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

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  1. Fred Mangels
    Fred Mangels 3 November, 2010, 08:49

    Does anyone know where I can find out the pension obligation figures for Humboldt County?

    Reply this comment
  2. Wayne Lusvardi
    Wayne Lusvardi 3 November, 2010, 09:21

    Fred:
    Go to the Humboldt County website and see if you can find the Certified Financial Audit Report (CAFR). The unfunded pension liabilities should be shown in that report. Or ask the County Treasurer for a copy of the report.

    WL

    Reply this comment
  3. A. E. Barg
    A. E. Barg 3 November, 2010, 10:34

    We are planning to leave this state as soon as possible. Our place is up for sale and we will go to Oregon.

    Reply this comment
  4. Fred Mangels
    Fred Mangels 3 November, 2010, 11:45

    Thanks for the suggestion.

    Reply this comment
  5. Roy Reynolds
    Roy Reynolds 3 November, 2010, 17:56

    Thinking about spending the equity from my home if I left and sold it in Nevada or Florida.

    Reply this comment
  6. Sam Wells
    Sam Wells 4 November, 2010, 17:00

    We also plan to move away as soon as we can scrounge up enough money to do so.

    Reply this comment
  7. Tough Love
    Tough Love 5 November, 2010, 07:26

    Unbelievable ……. all due to the Greedy Union and the enabling politicians!

    Reply this comment
  8. Tough Love
    Tough Love 5 November, 2010, 07:31

    You know, there IS an answer, even IF pensions for FUTURE service cannot be reduced for current employees (something ROUTINELY done in Private Sector pension plans).

    Outsource 90+% of all Civil Servants. This will end the “employment relationship” and with it any further growth in pensions.

    There are no other options.

    Reply this comment
  9. Fake OCO
    Fake OCO 5 November, 2010, 08:10

    There is another solution, I have listed it several times, and Carl DeMaio in San Diego has now propsed a MODIFIED version of it.

    It entails CUTTING public employee pay by 25%, feezing the pay at that lower level, taking the 25% savings and putting it directly into the pension fund to shoire it up, while putting ALL new hires in a 401K DC, or a midified DB-1%@40 with a 6% DC match.

    Reply this comment
  10. Charles Sainte Claire P.E. and proud of it
    Charles Sainte Claire P.E. and proud of it 5 November, 2010, 09:23

    If you look at the 3% of State budget for pensions compared to welfare and other entitlement programs you would immediately recognize a total disconnect with reality. Your next door neighbor from Mexico is probably soaking up ten times what persons who spent a lifetime working for you ever did.

    Of course that does not sell newspapers.

    Stop and think.

    Reply this comment
  11. Charles Sainte Claire P.E. and proud of it
    Charles Sainte Claire P.E. and proud of it 5 November, 2010, 09:28

    Hello there ToughLove and if course also Fake OCO, also known as Rex the Wounderdog.

    Go ahead and lay off and cut pay by 25%. And then privatize everything. You will get what you deserve. Trillion dollar bailouts. THAT is what the greedy private sector will give you.

    Good luck with it.

    Reply this comment
  12. Charles Sainte Claire P.E. and proud of it
    Charles Sainte Claire P.E. and proud of it 5 November, 2010, 09:51

    I could go to work for the Private Sector and REALLY cash in. Oh, you think I can’t do it? I don’t live in the REAL world?

    I have been looking at those like you for a long time, in fact mostly working at curtailing their desire to make more bucks in Public Contracts. No problem, I know how to game the system, if I personally wanted to.

    However, as custodian of public funds and a California taxpayer (yes, State Employees pay taxes, just like you)I have fiduciary compact (involving responsibility for taking care of money or property that belongs to someone else) with the citizens of the State of California to respect their rights and money.

    And I am quite proud to say NO contractor ever received more money or less money then they signed for in the Contract that I administered. You can go to any Contractor I ever dealt with in Southern California and ask them, they will tell you I was fair, but it stopped right there. Call them.

    Reply this comment
  13. Fake Rex ther Wonder Dog!
    Fake Rex ther Wonder Dog! 5 November, 2010, 13:12

    Hello there ToughLove and if course also Fake OCO, also known as Rex the Wounderdog.

    Go ahead and lay off and cut pay by 25%. And then privatize everything. You will get what you deserve. Trillion dollar bailouts. THAT is what the greedy private sector will give you.

    Good luck with it.

    ==========================

    hahahahahaa

    The sky is falling………..the sky is falling.

    BTW, who is Rex?? 🙂

    Reply this comment
  14. Tough Love
    Tough Love 5 November, 2010, 14:03

    Charles ….. its NOT all about YOU.

    Reply this comment
  15. ilium
    ilium 5 November, 2010, 15:33

    become part of the solution. stay in california and get a second job to help pay for all of the persons who don’t work. i think the number is half of those of working age now collect a free check. ever wonder who you are supporting. do they even send you a pic and a thank you letter. probably not. no wonder they are cashing their checks in hawaii, casinos, strip clubs, and marijuana joints. their loaded !

    Reply this comment
  16. Charles Sainte Claire P.E. and proud of it
    Charles Sainte Claire P.E. and proud of it 6 November, 2010, 05:13

    Tough Love
    No it is not all about me. It is all about reality.
    Persons who work for the public do exactly that. They take care of the public interest. I did exactly that for 40 years. I will probably stay in California. I love this State. I have seen you here and there on many public forums. I performed my job well, all over this State. I am quite proud of my work. As I have said before, I took my career with true responsibility. Your dollars were safe with me as a contract administrator. Now I am retired. And I think I deserve it.

    Reply this comment
  17. Charles Sainte Claire P.E. and proud of it
    Charles Sainte Claire P.E. and proud of it 6 November, 2010, 06:14

    and of course mr toughlove. i don’t think you are really a human person. Just my thought, of course.

    Reply this comment
  18. Tough Love
    Tough Love 6 November, 2010, 15:02

    Quoting Charles Sainte Claire ….”Persons who work for the public do exactly that. They take care of the public interest. ”

    Let me ask you a question……

    The Former Head Librarian of San Diego retired with an annual pension of $227,249 vs the annual salary for that position of $139,680.

    Did this employee “take care of the public interest” …. or their OWN interests.

    The STRUCTURE of the system is defective to allow ANY employees to “work the system” to such advantage. Neither the employees nor the politicians who (effectively) run it can be trusted. That’s why the Defined Benefit system need to be dumped and replaced with a Defined Contribution Plan….. and for CURRENT as well as NEW employees.

    Reply this comment
  19. S L Pendergraft
    S L Pendergraft 6 November, 2010, 19:41

    Unfortunately, the children & grandchildren will bear the burdens. California will need $ from feds too, so all who pay taxes will bear the burden. State & Federal workers have no money to pay taxes, without first receiving $ from the private sector. Many in the private sector,including doctors who are small business persons, have no retirement. Fight to change the forthcoming health care bill, because it costs the average American Doc, $147,+++. per year, JUST TO RUN THE BUSINESS. There are only 10% med students entering school compared to the # of docs retiring. There will be rationing–if the HC Bill passes. Oh, we need a new wine, BYE NANCY, NOW WHINE!

    Reply this comment
  20. john
    john 14 November, 2010, 09:09

    Will the last taxpayer leaving this once great state please turn out the light at the end of the tunnel??

    But that’s what you get when you have the wacko wing of one party running the state. The other party shares the blame too for continuing to be irrelevant.

    jbs/

    Reply this comment
  21. w.n. sanabria
    w.n. sanabria 24 February, 2011, 16:55

    Was the head librarian who retired with the huge pension a member of the union? If so, the criticism is justified. I have the impression, however, that many of these pension horror stories are based on executives in the public sector who get these perks, not on the rank and file workers who are in the unions. That was certainly the case of the City Manager and his cronies who were looting the town of Bell. Am I wrong?

    Reply this comment

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