Sniffing out financial failure in California cities 

The Golden State cities of Vallejo, Stockton, Mammoth Lakes and San Bernardino have all declared bankruptcy, and city leaders in Compton are publicly pondering that option as well. Basically the roster of California cities has become a game of dead pool to see which one will drop next.

And while that might not be entirely preventable, State Controller John Chiang has asked legislators to give his office permission to deploy “red teams” of auditors to swoop in and dig around in the books of local governments when the whiff of financial failure first fills the air. Currently, the auditors can only go in once a city’s finances are ruined.

The argument for Chiang’s proposal just got a boost from the July 17 report of a State Budget Crisis Task Force. The multi-state task force advisory group is co-chaired by former New York Lt. Gov. Richard Ravitch and former Federal Reserve Chairman Paul Volcker, and its members are a bipartisan group of luminaries that are my new answer to the “fantasy dinner party” game.

The report compares the financial condition of various states and offers recommendations for reform. One of those recommendations is that states get a better handle on the finances of local governments. According to the report, states such as North Carolina, New Jersey and Pennsylvania require cities to report their finances and offer early assistance where distress is evident. Even Kentucky has a better system of local budget controls than California.

Here’s hoping that Chiang’s proposal passes and that the “red teams” get awesome superhero uniforms. Take that, Kentucky.

Alienating the math-savvy

That the California State Teachers’ Retirement System fund just posted a 1.8 percent investment return for fiscal year 2011-2012 is definitely a problem.

But a more dire problem is that legislators won’t fund the system.

CalSTERS is different from other public pension funds in that the benefits and contributions aren’t negotiated between employees and the employer; they are set by the Legislature. Since at least 1993, teachers have paid
8 percent of their salaries toward the fund and school districts have paid 8.5 percent. The state contribution used to be 4.43 percent, but now it’s 2.017 percent thanks in part to a 1998 deal that simultaneously lowered the state contribution and increased retiree benefits.

Other public pension funds have fixed employee contributions, and the governments have no choice but to fork over any shortfall. But while CalSTERS’ current funding just isn’t cutting it, legislation is needed to change the contribution levels. That leaves the pension fund with a $64.5 billion dollar shortfall and only 69 percent funded for the 2010-11 fiscal year.

Because our fearful leaders won’t dare cross teachers unions or local school boards by demanding they pay more or get fewer benefits, even the most ambitious reform scenarios being considered in Sacramento wouldn’t dent the unfunded liabilities that CalSTERS has racked up.

The longer this continues the more insolvent the fund will become and the harder it will be to recruit new talent.


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Melissa Griffin

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