Cities, Counties and States are borrowing billions to pay for public employee pensions
- From city hall to Congress every political hack has gone on an insane spending binge.
- With no money in the treasury, government is borrowing money to pay for public employee pensions.
- "They are just going to dig themselves deeper and deeper into a hole."
BANKRUPTCY - It is an amazing thing to witness. The thrift and commonsense of our Founding Fathers has totally vanished like a fart in the wind. In their place we have a bi-partisan orgy of spending of non-existent monopoly money by both political parties
Struggling to pay employee pensions, local governments are increasingly borrowing money to cover their obligations — exploiting a loophole in federal law that allows them to issue taxable bonds without seeking voter approval.
Exotic but increasingly popular financial instrument known as a pension obligation bond. Cities, counties and states use the bonds to take out high-interest loans from private investors to plug shortfalls in their employee pension funds reports the Los Angeles Times.
If the pension funds make smart investments with the borrowed money, the returns can help pay the interest due to borrowers and sometimes even spin off some extra cash to pay pension costs. If they don't, the bonds can create additional costs for taxpayers, put the retirement funds of teachers and firefighters in jeopardy, and, in the worst case scenario, force municipalities into bankruptcy.
Just in the last few weeks, proposals to issue the bonds have come out of Cincinnati, Ohio; Fort Lauderdale, Fla.; Hamden, Conn.; and the Democratic mayoral candidate in San Diego, Bob Filner, who said he would use the bonds to help the city's budget crunch.
The state will shell out $1.6 billion — or 5% of the state's entire annual budget — just to pay off the interest on its pension bonds issued over the last decade, according to the Illinois Civic Federation. The bonds were issued with the hope of increasing the funding level of the pension fund, but that level has actually dropped.
California - The pension plan for California public school teachers currently has only 72% of the money that it estimates it will need to pay for the retirement benefits of the state's teachers, down from 90% in 2007, according to the Pew Center on the States.
Oakland, California took a bet on its pension fund that ended up costing the city an estimated $245 million — nearly a quarter of its annual budget. That hasn't stopped the city from looking to try its luck one more time. The Oakland city administration proposes more than $200 million of new pension bonds in the coming months.
Another California municipality to encounter problems after issuing pension bonds is Stockton. The city issued $125 million in pension bonds in 2007, a third of which promptly disappeared when the market crashed in 2008. But Stockton is still on the hook for the annual interest payments, some $6 million, or about 75% of the city's deficit this year. In late February, the city announced it was moving toward bankruptcy after determining it was unable to make the payments on these and other bonds.
"Municipalities find it attractive to think that there might be a free lunch — they can issue bonds and solve their problems," said Jeff Esser, chief executive of the Government Finance Officers Assn., which has issued an advisory cautioning its members against pension bonds. "Unfortunately there is no free lunch."
"There are communities that just do not want to make the hard choices, even though it means the choices in the future will be worse," said Robert Doty, a municipal finance consultant in Sacramento. "They are just going to dig themselves deeper and deeper into a hole."
.(Los Angeles Times)