Will ‘basic income’ become the California norm?

StocktonAfter months of planning, Stockton is sending debit cards loaded with $500 to a select group of residents starting Friday as part of a closely watched experiment in universal basic income, the first led by a U.S. city.

Stockton, once dubbed “America’s foreclosure capital,” was the largest city to seek bankruptcy protection before Detroit’s 2013 filing. During the recession, unemployment soared toward 20 percent, and violent crime rose. Today, one in four residents lives below the poverty line, according to the U.S. Census Bureau.

Now, as the city slowly recovers from financial disarray, officials and advocates look to the Stockton Economic Empowerment Demonstration, or SEED, to provide insight on whether a long-term basic income program is a viable creative approach to lifting residents out of poverty.  …

Click here to read the full article from the Sacramento Bee

Stockton to test universal basic income plan

StocktonStockton, California, will soon become the first U.S. city to experiment with a universal basic income program, granting 100 residents $500 a month with no strings attached.

The project is being backed by Silicon Valley titan Chris Hughes, whose Economic Security Project gave $1 million toward the effort.

The goal, supporters say, is to ensure that the embattled city’s residents can stay out of poverty and the experiment is designed to assess whether or not the program could be rolled out on a wider scale.

“We’ve overspent on things like arenas and marinas and things of that sort to try to lure in tourism and dollars that way,” Stockton Mayor Michael Tubbs explained, according to Fox News, believing that the model can be used to bolster quality of life in the struggling city – and others like it.

Stockton in recent years has been known as the “foreclosure capital” of the country and drew headlines in 2012 when it declared bankruptcy, becoming a flashpoint for Americans suffering during the Great Recession.

The concept of a universal basic income has gained traction in the Bay Area amid concerns that automation will increasingly displace workers. It’s been propelled by major CEOs like Mark Zuckerberg and Elon Musk, who argue that so-called “free money” may be a necessity as technological advances alter the labor landscape.

“We should explore ideas like universal basic income to make sure that everyone has a cushion to try new ideas,” Zuckerberg said in his Harvard commencement address in May 2017.

Other similar efforts have been rolled out in places like Finland, which announced in April that it was ending its trial run to explore alternative welfare programs instead. The full results will be disclosed next year.

While some experts argue that universal basic income can be a way to lessen poverty by creating a guaranteed income floor, others explain that such a framework is impractical given the current entitlement and welfare state.

“I would be in favor of this if it meant eliminating all other welfare programs and requiring work,” economist and Heritage Foundation fellow Steve Moore told CalWatchdog via email. “The only way out of poverty is a job not a government handout.”

Overall, the experiment will look at how the residents spend the money and the potential economic impact it could have on the city, something that the young 27-year-old mayor is optimistic about.

“We trust that people are smart and resilient to make the best decision for them and their families with the money,” Tubbs said in a CBS News interview back in February.

Stockton’s effort is expected to begin in early 2019.

This article was originally published by CalWatchdog.com

Universal Basic Income: A Progressive Experiment That’s Doomed to Fail

Universal basic incomeIf the states are supposed to be laboratories for democracy, where new ideas that reflect regional attitudes can flourish, then cities are like micro-laboratories. Local governments can try out ideas that would never get statewide traction. Unfortunately, some California cities are more like laboratories run by Dr. Frankenstein, where frightening concepts are given life — and local residents have few other choices than to flee to other places.

Most conservatives are familiar with the goings-on in San Francisco, where stringent rent-control laws have — I know you’re surprised by this — led to the least affordable rents and most unaffordable home prices. Parts of the “City by the Bay” resemble an open-air cesspool, given the homeless problem caused by myriad public policies. It’s magnificently beautiful, though, so the city remains a magnet despite its officials’ best efforts to destroy it.

But what happens to a city that has few natural advantages, a less-desirable climate and nothing in particular to draw people to it? Apparently, Stockton — an historic San Joaquin Valley agricultural and port city 80 miles east of San Jose — is trying to cram every conceivable bad experiment into its 64.75 square miles. The latest idea is to offer a “universal basic income” to a few dozen residents to see what happens when you give people money for nothing.

KQED News pinpoints some of Stockton’s enduring problems: “Wage stagnation. Rising housing prices. Loss of middle-class jobs. The looming threat of automation.” We can add some others: A dreadful violent-crime problem, trash-strewn streets, a vacant downtown that could be a movie set for a third installment of Blade Runner, crumbling public services, overpaid public employees, high taxes, and a troubled city budget.

Mayor Michael Tubbs, an enthusiastic 27-year-old Democrat, has shown a keen interest in trying “new” things in the city. Last summer, for instance, he proposed paying people not to commit gun crimes, and now he’s working with some Bay Area entrepreneurs who are providing the funds to give some families $500 a month with no restrictions on how they spend the cash.

The Economic Security Project is backing the Stockton Experiment, based on its belief that “cash is an effective way” to rebuild the middle class and fight poverty. “Automation, globalization, and financialization are changing the nature of work, and these shifts require us to rethink how to create economic opportunity for all,” the group explains on its website.

Some conservatives have actually pitched a guaranteed-income concept. The thinking, advanced by Nobel laureate Milton Friedman, is to “replace the ragbag of specific welfare programs with a single comprehensive program of income supplements in cash  —  a negative income tax.” Such an idea, he added, “provides comprehensive reform which would do more efficiently and humanely what our present welfare system does so inefficiently and inhumanely.”

This is one of those cases where the concept makes a certain amount of sense in the philosophical realm, while being borderline crazy in the real world. If California ended its generous “ragbag” of welfare and support programs — programs that can provide more than $35,000 in benefits a year — then simply giving the recipients a cash payment could potentially reduce the size of the bureaucracy. It would presumably provide additional incentives to work, given that most of these programs are income-based and fade away if recipients work.

In the real world, it would expand government spending. Bureaucracies never go away. I recall the cost savings that would ensue after California sensibly decriminalized certain low-level crimes, yet there have been few budget reductions in various law-enforcement agencies. And chalk it up to human nature, but many Americans are not about to do anything productive if it’s easy enough to get a living wage while playing video games and downing six packs.

In a recent column, I argued that these funds aren’t enough to live on even in Stockton and also quoted a critic who said that a universal basic income would reduce incentives for work and self-reliance. The Stockton Record’s metro columnist criticized me for “a contradiction in this argument: $500 is not enough to live on but people who receive it will become lazy layabouts.”

It’s not actually a contradiction. Stockton’s plan isn’t enough to live on, so it will lead to endless calls by recipients for more money. A full-blown guaranteed income would indeed destroy whatever is left of the nation’s work ethic. Basically, 500 bucks would cause a little bit of sloth, while 50,000 bucks would cause a lot of it. It’s all a matter of degrees. But it’s hard to see what kind of experiment the city hopes to run if it’s only providing a pittance in income and isn’t ending other government programs.

It is easy to spot an underlying reason that this idea is rearing its head again. Some thinkers, especially on the Left, argue that the burgeoning tech industry is creating a winner-take-all economy, and that eventually automation will replace too many low-level jobs. Apparently, they believe a large portion of Americans will be permanently unemployable and just need a stipend. This is nonsense. The tech industry is creating far more jobs and opportunities than it replaces even on the lower end, but that’s where some of the impetus is coming from.

Leave it to Californians to go down this road, when a simpler path is so much better. Note that our state has the highest poverty rate in the nation, according to the Census Bureau’s cost-of-living adjusted model. The reason is fairly clear, and it has nothing to do with the state’s refusal to be generous enough with its welfare payments.

Our current public policies have destroyed middle-class and manufacturing jobs through excessive regulation and high taxes. They’ve destroyed many low-income jobs by raising minimum wages and passing union-backed work rules. We’ve created an education system that graduates functional illiterates. The state’s slow-growth rules have driven up rents and housing prices, thus delegating lower-income people to squalor.

On the local level, Stockton went bankrupt in 2012 because of its misplaced priorities. For instance, it paid ridiculous compensation packages to public employees and “invested” public funds in showy redevelopment projects that remain surrounded by vacant buildings. Instead of reducing pension packages, as the federal bankruptcy judge allowed, the city raised taxes. So now Stockton has an even harder time drawing businesses.

Stockton is like many other California cities, only worse. It’s trying to show us what not to do. As a Stockton property owner and someone who really likes the city, I’m saddened by this kind of misbegotten experimentation.

Steven Greenhut is Western region director for the R Street Institute. Write to him at sgreenhut@rstreet.org.

This article was originally published by the American Spectator

City of Stockton to Consider America’s First Basic Income Grant

StocktonThe city of Stockton, California, is planning to offer a basic income grant of $500 per month to poor residents, making it the first U.S. city to provide a guaranteed income.

Mayor Michael Tubbs announced the program on Wednesday, according to Capital Public Radio. “This is not a handout, it’s a hand up,” he reportedly said. The program is to be privately funded by the Economic Security Project, which Capital Public Radio describes as “a network of researchers, elected leaders, and organizers” and which is run by Facebook co-founder and Barack Obama campaign veteran Chris Hughes.

Stockton declared bankruptcy in 2012, a result of high pension costs, economic stagnation, and “a 15-year spending binge.” Though the city and its finances have recovered somewhat, and the city emerged from bankruptcy in 2015, poverty remains a problem.

The idea of a guaranteed basic income has been gaining traction lately, largely thanks to the advocacy of Facebook founder and CEO Mark Zuckerberg, who has suggested it may become necessary in the future as technological innovation pushes more people out of traditional jobs.

“We should explore ideas like universal basic income to make sure everyone has a cushion to try new ideas,” Zuckerberg said in May at the commencement ceremony at Harvard University.

In a Facebook post in July, Zuckerberg touted Alaska’s Permanent Fund — which pays dividends to residents every year from a portion of oil and gas revenues — as an example of a successful basic income grant. However, few states have Alaska’s vast resources and low population.

Others in Silicon Valley have also advocated for the idea. The Stockton pilot project will reportedly involve 25 to 75 families.

Joel B. Pollak is Senior Editor-at-Large at Breitbart News. He was named one of the “most influential” people in news media in 2016. He is the co-author of How Trump Won: The Inside Story of a Revolution, is available from Regnery. Follow him on Twitter at @joelpollak.

This article was originally published by Breitbart.com/California

Mayor of Stockton arrested for playing strip poker with teens and secretly recording it

As reported by the Washington Post:

Silva mugAnthony Silva, the mayor of Stockton, Calif., has a history of bizarre, outlandish and questionable behavior. His own website states that he is “a little ‘rough around the edges.’”

That may be an understatement.

During a mayoral candidate debate hosted by Stockton’s NAACP and Black Women Organized for Political Action in April, Silva — who is white — said he was the city’s first black mayor.

The next day, he clarified his statement to CBS, “I think I said, I’m not African American, but I’m pretty darn close. Quite frankly, I could be determined to be the first African American mayor of Stockton.”

In 2014, he was handcuffed after a fight broke out in a limousine. The fight caused $7,000 to $10,000 worth of damage to the car. Curtis Mitchell, who was arrested for the fight, said Silva inappropriately touched his fiancée. Silva denied the claim. The mayor was never arrested, but the limousine’s driver filed a civil lawsuit against him and the other passengers in May. …

Click here to read the full story

Property Taxes to Increase by 13 Percent in Coming Year

property taxIn Chicago, escalating property taxes are headline news. With the average property tax bill due to go up by 13 percent – and more increases in subsequent years virtually guaranteed – home ownership in the Windy City is in deep peril. No one seems happy except the moving companies.

This drastic tax increase is the result of bad decisions by corrupt officials who have caved to city employee pension demands that are unsustainable without massive borrowing. And that borrowing will be paid for by massive property tax hikes. But if homeowners are considering fleeing exorbitant taxation, they may have to travel a good distance. Illinois residents, even without the Chicago pension tax, are already paying the highest effective property tax rate in the nation at 2.67 percent, according to a recent study by CoreLogic, an Irvine, California-based provider of data to the financial and real estate industries.

Nationally, the study shows the median property tax rate is 1.31 percent of value.

In addition to Illinois, states with median property tax rates of greater than 2 percent include New York, New Hampshire, New Jersey, Texas (which some may find surprising considering its reputation as a low tax state), Connecticut and Pennsylvania. On the low end is Hawaii at 0.31 percent.

California, at 1.12 percent, ranks 30th compared to other states. Tax seeking politicians and their special interest allies will likely consider this a failure. After all, thanks to them, California has the highest state sales tax, highest marginal income tax rates and, due to carbon charges, the highest gas levies in the nation. “Why shouldn’t we be number one in every tax category?” they are, no doubt, asking themselves.

California property tax rates are reasonable for one reason and one reason only – Proposition 13. Arguably the most famous of all initiatives in the history of the United States, Prop. 13 was the brainchild of the late Howard Jarvis. He led the effort to put the tax limiting measure on the ballot where it was approved by nearly two-thirds of California voters in 1978. By limiting annual property tax hikes to two percent per year, it made tax bills moderate and predictable.

Still, California property taxes are not low. Because of high property values, the median priced home now costs nearly $519,000 according to the California Association of Realtors. Thus, while our effective tax rate ranks 30th of the 50 states, when measuring property tax revenues per capita, we rank 14th. This belies government complaints that California is starved for property tax revenues.

Proposition 13 protections should not be taken for granted. Consider the cities of Stockton, Vallejo and San Bernardino which were driven into bankruptcy by officials who, like Chicago’s aldermen and mayor, agreed to inflated and unsustainable pension benefits for government workers. The difference is that Proposition 13’s tax limiting provisions prevent California cities and counties from arbitrarily increasing property taxes. At least for now.

Jon Coupal is president of the Howard Jarvis Taxpayers Association — California’s largest grass-roots taxpayer organization dedicated to the protection of Proposition 13 and the advancement of taxpayers’ rights.

Stockton’s Pension Struggles Offer Lessons for California

StocktonIt was an official document, circulated by former Republican Assemblyman and Board of Equalization member Dean Andal, who is well respected for his understanding of fiscal matters. The city pooh-poohed the suggestion, and provided its own economic analysis, although it refused to share the detailed data with the media or the public.

The bad news was easy to believe. Stockton’s bankruptcy exit plan didn’t address the fiscal elephant in City Hall (unfunded pension liabilities). The city was following the basic route taken by the Bay Area city of Vallejo, which also went bankrupt and soon again faced deep fiscal problems.

The crux of Stockton’s plan was a voter-approved tax and spending plan. Measure A raised the city’s sales tax by three-quarters of a cent. Measure B was an advisory vote for how the money would be spent. The tax-hike campaign promised significant new spending on popular programs, especially law enforcement in that crime-plagued city. Voters approved the measures.

Now, after collecting the tax for 15 months, the data seems to confirm what Andal had been saying. “After only one full budget year, the city has already broken three fundamental promises and is destined to return to insolvency within four years,” wrote Andal in a letter this month to supporters and opponents of the 2013 ballot measures.

First, the city promised to hire 120 net new police officers over three years, with 40 new officers hired by last July. The city hired only 13 new officers so far. Second, the city promised the new sales-tax measure would raise $29.5 million by July, but fell $1.4 million short. Third, the “plan of adjustment” expected its pension payments to the California Public Employees’ Retirement System to be nearly $23 million – but the actual costs were $23.7 million higher.

The Stockton situation is of statewide importance because it’s clear the state’s unfunded pension liability crisis has not gone away even in relatively good economic times. “All these budget problems show up at the service level,” Andal told me. He says Stockton faces “service insolvency,”  i.e., a budget so troubled the city cannot provide adequate levels of public services.

Stockton spent $38 million in legal fees in a nationally watched bankruptcy proceeding. Judge Christopher Klein ruled that cities could cut pension benefits in bankruptcy. Stockton officials chose not to do so, relying instead on other cuts and sales-tax increase. Now that their numbers might not be adding up, it puts the city in a difficult position, Andal argues, given it already has the highest sales tax allowed by law, the highest utility tax in the Central Valley and some of the highest developer fees.

Other cities will likewise find limited ability to raise new revenues as CalPERS continues its plan to ramp up its bill for cities that participate in its pension plan. Yet Sacramento officials act as if the pension problem is gone. There’s hardly an issue legislators didn’t try to address in the recently concluded legislative session, yet nothing of substance to deal with growing pension debts. The good-government group California Common Sense confirms that the state’s unfunded pension liabilities continue to show a pattern of steady increases.

Pension reformers led by former San Jose Mayor Chuck Reed and former San Diego city councilman Carl DeMaio have proposed a statewide measure that would subject most local pension increases to voter approval. They say the title and summary Attorney General Kamala Harris offered for that measure includes the same union-backed poison pill (claiming the initiative undermines constitutional benefit protections) she used for previous pension reform measures. They plan take the matter to court.

So nothing much has changed at the statewide level, with the state political establishment squelching reform. Sadly, it might take another economic downturn to get Sacramento officials to check out the problems in a city just 50 miles from the Capitol.

Originally published by Reason.com

Steven Greenhut is the California columnist for U-T San Diego.

Stockton and Detroit Exit Bankruptcy Leaving Pension Systems As-Is

The landscape for public employee pensions shifted in 2014 as federal judges gave credence to the idea that pension benefits may be cut in bankruptcy. This challenges the long held idea that pension benefits are impervious to cuts and most observers are wondering just how significant this shift will be going forward.

This fall, city leaders watched as federal judges approved debt-cutting bankruptcy plans in Stockton and Detroit, ending two of the largest municipal bankruptcy cases in U.S. history. Many speculated both cities could do more to ease their fiscal problems by making significant cuts and structural changes to public pensions. However, both judges demurred and moved forward with plans that eased a portion of the cities’ financial obligations, but largely protected pensions. The failure to significantly address public pension debt and make structural changes to the pension systems in both Stockton and Detroit does not bode well for the economic future of either city post-bankruptcy. It also presents an interesting conundrum for other cities in dire fiscal distress that bear significant pension costs and unfunded liabilities. Are more cities to follow the path to pension cuts in bankruptcy?

In Detroit, the nation’s largest municipal bankruptcy case ended on November 7, fifteen months after it began. The restructuring plan approved by Judge Steven Rhodes slashed $7 billion in debts with bondholders receiving between 14 and 74 cents on the dollar back from the city. Public pensioners did not see cuts as deep, thanks in part to the likes of Van Gogh and Renoir. Detroit’s so-called “grand bargain” transferred ownership of part of the Detroit Institute of Arts collection from the city to the nonprofit running the museum for $816 million. The money, to be paid out over 20 years, comes from state taxpayers and privately-donated funds raised to offset deeper pension cuts. Pensioners in Detroit’s general retirement system are taking a 4.5 percent cut to their monthly pension check, will no longer receive cost-of-living adjustments, and will see a reduction in medical benefits. Some members who received excess annuity payments from the city will also be required to pay them back. Police and firefighter pensioners will only see a reduction in cost-of-living adjustments from 2.25 percent to 1 percent annually.

The pension cuts, which have been called “modest” by both the Wall Street Journal and NPR are exactly that. Detroit’s unfunded pension benefits are still a risk to the city’s fiscal health. And the system still relies on unrealistic rates of return when calculating required pension system contributions—the General Retirement System assumes a 7.9 percent annual return and the Police and Fire Retirement System assumes 8.0 percent, even though the city has only been earning an average of 5.89 percent for the general system and 5.5 percent for the police and fire system over the last 10 years, from 2004 to 2013.

In Stockton, even less was done to address the city’s pension problems despite a golden opportunity to make significant reforms. On October 1, Judge Christopher Klein ruled that the city could reduce its payments to CalPERS and exit its contract with the pension administrator if the city wanted. It was in his purview to cut the pensions if he saw that as the city’s best course of action. But the city chose not to modify its pension benefits or leave CalPERS. On October 30, the fourth largest U.S. municipal bankruptcy case was settled when Judge Klein approved Stockton’s bankruptcy plan, leaving existing pension benefits intact. The city agreed to pay most bond creditors between 50 to 100 cents on the dollar. Investment firm and Stockton creditor Franklin Templeton received only $4.3 million back from a $36 million loan (or 12 cents on the dollar).

Judge Klein noted the reason he left public pensions untouched was because public workers had already suffered other cutbacks, including having their salaries and healthcare benefits reduced, and because redoing current employee pensions would not be a simple task. Franklin Templeton disagrees and is appealing the judge-approved plan at the Ninth Circuit Court for further remedies.

The so-called “California Rule,” which means pension benefits cannot be reduced for current employees, was once thought to be ironclad, but Judge Klein’s ruling opens up the possibility for a future bankrupt California city to challenge it by choosing to cut pensions or leave CalPERS entirely if the city ends up in bankruptcy. Some thought that San Bernardino, another city battling with CalPERS, may take this route. Yet after Klein’s October 31 ruling on Stockton, San Bernardino decided to pay full fare despite the fact that they had previously tried to reduce their payments to CalPERS. Like San Bernardino, Stockton missed an opportunity to shrink its $29 million annual pension costs that have led to both reduced services for the citizens of Stockton and a new sales tax.

Granted, though there are not a lot of cities currently positioned to challenge the California Rule, Moody’s Investors Services points out that Judge Klein’s October 1 ruling allowing cities to cut pensions may give cities more negotiating power with public sector unions. In reality, reducing pension benefits is likely only an option for larger cities where pension obligations and general fund costs make it reasonable to wager tens of millions of dollars on the litigious process so that they can reduce their pension liabilities in the hundreds of millions or billions of dollars. Los Angeles and Chicago, anyone?

Both Stockton and Detroit are still saddled with billions in unfunded pension debt even after exiting bankruptcy. The bankruptcy plans that both cities presented and got approved did nothing to even chip away at existing pension debt. It is unlikely that either city will be able to contain the pension debt that devours their budgets unless structural changes are made to the current defined benefit pension systems they have in place. Other formerly bankrupt cities, like Vallejo, California, have struggled post-bankruptcy because of pension debt and the same type of budgetary problems affecting Stockton and Detroit.

This is only the first couple of rounds of a long bout, as we learned from the lengthy reform processes in San Diego and San Jose. Pension systems like CalPERS have deep pockets and one can sympathize with the city manager or attorney who decides not to go for the option of challenging the increasing costs of pensioners even though legal precedence is tilting in their favor. No doubt, without substantive reform that provides for an affordable and secure retirement system for both the retirees and taxpayers, that pays down the debts sooner rather than later and requires that these jurisdictions pay their full pension costs, Detroit and Stockton will likely be back before a judge begging for more protection. Just ask Vallejo.

Lance Christensen is Director of the Pension Reform Project at the Reason Foundation, and Victor Nava is a Policy Analyst at the Reason Foundation.

Stockton Bankruptcy Ruling Backs Away from Pension Reform

Jack Dean likes to tell the story of Prichard, Alabama, a city that declared bankruptcy not once, but twice.

“They were warned that the pension fund was running dry, and in 2009, it ran dry,” says Dean. “So they stopped mailing the checks.”

Dean, the editor and founder of PensionTsunami.com, tells the cautionary tale of Prichard in response to Thursday’s federal ruling that gave the California city of Stockton the green light to exit bankruptcy by paying bond investors chump change while protecting public pensions.

“Once again, Calpers has managed to intimidate a city government into not dealing with the pension issue,” says Dean. “So we’ll continue to careen down the pension crisis path, because they’re not paying attention to the elephant in the corner.”

While Stockton pensioners breathed a sigh of relief, an executive at Calpers, the nation’s largest pension fund, called U.S. Bankruptcy Judge Christopher Klein’s ruling “smart.”

“The city has made a smart decision to protect pensions and find a reasonable path forward to a more fiscally sustainable future,” Calpers Chief Executive Officer Anne Stausboll said in a statement. “We will continue to champion the integrity and soundness of public pensions.”

Earlier this month, Judge Klein issued the explosive decision that pensions can be reduced in bankruptcy, but on Thursday, he accepted the city council’s plan for Stockton, suggesting the workers had suffered enough.

“What it means is when you go into bankruptcy, pensions are not protected,” says San Jose Mayor Chuck Reed, who’s leading California’s pension reform movement. “But in this case, Judge Klein looked at the whole package, and decided that employees gave up their health care for pennies on the dollar… So you don’t necessarily have to cut pensions, you don’t necessarily have to cut health care, you don’t necessarily have to cut salary, but you have to do something to deal with the problem. Employees have to share the pain.

“The takeaway for California is it would be a whole lot better if we could deal with these problems outside of bankruptcy and before bankruptcy.”

Reed says local governments should be empowered to negotiate changes in future benefits as a means of controlling the costs in order to avoid the pain of bankruptcy.

“It’s certainly a knockdown, drag out fight in San Jose,” says Reed, who is calling for the U.S. Justice Department to investigate San Jose’s police union for corruption. “The good news is, we’re saving 25 million dollars a year due to our pension reforms and we’re putting that back into city services.”

In court on Thursday, Judge Klein suggested that Stockton’s plan was the best it could do and that bankruptcy was a dauntingly expensive proposition.

But attorney Robert Flanders, the municipal fix-it guy in Rhode Island, says when push comes to shove, don’t be afraid of the “B” word.

Flanders, a partner in the law firm Hinckley-Allen, was the state-appointed receiver in Central Falls, Rhode Island, which went through a bankruptcy restructuring in 2011 and came out the other side.

“It was plain that we were running out of cash to pay people,” says Flanders. “That’s when I had to go in front of them and say, ‘I’m sad to say this, but there’s a risk that you’re not going to get paid at all and we’re going to default. A haircut still looks a lot better than a beheading.’ It really was the true situation.”

Thirteen months later, the city was back in business and ultimately retirees ended up with a 25 percent haircut, down from a high of 55 percent.

“We took the opportunity of the bankruptcy to not only restructure the pension system, but get rid of the gamesmanship and make it much more favorable to the taxpayers,” says Flanders. “It can be done, and it can be done quickly. The beauty of it from a legal standpoint is all the arguments about breach of contract amount to a hill of beans in a bankruptcy proceeding because the only issue is what can a city afford.”

He says Judge Klein is giving Stockton the benefit of the doubt. But Stephanie Gomes, the former vice mayor of Vallejo, says Stockton missed the opportunity to learn from Vallejo’s mistake. Vallejo was the first California city to topple.

“If I were on the Stockton city council, I would’ve pushed for some sort of pension reform,” says Gomes, who was on the Vallejo city council before, during and after the city declared bankruptcy. “We didn’t have a majority willing to do that, and because of that, we are still saddled with crushing pension debt in Vallejo, and we’re still struggling with our exit plan.”

In effect, she says, Vallejo failed bankruptcy.

“I call Calpers ‘Hotel California,’” says Gomes. “Once you’re in, you can never leave. Until there’s statewide reform, there’s not much cities can do.”

For John Moore, a candidate for mayor in the seaside town of Pacific Grove, California, Thursday’s ruling was a bummer.

“Judge Klein led us on for about a year,” says Moore, a retired attorney whose run for mayor is an attempt to tackle Pacific Grove’s pension debt. “We thought something really big was going to happen, and now we have a plan that has no chance of working.”

Dean says nothing changes the fact that Stockton’s pension fund is millions in the hole.

“When the checks stop coming in the mail, maybe we’ll get reform.”

This piece was originally published on Fox and Hounds Daily

Have Stockton officials learned their fiscal lesson?

The Bureau of Labor Statistics, which tracks monthly unemployment in 372 metropolitan areas, reported that Stockton, California had the nation’s eighth-highest jobless rate at the end of August. More than 10 percent of those looking for work in the struggling Central Valley city couldn’t find it. This is nothing new. Stockton has been coping with unemployment rates 50 percent to 75 percent above the national average for more than a decade. Based on that long history of joblessness, you’d think that qualified local residents would be ready to snap up government jobs with starting salaries of $60,000, plus health benefits, a pension, and yearly pay increases. Apparently not: according to the city’s elected officials, if Stockton is forced to reduce its generous and costly retirement plan as part of its exit from bankruptcy, the city will see a “mass exodus” of workers and won’t be able to fill crucial positions in its police and fire departments.

Bankruptcy judge Christopher Klein ruled last week that the unusual legal protections enjoyed by California pensions, which make it virtually impossible to cut the costs of a pension plan in the Golden State, did not apply in bankruptcy court. Stockton city officials and lawyers were livid. They had planned a reorganization sharply cutting what some creditors receive while leaving the city’s gigantic annual pension bill untouched. One city creditor, Franklin Templeton Investments, which would receive as little as one penny on the dollar for its unsecured claims, has objected, arguing that it’s not fair that Stockton could ignore its huge retirement debt. Judge Klein essentially agreed, saying that there’s no reason the city couldn’t hack away at it, or even dump its expensive plan with the California Public Employees’ Retirement System and seek a cheaper alternative. “There are lots of permutations and combinations out there,” said Klein, explaining the various ways Stockton might save money by replacing its expensive pensions with something more affordable.

Stockton officials’ claims that they would face a personnel crisis if they cut pensions strain credulity. Salaries and benefits in California’s public sector are so generous that, even after bankruptcy, a government job should appeal to many Stockton residents. Based on a deal negotiated between the city and its police union after Stockton entered bankruptcy, the starting salary for a police officer is $4,970.39 per month, or $59,644 annually. That rises to $72,888 after five years. Firefighters start at $49,000 annually, a salary that rises to $60,000 in five years. The city’s median annual household income is less than $36,000. Stockton will also spendabout $14,000 a year toward a family health-insurance plan for a new officer or firefighter. New officers enter a pension plan under which they can retire at 57, with 2.7 percent of final salary for every year served. So an officer with 30 years of service and a final salary of $75,000 would qualify for a pension of nearly $61,000.

Public service is apparently so tough in Stockton, however, that the city claims it must compete aggressively for a limited pool of new workers. Stockton’s former city manager justified not asking for significant changes to pensions because “we cannot just pluck people from the unemployment lines—the requirements to be a police officer are demanding and 99 percent of applicants do not qualify or, if hired, wash out.” Some elite military units have lower washout rates.

Government-worker unions exploit this kind of thinking to demand higher wages and benefits, especially when neighboring municipalities boost their compensation. That creates an ever-upward spiral of wages as school districts, towns, and cities adopt the new wage levels, regardless of whether they can afford them. Stockton officials admit that their current woes are a product of this mindset. In 2012, the former city manager pointed out that for years, Stockton officials added benefits in line with those offered by other cities. “Nobody gave a thought to how it was eventually going to be paid for,” he said.

Stockton risks coming out of bankruptcy with a heavy compensation burden. Officials argue that city workers have sacrificed enough, largely because the city eliminated its program of providing free health-care coverage for all retirees. But that extremely expensive perk is rare in the private sector and disappearing in government. Meanwhile, however, pension contributions for public-safety workers now amount to 41 percent of payroll. That would put the total cost of salary, health benefits, and pensions at about $120,000 annually for a fifth-year officer. The good news, if you can call it that, is that the city projects that after several more pension increases in coming years, Stockton’s soaring retirement costs will “level off.” The bad news is that pension contributions already amount to $42 million annually in a city with a general-fund budget of just $185 million.

Stockton is heading down a path previously traveled by Vallejo, the Bay-area city that emerged from a three-year bankruptcy in late 2011 without cutting its pension debt. Vallejo tried to compensate for its still-high retirement costs with cuts elsewhere but is now struggling financially thanks to its soaring pension costs, including annual pension contributions for police officers that average about $50,000 per cop.

The long saga of Stockton’s decline dramatizes the inefficiency and illogic of union-dominated, monopolistic, government-labor markets. California laws and court rulings provided Stockton workers with extraordinary protections for some benefits, including one of the nation’s most generous pension plans. When Stockton couldn’t cut its labor costs fast enough, it engaged in destructive rounds of layoffs because, ironically, the one thing you can do when all else fails is fire people. City residents and laid-off city workers were the losers.

Now Stockton has a chance to reach more solid financial footing thanks to Judge Klein’s ruling and a painful two-year sojourn through bankruptcy. But it’s not clear that city officials have learned their fiscal lessons.

This article was originally published by City Journal.

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