saved but wasn’t worth the time.
For those receiving pensions, are most of them living in the city limits of this failing city or have they pulled up roots and are living somewhere else?
One item I can’t understand is why pension benefits (salary and/or healthcare) are not items that can be negotiated in receivership proceedings. Sure it’s a nasty process and generates all sorts of ill will but what options do these entities have? They’ve already attempted to sustain the unsustainable and are exhausting all avenues and means to resolution. If that means forcing one’s hand through the legal process isn’t that what a ‘strong judiciary’ was intended for?
The only thing left is to force a renegotiation of the benefits folks feel they’re due; with the understanding that those benefits must be lower in cost than before.
Though I can’t condone what was negotiated and agreed-to all these years ago between cities and organized labor, you can’t also vilify an organization of people who, without them, would make American life look more like India in terms of the haves and have nots.
A middle class is paramount for a “successful democratic society” (put in quotes because there are some “partially successful democratic societies” and I like to have some semblance of faith in our form of government) and denying or attempting to suppress the organization of laborers only gives rise to a severely stratified society with minimal opportunity to put yourself higher.
And that is one thing I don’t think any cheerleader of union busting or supporter of unions would be clamoring for: an artificial limit on possibilities.
TinMan
(Sorry my post is a bit jumbled; too many interruptions during its writing. I hope it comes through.)
P.S. Glad to see you’re okay Les and welcome to the land of the public transportation commuters!
According to the article Vallejo’s creditor’s are going to take a 95% haircut and the city retirees an 80% haircut. Vallejo had to suffer through a bankruptcy to get there.
It’s funny what the article says about the numbers for San Jose’s retirement benefits. You can see the numbers won’t work, just like Madoff’s scheme. Likewise you can see the numbers won’t work for Social Security, but no one wants to make the changes necessary. (And the changes necessary for Medicare/Medicaid are almost unimaginable. No one even wants to talk about it because it’s staggering.)
http://www.lesjones.com/2009/04/20/wharton-prof-real-fiscal-crisis-is-yet-to-come/
I don’t agree about the middle class part. You can’t make government workers middle class on the backs of taxpayers, many of whom make much less.
As far as organization, I’m not sure where to draw the line, but even FDR and Jimmy Carter didn’t think public employees should have the same right right to unionize and strike as private workers.
Thanks for the well wishes!
And if you think you have problems now just wait till every dime of stste money is committed to welfare benefits, pensions, interest, and payroll. And all the taxpayers have left. I give it five years.
Excellent post. It drives me nuts that when Bloomberg or any public official wants to raise taxes they say, “well, if we don’t….we’ll lay off firefighters….” and people believe it. It’s not firefighters and cops, but there are plenty of other “city workers” who are hardly professional and courteous yet rake in benefits I have to pay for through payroll dedeductions at my job. I get nothing for free. I end up paying for my retirement AND theirs. BS. As far as the teachers, I get REEEEALY tired of hearing from Hollywood, Oprah and the teachers unions what a sacrifice it is to be a teacher, like they joined the sacred order of teachers and live on stale bread and water teaching our children. The truth is, they make as much as I do as a secretary for 9 months work as I do for 11 months and 2 weeks (meaning 2 weeks vacation and yeah, after 12 years if I am not fired I can make it to a 4 week vacation a year – wooo hooo, but other wise I start back at 2 weeks at every new job), can not be fired and then can retire at 50 lavishly…and then get another job to 65, perhaps another state job, while pulling a teacher’s pension. Makes me sick. Don’t come to me and cry that bringing down their benefits they would find “no one” to do this “horrible job” of teaching in the public schools. It’s robbing me and every other middle and working class person of their retirement. AND THE POT HOLES CAN’T BE FILLED BECAUSE WE CAN’T HIRE NEW POT HOLE FILLERS WHILE WE PAY THE RETIREMENT OF 1980s pot hole fillers. GAAAAAAAAAAAH!
Here in my town of Sunnyvale, near San Jose, average compensation package for a fire/police is a quarter million a year including health and benefits.
So, in the end, what happens to zombies?
Aw, what a cute little story about Vallejo. Too bad it’s almost entirely fictional! The traffic lights work just fine, thanks. And there are police, just not as many as before. As for parking anywhere you want w/o worrying about tickets? Good luck with that.
“The only way I can explain it,” [San Jose mayor] says, “is that they got the money because it was there.”
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Finally, someone spoke the truth. The fact is that, for the last 3 decades, unions and many city leaders saw revenues increasing and convinced themselves that they deserved a larger and larger share of it. It wasn’t a question of: “Should a lifeguard make $100k?”. It was simply: “Every time revenues go up, we should get our cut”.
Government workers now accuse us taxpayers of not living up to our obligations to them. But they fail to understand. Over the years they created a self-serving win-win system for themselves. In good times, they profit. In bad times, they expect taxpayers to make up the difference (as if it were still good times!).
In berating us to pay up, they also use words like “a promise is a promise” and other such phrases. But taxpayers don’t accept that we ever made those promises. These are essentially promises the unions made to themselves. Taxpayers were busy and trusted government workers not to screw us. But they did screw us and the revolt started when taxpayers realized gov’t workers were making 2, 3 times more than the average worker.
There have always been three problems with the public workers pension system.
1. Public officials dont pay into the system. After all, they can offer the pension increase, not pay for it, and the elected officials down the road have to cover the difference.
2. Public pension managers give artificial numbers about fund growth. The concervative number is 4%, CALPERS is claiming 6%. When the numbers dont work the plan managers increase the expected growth rate to hide the problem.
3. Pubic employee negotiations are done out side of the public eye. Political junkies follow the negotiations but citizens dont get to vote on the results.
Our Zombies are meaner than California’s. In Illinois, Governor Quinn’s answer to plugging the hole due to the un-funded state pensions is to close the facilities for the mentally ill and disabled in Rockford, Jacksonville, Tinley Park, Dixon and Chester. The most vulnerable people in the state will be turned out on the streets to fend for themselves.
Nobody disputes that closing the Jacksonville Development Center will result in death when the residents being displaced lose the supervised housing, medical care, and medicine required to control severe mental illness.
Governor Quinn using the mentally ill as political pawns makes me ashamed to be an Illinois citizen.
I wonder how long until someone proposes that pensions incurred but not paid for by city and state governments are illegal debts that didn’t go through the state constitutional bond process. One legislature cannot bind a future legislature except through a specific debt process, normally involving the voters. The unfunded pension liabilities did not go through that process. Who will be the first judge to declare that retired city and state workers get only what is in the current pension fund and no other payments from future legislatures?
I have a friend in the Dept of Welfare. She says that every year, when their budget grows, the priority is on finding a way to “keep it in the building”.
When I indicated I didn’t understand, she explained that the primary focus was on making sure the budget increase went into higher pay and benefits for welfare employees, not better support for welfare recipients.
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