Using the “B-word” in California’s Public Sector Pensions

At City Journal, Steven Greenhut writes that cities in California are becoming increasingly comfortable talking about bankruptcy. Los Angeles and San Diego have their eyes on the city of Vallejo which filed for Chapter 9 in 2008. What drove the port city of 117,000 to this point? Benefits and salaries for public sector workers. To see the handiwork public sector unions on Vallejo’s fiscal plight consider that 74 percent of the city’s budget is spent on police and firefighter salaries and benefits. Some highlights include $300,000 a year for police captains, and average fireman’s compensation of $171,000. The looming question for Vallejo and cities and states across the country is how to pay for pensions. Vallejo was given a chance to void its existing union contracts by the court but chose to buckle. Now the options are between the impossible and the unpalatable. Vallejo can ask bankrupt Sacramento for a bailout or they can raise taxes on city residents.

How Vallejo manages will be an early indicator for the rest of the nation. State pensions face an unfunded obligation of $3 trillion, nearly triple what is officially reported. Johnathan Lang writing for Barron’s offers a few possible scenarios in the near future for state and local governments including higher property, sales and income taxes, cuts in essential services, debt defaults and bankruptcy filings. He writes, “The possibility of taxpayer revolts and likely insolvencies has shaken some investors’ confidence in general-obligation bonds–those backed by the “full faith and credit” of the states or localities.”

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