Expect More Population Flight

NOV. 2, 2010

By WAYNE LUSVARDI

Given the predictably one-sided recent election results in California, a new trend may be soon emerging called “red flight” to describe the rapid mass out-migration of residents from cities and counties that are insolvent due to an inability to meet public employee pension obligations (i.e., cities that are “in the red”). Only unlike the term “white flight,” this flight may span across attributed ethnic, class, or political colorations.  And oddly, it may be public pensioners that will lead the flight out of California taking with them their lucrative pension checks and escaping state taxes and higher water and power rates from California’s now unimpeded Green Power Law.

A recent study released by Northwestern University’s Kellogg School of Management forecasts that there may be future population flight from many of California’s large cities and counties due to inability to meet mounting public employee pension obligations.

The study states:

“At the metropolitan level this is particularly stark, as residents can move to suburban areas in response to increased taxes and cuts in services in the urban areas. The fact that there is such a large burden of public employee pensions concentrated in urban metropolitan areas threatens the long-run economic viability of these cities.”

Out of 50 municipalities surveyed nationally that are in potential financial insolvency due to future pension obligations 18 of them (or 36 percent) are in California. Pensions would eat up the following percentage of annual general fund revenues from the California counties listed below depending on a no growth scenario or a growth scenario of 3 percent per year:

Percent Municipal Revenues Consumed by Pensions

County	Best Case (2019)	Worst Case (2015)
Fresno County	78%	142%
San Diego Co.	62%	119%
L.A. County	41%	91%
San Bernardino County	45%	90%
Kern County	51%	82%
Ventura County	38%	76%
San Francisco	34%	74%

(see table below for complete list)

Even under the best-case estimate many California major municipalities would be so financially decimated that it is doubtful that they could fund first-responder services, courts, and make any debt payments at the same time. This would be a real experiment in how much local government is really needed.

The Northwestern Kellogg School of Management study also points out that this situation could be worsened by pensioner “run outs” into early retirements before the draw bridge of generous pensions is pulled up. Not only would public employees have an incentive to retire early with higher pension benefits, but many would have an incentive to migrate out of the state and take their state pension checks with them while also avoiding state taxes and expected higher water and power rates now that California Prop. 23 to stop Green Power has been rejected by the voters.  A sweetheart pension deal by the Legislature and new governor may actually stimulate “red flight” paradoxically by public pensioners.

The next California financial meltdown may not be from bank runs but pensioner “run outs” and resident and public pensioner “move outs” from those cities and counties running in the red.

The Northwestern study reports that state and local governments are essentially trapped by the legal protections that are given to pension liabilities enshrined in the state Constitution.  The study warns that if this problem remains unresolved that losses to municipal bondholders may result.

Shifting government workers to water and power departments is unlikely to help much either.  The city of Los Angeles shifted 1,600 employees in the past six years to the L.A. Department of Water and Power but even it can’t cover the $183 million annual cost of these retirement packages.

Utility user taxes provide a money lifeline for municipalities to raid water and power utility funds and shift them into their general operating and fiduciary retirement funds. When California’s Green Power law goes into effect in 2012 it is likely that municipal water and power funds will swell and the surplus siphoned into city and county general funds to meet pension obligations. Voters will not have a vote in determining whether existing pension obligations will be met or not. Instead lucrative union pension deals will be buried in increased water and power rates.

This may explain why expensive Green Power is being rolled out so aggressively and so fast over the voices of prominent scientists exposing global warming and C02 pollution as a fraud. Green Power may be a means to bail out broke municipalities before 2015 or 2020 rolls around whichever is the case. Green power could result in 40 percent to 60 percent higher electricity rates coupled with a 15 percent to 30 percent increase in water rates, not including the $44 billion water bond proposed for the 2012 ballot (including bond interest and matching funds).

But this does not factor in the likely mass hemorrhaging of municipal revenues and declining property values from “red flight” and rampant inflation from increased electricity rates loaded into the price of food, goods, services and everything else.

Paradoxically, the public may be forced to conserve water and electricity as it becomes unaffordable.  The political ramifications of being unable to use air conditioners during heat waves or turn on heaters during cold snaps won’t show up until California’s residents first get those high water and power bills. But municipal and public utilities and elected officials will blame it on inflation and deny that they created it.

People are prone to “vote with their feet” if the pension crisis is unresolved or resolved to the detriment of home values, the viability of businesses, or the ability to afford residential comfort levels.

The term “Green Power” may take on a double meaning (as in inflationary green money) given its potential fiscal power to bailout insolvent California counties from overwhelming pension liabilities.  But “Red Flight” is likely to eventually win out over “Green Power” in California especially as voters have now rejected Prop 23 to stop the forced roll out of green power and a green governor named Brown has been elected again in California.

Large California Municipalities Pension Liabilities Compared

City/County	No. Years Could Pay From Existing Assets	Year No Longer Able to Pay (best case)	Pension Liabilities per Household	Retirement Share of Revenues in 2015	Retirement Share of Revenue in 2019
Kern County	12	2022	$11,919	82%	51%
Sonoma Co.	12	2023	$8,394	65%	39%
San Joaquin County	14	2024	$9,119	78%	46%
San Mateo County	14	2024	$9,415	59%	35%
Contra Costa County	14	2025	$12,771	68%	39%
Orange Co.	15	2025	$8,233	98%	56%
Fresno Co.	14	2026	$8,401	142%	78%
Los Angeles	14	2027	$7,473	66%	36%
San Jose	16	2027	$11,391	61%	33%
Santa Barbara Co.	16	2027	$11,995	59%	32%
Alameda Co.	15	2028	$7,579	69%	36%
San Diego Co	15	2028	$6,329	119%	62%
Stanislaus Co	15	2028	$6.698	90%	47%
San Bernardino Co	17	2029	$6,716	90%	45%
Ventura Co	16	2029	$8,195	76%	38%
Sacramento County	19	2030	$8,582	110%	54%
San Francisco Co. & City	16	2032	$34,940	74%	34%
Los Angeles County	16	2033	$18.193	91%	41%
Tulare Co.	17	2034	$4,068	93%	41%
Fresno City	23	Never	—-	—-	—-

Source: The Crisis in Local Government Pensions in the U.S., Northwestern University Kellogg School of Management, Oct. 2010