To Plug a Pension Gap, This City Rented Its Streets. To Itself.

Is not the transfer of solid assets, usually city owned real estate, from a government to a private entity, "dummy" or otherwise, a gift or sale of a public asset without (taxpaying) public, i.e. voter, approval? Sounds like a lawsuit to me.

It would be good if governmental entities put a pencil to obligations they are contemplating agreeing to before they agree to them.

You can almost hear the sound of the can being kicked down the road once again. The problem is not the pension funds, which are generally run well, but simply cannot manufacture the levels of return required to meet the pension obligations that have been agreed to by elected officials, often years ago. In the end, these schemes amount to little more than borrowing today in order to pay what is owed in the future - plus, of course, fees to the investment firms and lawyers that create these schemes, as well as above market interest to the buyers of the bonds. While borrowing money today to pay current pension funding obligations may create a short term "solution," it does absolutely nothing to lessen the long term impact of the pension promises that have been made. Converting public pension plans from a defined benefit to 401K-style plan makes long term sense, but will provide little immediate relief as: 1) most public pension plan changes are subject to labor negotiations, and 2) would in most cases only affect new employees going forward. In private business, pension obligations can be capped, plans can be terminated, or in the worst case a company bankruptcy can shift remaining pension obligations to the federal government. Not so with public pension plans. In the end, taxpayers will be left paying the bill for irresponsible pension promises made by long gone law makers.

Well, with people living longer and longer and states giving out handsome pensions to teachers, police, firefighters, professors, etc. the chickens are going to come home to roots.

Municipal unions and politicians conspired to defraud the public with promises of pensions that we not sustainable in exchange for campaign contributions. Where are the investigations? In NY, NJ, Cal, etc pensions above $100,000 are common for teachers, police and fire depts. And after retiring after 20-25 years, they get another government job! Freeze all pensions over $90,000 per year!

This is the making of the next financial crisis, public pension. The California Public Employees’ Retirement System, or CalPERS projected 7% return on their pension plans and charged that to the Cities for any shortfalls. (City's pension shortfall is a loan from CalPERS at 7% interest rate to pay for future pensions of Police Officers, Fire Fighters, Teachers, Mayors, etc.) Cities rent their assets to themselves and sell bonds at 4% with the assets as collateral, then pay off CalPERS their shortfalls/obligations. As the result of this financial engineering, they save 3% on the Pension shortfalls. This creates an anti-democracy perverted complicated feedback loop where state government workers want lower tax for themselves but higher tax for the state tax payers to support their pensions and vote for GOP candidates once they are entrenched in their state jobs. For example, Government workers such as McCarthy (California), Rubio (Florida), McConnell (Kentucky) vote against the interest of their states as long as their Pension and Wealth are non-negotiable. Others are voting against the interests of their state citizens/neighbors for same reason. This means City Bonds are not safe financial instruments. Target-Date Funds in 401K most likely are buying a lot of these City Bonds to get yield higher than current CDs and Treasury Bonds. So now Target-Date funds are also unsafe.

I am still trying to understand the renting of streets. Who pays to rent a street?

The solution is to pass well-defined Federal law to allow municipal bankruptcy. The threat of bankruptcy would allow municipalities the ability to renegotiate terms of public-sector pensions.

I’m not sure why municipalities and state governments first decided they needed their own pension funds. Why can’t social security just cover everyone? There is a lot of duplication of effort, from the largest to the smallest group, each with investment and income problems. Seems too complicated to me.

Mr. Wu - You rightfully question whether 7% is a reasonable rate. What you don't seem to understand is that lowering CalPERS's expected rate of return (7%, which is why they are charging West Covina a 7% interest) to, say, 4% would make West Covina's pension shortfall even higher... well beyond the $200 million. So, which fantasy do you want? The fantasy that CalPERS will have a 7% annual rate of return forever on its investments or the fantasy that West Covina should pay a lower interest rate to CalPERS? You can't have both, and it's sad that somebody in your position doesn't seem to understand that.

This borrow-against-the streets scheme smacks of a classic arbitrage scam, taking advantage of tax-exempt bonds. Who benefits? Bond attorneys, high income taxpayers (who buy the bonds) & bond brokers. At whose cost? The federal treasury: ie all of us taxpayers. Yes, probably legal. Yes, just another example of a tax system designed for the 1%. Do we really want to celebrate this?

Sure - we definitely need more unions and their gold-plated pension plans - Go Joe!

This is what happens when politicians give into public sector unions.

Just wow! What a way to kill all future vitality of a community. You think young people are bitter now about all that is on their shoulders, once word gets out that boomers continue to saddle future generations with more unforgiving debt, they will flee, never to return.

At this point, it should be abundantly clear to the casual reader that our economic system has become completely divorced from reality. So, will 2022 be the year when we can finally have a congressional election cycle where we can have a nuanced, nationwide, bipartisan discussion about which big civic investment plans will create the greatest set of positive externalities? Yeah, I didn’t think so. But a gal can dream.

These appear to be the ultimate junk bonds. I think the tax structures of both states mentioned in this article need a thorough revision, as does New York State's tax structures. An overhaul of taxing methods will need even more revision once electric motor vehicles become more widespread. Gasoline tax receipts will no longer cover the federal & state highway trust funds. Property tax revenues will definitely be reduced as more and more companies reduce the size of their offices and employees use home offices. Not all large office & retail commercial buildings can or will be converted to residential properties. Municipalities must include some type of fund to tear down properties left empty by developers/real estate owners. In Rochester NY we have one building downtown which has been empty for 30 years. It will never be redeveloped even though there is new construction on neighboring properties.

This is what happens when we put people on short term timelines--the next election--in charge of long-term obligations. The long-term almost always loses.

Is a pothole-ridden street a multimillion dollar asset or a multimillion dollar liability?

When that self-regulatory group - "Public Finance pros" it might as well be called - tagged this as a BAD IDEA, you have confirmation of the "common sense" flaws. Forget how weird it sounds. The "nub" is what was tossed off in a somewhat opaque sentence or 2 - They borrow for 30 years or more at 4% [any individual who has ever borrowed money knows that there are fees & expenses on top of that, and they're not chicken feed] ... and hope that they can find investments that pay 5%, say - year in, year out. As someone else pointed out, look past the 1% today that one can get with low risk to "normal times" (although there are lots of questions about "new normal" and even IF we'll ever get back to it), BUT in recent decades 2-3% per year is more like REAL RETURNS without taking huge risks or starting a company. Presumably, Tucson and other smaller municipalities WILL NOT be starting businesses ... nor SHOULD THEY be looking for high risk "opportunities." How are they ALLOWED to do something this nutty - something HIGHLY LIKELY to end in a train wreck?! Talk about kicking the can down the road. In due course, services will have to be slashed and/or taxes hiked in a big way. The pension holders may or may not get every penny stipulated, and everybody's "BIG" home investment is sure to get nicked in a big way. Sure, none of us LOVE a dental cleaning bill. But we're thinking that it's smart - helps avoid much larger bills for those who neglect/economize. Same thing applies here!

TO THE TAXPAYERS: YOU, through your elected officials, hired workers and paid them sub-market salaries with the promise that they would get a future pension. YOU, through your elected officials, did not properly fund the pension plans to keep YOUR taxes low. The future is now and it is time for YOU to keep YOUR promise. This article is about public-sector pension funds where the government has control of the money. The government did not fund the pension system in order to keep your taxes low. Your lower taxes were a loan from the public employees. Now pay them back. Stop whining and pony-up.

Sure sounds like a ponzi scheme ... Pon·zi scheme /ˈpänzē ˌskēm/ noun a form of fraud in which belief in the success of a nonexistent enterprise is fostered by the payment of quick returns to the first investors from money invested by later investors. "a classic Ponzi scheme built on treachery and lies"

Good old American know how got us into this mess. So did greed and tax breaks. When we had higher taxes on the richest the country was in better physical shape and financial shape. We elected people who promised us smaller government, fewer taxes, and forgot to tell us where that would lead. Now we know and it's not a pretty picture. Many of us will not be able to retire in comfort. Many of us will not be able to find a place to live that is affordable and decent once we are no longer working. Many of us will not be able to receive medical care when and where we need it. But hey, we made sure to safeguard the wealth of the richest. They're happy.

So basically Wall Street sets up payday loan operations to help incompetent, if not insolvent, municipalities avoid making the fundamental changes needed to restore solvency and fiscal responsibility. In 2008 there was a cash strapped Illinois municipality that “hocked” their firetruck in order to make payroll.

The pension shortfall nationwide is estimated to be about $4.7 trillion--about as much as we've wasted fighting pointless wars in the Middle East over the last 15 years...

The most that could be said about Covid and pension finances is that the immediate crisis has hastened the slow-motion train wreck long in progress—a collision between extravagant promises by politicians buying off unions and exaggerated assumptions of extremely unlikely investment returns. From California now and Detroit recently, coming soon to a state or municipality near you.

Always interesting hearing about the pension crisis. I feel as though it has the potential to bring catastrophic calamity if it pops.

This shows how defined benefit pension plans are a trap. Risk cannot be escaped; it is assumed by the municipality, and hidden by unrealistic assumptions about investment returns. Often they assume 7% return, over the 60 year life expectancy of a new hire. This is a fantasy. Real returns over the last century have been 2--3%. Inflation makes that look better, but that doesn't help if pensions are inflation-adjusted. Defined contribution pensions shift the risk to the employee. That seems unfair, but they have the advantage of not making an irredeemable promise. Sooner or later, defined benefit pension plans are going to default on their promises. It may become nationwide. A defined benefit plan could be written without irredeemable promises if the benefits were defined in terms of the unknown future return on investments. I don't know if any are done that way.

The generosity of public pensions is truly astounding. The time has long passed for them to be converted to IRA's or 401(k)s like everyone else has had to, especially because their recipients for the most part had guaranteed salaries and loads of paid holidays and vacation time, and vest after 20 or 30 years. That paying them off has priority over fighting hunger and upgrading public schools to the 21st century is a blot on how we do things in this country.

Instead of instigating yet another scheme to upt the money to fund the pension funds, why not treat the source - the pension funds themselves? Pension funds which are getting ever larger as city/municipal workers via their unions continue to pay contributions which are no-where near enough to pay for the generous benefits when said employees retire. I'm always astounded as to the benefits/pensions city workers accumulate. Huge pensions and life long health cover - some starting as early as 55. California has long boasted that it manages its budgets - but only if they do NOT include the massive public pension payments they have to fund. It used to be that public workers were compensated with good pension benefits because of supposedly lower wages. Not anymore - with city managers on well over $200K and local fire and police personnel not far behind, these pensions are a slap in the face for all working taxpayers.

So, are these streets and golf courses collaterals to the bond holders? If the city goes bankrupt or stops rent what happens to the shell company? Will the bond holder take possession of the street? Presumably they would try to sell them back to somebody who can pay? Perhaps a private entity? So there maybe a future way to privatize public property! Hurray - sarcastic!