BANKRUPT CITIES AND TOWNS AND COUNTIES IN THE U.S.A.;  HARTFORD, CT, SOMEDAY SOON?
150th anniversary of the war between the states this year...north in blue, south in grey...black if discussion of both. 

STATES WITH BANKRUPT CITIES OR COUNTIES:  AND THEN THERE IS THIS....
 CONNECTICUT
COMMENTARY
CALIFORNIA WATCH...
 



“If Detroit would ever go into default, it would kill the state,” he said, quickly adding that he did not think the situation would come to that.

Detroit fights to keep control of its finances;  State may impose emergency manager
The Washington Times
By Andrea Billups
Sunday, December 25, 2011

DETROIT — In the Motor City, the fight over who gets the keys is becoming increasingly intense.

Detroit city officials and activists such as the Rev. Jesse Jackson are stepping up their campaign to retain local control as Gov. Rick Snyder, a Republican, nears a decision on whether to appoint an emergency manager to keep the financially crippled city from going under.

Hammered by foreclosures, 20 percent unemployment and governmental malfeasance, the city is facing a $47 million shortfall by June - a deadline that has residents concerned that services including fire, police and even garbage pickup would go off the rails unless the state intervenes.

The situation pits Detroit leaders struggling to maintain the city's independence against outsiders pressing for reform.

"They don't want someone from the outside running their city. They have a long history of that," says Doug Roberts, a former state of Michigan treasurer who directs Michigan State University's Institute for Public Policy and Social Research. "The best scenario is that the governor keeps pushing and says, 'I'm coming,' and they begin to make serious and quick progress internally, because they all agree they don't want the option of an emergency financial manager."

Currently, the state has begun the process of a 30-day preliminary review — a precursor to forming a formal review team that could set in motion the appointment of an emergency manager. The governor, however, has stressed that he would rather the city work matters out, and that he has no interest in the state running Motown.

As the situation in Detroit comes down to the wire, several members of Michigan's congressional delegation have approached the governor about reviewing the emergency financial manager law itself. They question its constitutionality, which has been used successfully in other Michigan cities, and they hope to meet with Mr. Snyder to discuss not only the constitutional issue, but also the emotional ramifications of the state taking over a major city.

"We are deeply concerned about how this law is igniting tensions in our local communities and dividing our state," said Sens. Carl Levin and Debbie Stabenow, both Democrats, in a letter to the governor. "This law runs counter to this cooperative spirit and is sending the wrong message to the rest of the country about what our state stands for."

Rep. John Conyers Jr. — whose wife, a former Detroit City Council member, is serving time in federal prison for her role in a bribery scandal - has taken the matter one step further. He is seeking Justice Department review of the Michigan emergency manager law and asking U.S. Attorney Gen. Eric H. Holder Jr. to intervene.

Meanwhile, as lawmakers seek to assuage tensions about a possible takeover, momentum is building behind a petition drive to gather 161,000 signatures to repeal the current Public Act 4, which gives the state power to put in place an emergency financial manager for schools and governments.

"I've got real doubts that they will be able to get them," says Bill Ballenger, the publisher of Inside Michigan Politics. "If they do, they will be fought tooth and nail by the state and everybody else in the courts."

A native of Flint, where an emergency financial manager is in place, Mr. Ballenger says that if Detroit can't fix its problems, it shouldn't be immune to a takeover.

"Why is Detroit different? Why do they get a pass?" he says of the public outrage. "It's absurd. They are either going to have to have a consent agreement between the mayor and council" or get an emergency manager.

"Frankly, I am on Snyder's side and his approach to this. It's the only way Detroit is ever going to get out of this mess is through this mechanism. The petitioners are just totally irresponsible."

Last week, the GOP-led Michigan Senate, in its closing days before the holidays, approved what has been described as a stopgap bill that allows the governor to create a transition board for cities currently under emergency revision, along with a new emergency manager in places where the problems have yet to be fixed. Democrats were angered by the measure that they said would fly in the face of the petition drive's success.

"This legislation is an end-run around the last constitutional step left to our citizens to stop bad legislation passed by the Legislature, that being the petition initiative," state Sen. Glenn Anderson, a Democrat from Westland, said in a statement. "This action by the Republican-controlled Senate and House ignores the will of the people and subverts their right to place the emergency financial manager legislation before a vote of the people."

The possibility has put Detroit Mayor Dave Bing in a tough position. He has attempted to negotiate with the city's 48 employee unions. He has asked for concessions in wages and benefits to stop the state takeover. The City Council last week approved 10 percent pay cuts for the few nonunion city workers.

The mayor is also in the process of laying off about 1,000 city employees, a painful process for city police, firefighters and bus drivers along with many from the white-collar ranks. If spending is not stemmed, the city faces a budget shortfall by April and could not cover payroll and essential city services.

Former Mayor Dennis Archer, speaking on WJR-AM radio's Frank Beckmann show Dec. 19, says union pension and retiree health care costs have been the 100-pound weight on the city for many years. Detroit, he added, cannot keep up the heavy payment burden, and he called on the current council and government to find their own solutions now on these legacy costs, something he thinks can keep the state away from Detroit's door.

Mr. Roberts, the former treasurer, however, calls it not just a Detroit problem, but an issue that affects everyone in the state. He dubs Mr. Bing's efforts "sincere," but says if an emergency manager is ultimately put in place, "the single biggest loser would have to be the mayor."

He compared the city's legacy woes with what ultimately sunk General Motors Corp. into bankruptcy protection - a move that ultimately gave the company a chance to turn its fortunes around.

"I think everyone here is trying to walk a little gingerly because they know every step is fraught with difficulties," he said. "The union could take a step that says we disagree and we understand and will come to work and sue you in court. Or, the other step is they say we disagree and are not showing up. That is a serious issue."

He said he hopes Detroit's leaders will use the little bit of time they now have to work on a mutual solution, but he is not optimistic.

"I think ultimately an [emergency financial manager] is going to have to be appointed," he said. "Some people in Detroit already support [the move], and that is not the same ones who necessarily show up for mass rallies."

© Copyright 2011 The Washington Times, LLC. Click here for reprint permission.
Looking Up, Detroit Faces a New Crisis
By MONICA DAVEY, NYTIMES
December 23, 2011

DETROIT — For a city that some have declared dead again and again, the talk of late here was of renaissance — of auto industry jobs growing, new companies moving into empty buildings downtown, urban gardens blooming in vacant lots.

Then came the revelation that Detroit is poised to run out of money by April and fall deep into debt by June. Now a place that had seemed to be finding its balance is reeling once more.

A formal state review of Detroit’s books — a step that could lead to the appointment of an outside emergency manager to take over the city’s finances — was announced this week. City leaders are conducting urgent meetings with labor union leaders and financial consultants in a race to cut costs and head off further intervention.

The possibility that an outside manager could come in — one who would have broader than ever powers under a rewritten state law — has stirred new concerns among financial ratings agencies and business leaders who have fresh investments in the city. City government, meanwhile, is finding itself forced to re-examine services it provides — including buses, health care and street lighting — and shed what it can no longer afford.

The crisis could not have come at a worse time.

“This state is starting to come back, the economy is starting to come back, and as long as you are out there promoting all this negativity, it’s no good for any of us,” Mayor Dave Bing said in an interview. “You don’t need Detroit against the state.”

Still, Mr. Bing, a former basketball star who built an auto-parts manufacturing company, says he also knows the risks — symbolically, financially and politically — if a city of this size reaches a point where it cannot pay debts.

“If Detroit would ever go into default, it would kill the state,” he said, quickly adding that he did not think the situation would come to that.

Already, though, Detroit is the only major American city with credit that sits beneath investment grade, experts say. With 11,000 city employees and 139 square miles of increasingly vacant land to tend to, it has struggled, year by year, deficit by deficit, to pay its bills. Once the nation’s fourth-largest city, it has seen its population drop since a high of 1.8 million in 1950 to a low last year of 714,000.

In the eyes of some leaders, this financial crisis, despite the recent positive signs from the private sector, was decades in the making: the city never shrank its operations enough to match a shrinking tax base, and it delayed its woes with borrowing, exaggerated revenue estimates and accounting shifts.

This fall, Mr. Bing warned that Detroit would run out of cash without major cuts, particularly layoffs and deep salary reductions.

Within days of Mr. Bing’s announcement, state officials said they were starting a preliminary review of the city’s finances, which concluded this week with the announcement of a deeper state look at the books and an alarming snapshot of Detroit: more than $12 billion in long-term debt, an estimated general fund deficit of $196 million and no sufficient plan for dealing with the shortfall.

The state’s moves have set off an uproar. Under Michigan law, a formal review must precede a state finding that a city’s financial circumstances are so dire as to require an outside manager to take over — and many here view that as the state’s ultimate intent. Mr. Bing, a Democrat, and even groups he has sparred with — the City Council and leaders of the city’s 48 unions, whose contracts are the target of much of the cuts — have pushed back, as have residents. The refrain: Detroiters can take care of Detroit just fine, thanks.

For Gov. Rick Snyder, a Republican and businessman elected in the wave of Republican statehouse victories in 2010, Detroit’s crisis comes at a complicated moment. Earlier this year, Mr. Snyder and the Republican-dominated Legislature passed a law adding vast powers to the emergency managers sent to troubled Michigan cities, including the ability to throw out union contracts.

Critics said the law was an attack on democratic principles and an assault on labor unions. A lawsuit is pending. A campaign to repeal the law is under way, raising the possibility that the current emergency manager law could be suspended until the vote — even as the state’s most significant city may be on the verge of being assigned one.

State officials insist that the steps taken do not mean that an outside manager will necessarily be appointed in Detroit. For his part, Mr. Snyder, who had never held political office before, seems put off at suggestions that he hopes to step in.

“Why would I want an emergency manager?” Mr. Snyder said in an interview. “I’ve got plenty to do as it is. It’s best if we’re a supporting resource and they resolve their own issues with support.”

That said, Mr. Snyder, a former computer company executive and venture capitalist who is trained as a certified public accountant, seems unlikely to back away without firm evidence — perhaps a consent agreement between the state and the city — that Detroit is taking steps to repair itself. Mr. Bing says he opposes such a commitment.

A financial control board helped pull New York City from the brink in the 1970s, and some have begun speaking of Detroit in similar terms.

“An emergency financial manager might be a blessing at this point,” said Peter Karmanos Jr., who founded the Compuware Corporation, which moved its headquarters to downtown Detroit from the suburbs almost a decade ago.

Mr. Bing said he believed a solution was within reach. Significant concessions by the city’s labor unions, whose contracts do not expire until June, would have to be a part of that, city officials say, though no agreements have been announced. Mr. Bing has called for 1,000 layoffs, a 10 percent pay cut for employees and privatization of some services, though City Council members have said cuts will have to go far deeper.

The one thing that is certain is change is coming.

“Privatization, outsourcing has always been a dirty word,” Mr. Bing said. “But we’re talking about survival. And we can’t allow our 11,000 employees that we have to dictate the future of over 700,000 people here in this city.”

On the streets here, Detroiters sound frustrated — at the mayor, at the state, and at the possibility that more cuts might mean a further diminishment of their shrinking city.

“Are we going to survive?” Mr. Bing says constituents are asking. “What are we going to look like when all of these changes are implemented? Should I stay? Should I run? You hear all of that. But I think the base in this city, in terms of citizens, are fighters, and don’t want to give up.”




24 October 2011 Last updated at 18:24 ET
Pennsylvania declares Harrisburg in fiscal emergency
12 October 2011

The governor of the US state of Pennsylvania has declared a fiscal emergency in the capital, Harrisburg, beginning a state takeover of the city's finances.
The takeover comes after Harrisburg's city council rejected calls to implement a financial recovery plan and declared bankruptcy.  The city faces debts of $458m (£291m) and has struggled to pay for services.

Critics of the takeover law say it is unconstitutional.  Mr Corbett signed the takeover law last week, after it was passed by the Pennsylvania legislature.

'Destitute for decades'

Debt woes have plagued the city of 50,000 since 2010, when an incinerator project funded by municipal bonds failed to raise expected cash. A takeover plan is likely to include renegotiating labour deals, cutting jobs and putting most of the city's valuable assets up for sale or lease, correspondents say.  That would include the incinerator, as well as parking garages.  The city council has said it chose bankruptcy over a rescue plan which would benefit creditors at the expense of the city.

"I think [bankruptcy] is the only real option that we had," said City Controller Dan Miller. "They wanted to sell all of our assets and make Harrisburg destitute for decades to come."

Harrisburg's bankruptcy declaration is opposed by the city's mayor, Linda Thompson, who challenged the legality of the vote.  According to Ms Thompson, city law requires the mayor and the city solicitor to sign off all hiring of outside lawyers, as well as having city solicitors approve all ordinances and resolutions considered by the council.

"They have been dishonest with the entire community for months," the mayor said about the council. "I am ashamed of the behaviour."

Harrisburg's federal petition for Chapter 9 bankruptcy lists six pending legal actions by creditors.

Pension pitfalls
Lavish retirement benefits create economic crisis for state and local governments
Washington Time
Nita Ghei
Friday, Sept. 9, 2011

Ongoing economic stagnation has hit state budgets hard. The pain inflicted by the market's downward spiral has been made more acute by mounting deficits in state pension plans. Five years ago, 40 percent of these government-run retirement systems were underfunded. Now only four states are fully funded. The problem is so serious that Rhode Island was forced to call a special legislative session to address the crisis.

Closer to home, both Maryland and Virginia are facing about $17 billion in unfunded pension liabilities. It's a story repeated through the country. Without significant reform, municipalities, counties and state governments will be forced into bankruptcy by the crushing obligations.

For years, the problem of underfunding has been carefully concealed from public view. States have borrowed cash to paper over the shortfalls. They've preserved benefits for retirees while cutting benefits for new hires in an attempt to limit the future damage. They've even resorted to bookkeeping gimmicks. State pension plans have broad leeway over the accounting methods they use, and, unsurprisingly, they take advantage of wildly optimistic projections of market earnings while downplaying life expectancy.

Most public pension funds, for example, assume their investments will grow between 7.5 and 8.5 percent annually. The Dow Jones Industrial Average grew at an average annual rate of 5.3 percent over the 20th century; any long-term predicted return above that rate is unrealistic, to say the least. At the same time, cost pressures mount because we are living longer, and health care expenses are on the rise. A California study predicted that its retiree health costs would jump from $4 billion in 2008 to $27 billion in 2019.

The problem is obvious. Pension funds get their money from three sources: employee contributions, government payments and the returns from investing this money. These funds are supposed to pay annual pensions and health benefits to retirees for their lifetimes. But generous terms allow employees to retire young - sometimes after showing up at the office for as little as 28 years, as is the case in Rhode Island. Pensions can even exceed the amount of a full salary. In one Ocean State town, retired firefighters were actually paid more than those doing the hard work of putting out fires.

Municipalities and states are rapidly realizing the mess they've made. Faced with tax-weary residents, Rhode Island is already contemplating what was previously unthinkable - reducing benefits for retirees. Courts in Colorado and Minnesota have already upheld benefit cuts implemented in those states. Other states might well follow.

Other reforms, such as requiring state pension plans to adhere to the same accounting standards as private plans, must be adopted immediately. This will clarify the true extent of the problem. Above all, the states must stop the gravy train and switch to defined contribution plans - just like the ones that private-sector employers offer.

The Central Falls Success
By JOE NOCERA, NYTIMES
January 2, 2012

Central Falls, R.I., is a speck of a city, one square mile of triple-decker houses and tired storefronts a few miles up the road from the state capital, Providence. It is the poorest city in Rhode Island, with 27 percent of its residents below the poverty line, according to the Census Bureau. Earlier this year, it started bankruptcy proceedings. Its mayor, who is the subject of a state police investigation, has been pushed aside in favor of a receiver, who has taken control of the city’s finances.

Central Falls, though, also has one of the most promising reading experiments in the country. The Learning Community, a local charter school, and the Central Falls public elementary schools have joined forces in a collaboration that has resulted in dramatic improvements in the reading scores of the public schoolchildren from kindergarten to grade 2. Given the mistrust of charter schools by public schoolteachers, creating this collaboration was no small feat. And while the city’s bankruptcy now threatens it, the Central Falls experiment not only needs to be preserved, it should be replicated across the country. I haven’t seen anything that makes more sense.

When I last wrote about public schools, it was through the prism of Steven Brill’s book, “Class Warfare: Inside the Fight to Fix America’s Schools.” Though a fan of the charter school movement, Brill concluded that, by themselves, charters were never going to fix what ails the nation’s public schools; you couldn’t possibly scale them to encompass 50 million public school students.

As it turns out, Meg O’Leary and Sarah Friedman, the co-founders of The Learning Community, had gotten there a whole lot earlier. Before starting The Learning Community in 2004, they spent three years working with the Providence school system on a pilot program designed to come up with ways to “transform teaching practices and improve outcomes,” says Friedman. During a time of upheaval in the school system, a small corps of great teachers were the real anchors in the schools. In setting up The Learning Community, O’Leary and Friedman wanted to apply the best practices they had learned during the Providence project — and, eventually, to use their knowledge to help public school districts in Rhode Island.

They got their chance in 2007, when Frances Gallo became the Central Falls Schools superintendent. After she got the job, Gallo stopped in on several families just as they had learned that their children had won a spot (via lottery) in The Learning Community. “They were so excited,” recalls Gallo. She wanted to understand why.

So Gallo began spending time at The Learning Community — where she, too, became excited. The school drew from the same population as the public schools. It had the same relatively large class sizes. It did not screen out students with learning disabilities. Yet the percentage of students who read at or above their grade level was significantly higher than the public school students. When Gallo asked O’Leary and Friedman if they would apply their methods to the public schools, they jumped at it.

Did everything go smoothly at first? Not even close. “At first it was, ‘Oh, here comes another initiative,’ ” recalls Friedman. There were plenty of “venting” sessions at the beginning, along with both resentment and resistance. But The Learning Community invited the teachers to visit its classrooms, where the public school teachers saw the same thing Gallo had seen. And very quickly they also began to see results. Most public schoolteachers yearn to see their students succeed — just like charter schoolteachers do. Most of the resistance melted away.

There is another important element to this collaboration: The Learning Community advisers who work most closely with Central Falls teachers haven’t just done a fly-by. They have worked hand in hand with their public school colleagues for three years. They have been a constant, encouraging presence. They have developed relationships. And they have treated the public schoolteachers with respect. It makes a huge difference.

Early on, O’Leary and Friedman convinced Gallo to hire reading specialists for Central Falls. (The Learning Community’s methods call for a great deal of one-on-one instruction, especially when a teacher sees a student beginning to lag behind.) Ann Lynch, a Central Falls elementary school principal, told me that budget cuts have already forced her to cut back from two specialists to one. Everybody is worried about more cuts: the combination of the bankruptcy and a new state funding formula — which will cut back some state financing for the Central Falls School District — has people fearful that The Learning Community’s project will be pared back, too.

Let’s hope it doesn’t happen. What is happening between this one charter school and this one school district offers an all-too-rare chance for optimism — not just about Central Falls’s public schools, but America’s.
Sweeping Rhode Island pension system overhaul passes
DAY
By DAVID KLEPPER Associated Press
Article published Nov 18, 2011

Providence - Despite jeers and the threat of a union lawsuit, Rhode Island lawmakers on Thursday approved sweeping changes to one of the nation's most underfunded public pension systems.

The state's heavily Democratic General Assembly defied its traditional union allies to pass the landmark changes. The legislation is designed to save billions of dollars by backing away from promises to state and municipal workers that lawmakers say the state can no longer afford.

Lawmakers said Thursday's vote was one of the most wrenching they've had to cast, though the fight might not be over if unions follow through with promised lawsuits.

"It would certainly be a lot easier to walk away from this reform," said Senate President Teresa Paiva Weed, D-Newport. "However, it is clear that doing nothing only puts our retirees' and our active members' benefits at greater risk. We owe it to them, as well as to all other taxpayers, to attack this challenge head on."

Gov. Lincoln Chafee, an independent and one of the bill's original authors, said he will sign the bill.

Public workers said they felt betrayed and some interrupted Thursday's debate with jeers.

"They should be ashamed of themselves," said Dean Brockway, a Cranston firefighter with 28 years on the job. "These were Democrats voting to do this. They're trying to solve a 40-year-old problem in one day. They didn't have to do this."

The landmark legislation could have big implications around the nation. Nearly every state is confronting the same problem, caused by escalating pension costs, huge investment losses and recession-induced budget deficits. The Pew Center on the States released a report earlier this year that found that states face a collective gap of $1.26 trillion between what they've promised public workers and what they've set aside to meet those promises.

Rhode Island needs $7 billion to fully fund the pension fund that covers state workers and many municipal employees - roughly the same amount as the state's entire annual budget. Under the current system, the state must pour more and more into the pension system annually, from $319 million in 2011 to $765 million in 2015 and $1.3 billion in 2028.

The pension system covers 66,000 active and retired public teachers, state employees, judges and police and firefighters. Fifty-eight percent of retired teachers and 48 percent of retired state workers receive more money in their pensions than they did in their final years of work. Their benefits are set by state law and not collective bargaining.

The legislation passed Thursday would suspend automatic, annual pension increases for retirees for five years and then award them only if pension investments perform well. The bill also raises retirement ages for many workers and creates a benefit plan that mixes pensions with 401(k)-style accounts. The changes wouldn't apply to municipal pension plans.

The measure is projected to reduce the state's unfunded pension liability by $3 billion immediately and save taxpayers $4 billion over 25 years.

Passage of the bill is a political victory for legislative leaders, Chafee and Treasurer Gina Raimondo, a Democrat who was the main architect of the legislation.

For months, Chafee and Raimondo warned that unless the state reined in pension costs, lawmakers would have to raise taxes and slash funds for education and other services.

"Rhode Island has demonstrated to the rest of the country that we are committed to getting our fiscal house in order," Chafee said.

Leaders of public-sector unions aren't giving up and vow to overturn the legislation in the courts.

"The attorneys are going to make a lot of money," Philip Keefe, president of Local 580, which represents social service, administrative and technical workers. "If this is overturned, it will be you, me and every other taxpayer that is on the hook for billions."

Opponents of the bill pushed unsuccessfully to weaken its impact, but the bill passed easily nevertheless. The Senate passed its version of the legislation 35-2, with the House voting 57-15 a few hours later.
Frustrated opponents of the bill warned that it would prompt a long and potentially expensive court battle.

"What we are about to do is a crime," said Rep. Scott Guthrie, D-Coventry, a retired firefighter. "You want this thing to linger around for 10, 15 years? You want to go through 10 years of litigation? You want to spend God knows how much money on legal fees?"

Several lawmakers said they supported the bill with great reluctance, noting that they were voting to withhold money that retired workers were counting on. Rep. Donna Walsh, D-Charlestown, said it was the "most heart-wrenching, gut-wrenching vote" she has cast in 12 years in the General Assembly.

"It may be necessary, but it certainly is not fair," said Rep. John Savage, R-East Providence. "Can we honestly say to our state workers, to those who educate our children, to those who protect us... that this bill is fair? I don't think so."

Lawmakers said the state's stubbornly high unemployment rate of 10.5 percent helped convince them of the need for change. The state has intervened in the financial struggles of two cities, and a state-appointed receiver sought bankruptcy protection last fall for the insolvent city of Central Falls.

Raimondo said it's not fair to ask taxpayers to pay for ever-increasing pensions for public workers when they may not be able to find a job themselves.

"The average Rhode Islander is worse off than the average public employee," she said. "The average Rhode Islander is pretty strapped right now."

The changes in the legislation would not apply to locally run pension funds, many of which are in even worse shape than the state-run system. Chafee said he will introduce legislation in January to give cities and towns greater authority to curb their pension costs.
Faltering Rhode Island City Tests Vows to Pensioners
NYTIMES
By MARY WILLIAMS WALSH and MICHAEL COOPER
August 13, 2011

When the small, beleaguered city of Central Falls, R.I., filed for bankruptcy this month, it sought to cut the pension checks it has been sending its retired police officers, firefighters and other workers by as much as half. All the city promises now is that its retirees, many of whom do not get Social Security, will not have their benefits cut to less than $10,000 a year.

But investors who bought the city’s bonds could do much better: Rhode Island recently passed a law intended to make sure that they would be paid in full, even in bankruptcy.

Retirees are wondering how the city can cut what they believed was a guaranteed benefit. “We put our time in, we put our money in,” said Walter Trembley, 74, a retired Central Falls police officer. “And the city, through their callousness and everything else, just blew it. They were supposed to put money in and they didn’t.”

Cities and local governments make lots of promises: to their citizens, workers, vendors and investors. But when the money starts to run out, as it has in Central Falls, some promises prove more binding than others. Bond lawyers have known for decades that it is possible, at least in theory, to put bondholders ahead of pensioners, but no one wanted to try it and risk a backlash on Election Day. Now the poor, taxed-out city of Central Falls is mounting a test case, which other struggling governments may follow if it succeeds.

If Central Falls, a city of about 19,000, is able to reduce the benefits its retirees now get — something they will fight — it would not only unsettle the millions of public workers and retirees across the country, but also reshape the compact between governments and their workers. Most public workers now pay a portion of their salaries toward their pensions, but they may balk if they see those pensions can be cut when they retire. And governments that, like Central Falls, have not enrolled all their workers in Social Security as a money-saving measure may have to rethink that strategy.

Millions of teachers, police officers, firefighters and other government workers have long believed that their pensions were untouchable, thanks to provisions in state laws and constitutions. But some of those promises are unclear or untested, said Amy B. Monahan, an associate professor at the University of Minnesota law school who has studied the myriad laws protecting public pensions in different states.

Just how those promises would stack up against promises made to others, like bondholders, is unclear. It is also unclear how those state laws would hold up in federal bankruptcy court, which has its own ranking of creditors.

“This will all be up to a court to decide,” Professor Monahan said.

But many cities and states have already signaled that their bondholders take priority.

When Jefferson County, Ala., was poised on the brink of bankruptcy this summer after defaulting on more than $3 billion of bonds to finance a new sewer system, the state moved to help. Alabama’s new governor, Robert Bentley, proposed a plan to replace the defaulted bonds with new ones issued with state backing, which could lower the borrowing cost and avert what would otherwise be the biggest municipal bankruptcy in American history. Bondholders would forgive some of the debt they are owed.

Mr. Bentley’s move contrasted with the lack of action by his predecessor two years ago when the city of Prichard’s pension fund ran out of money and it simply stopped sending retirees their checks. Despite a state law saying that the pensions must be paid, no one in state government moved to enforce the law or propose a rescue plan.

“I’m a little ticked about it,” said Mary Berg, 62, a retired assistant city clerk from Prichard, who said she had sent news accounts of the proposal to help Jefferson County to local officials, asking why the state had never helped her and her fellow retirees. “The state didn’t even look at Prichard.”

Teachers in New Jersey likewise got a cold shoulder when they tried to make the state comply with a law that it contribute a required amount to their pension fund each year. A judge ruled that their plan was not yet unsound, despite the state’s failures to make the payments. The teachers, who argued that by the time the plan qualified as “unsound” it would have collapsed, lost on appeal last year. But the state always sets aside enough money to pay bondholders.

Illinois has some of the strongest bondholder protections anywhere, which explains how a state that began its fiscal year with $3.8 billion in unpaid bills from last year — and whose pension system has less than half of the money it needs — is able to keeping selling bonds.

State law requires Illinois to make “an irrevocable and continuing appropriation” of tax revenues into a special fund every month that can be used only to pay bondholders. Illinois’s pension system claims to have a “continuous appropriation” too, but it does not have meaningful deadlines and has proved much more porous over the years.

The federal bankruptcy code says pensioners and general-obligation bondholders are both unsecured creditors, stuck at the back of the line and treated as equals. But there is maneuvering room in the welter of state and federal laws. After Vallejo, Calif., declared bankruptcy three years ago, it cut payments to bondholders, but let workers bear their loss in lower pay and skimpier retiree health benefits. Pensions were untouched.

In Central Falls, the pension plan for the police and firefighters is projected to run out of money in October. But officials there say short-changing the bondholders will not bring relief. The next time the city needs to borrow money, investors will simply demand more in interest, and they might decide all Rhode Islanders were a bad risk and charge all cities more.

“The last thing we want to do is increase borrowing costs for all our cities and towns, and therefore cause tax rates to go up across the state, because one city has fiscal problems,” said Robert G. Flanders Jr., the state-appointed receiver for Central Falls, explaining the new state law putting bondholders first in line.

After going 20 months without their pension checks, the 141 retirees of Prichard decided a third of a loaf was better than nothing and settled with the city. Their average benefit, which had been $1,000 a month, is now about $350. But they also get Social Security. Ms. Berg, the retired clerk, said she worried about the retirees of Central Falls, many of whom do not.

“I can’t imagine telling them that they have to take this 50 percent cut,” she said. “These are retirees, elderly people. They can’t go out and get new jobs.”


Birmingham, Alabama, in Jefferson County.

Judge clears way for record bankruptcy in Alabama
YAHOO
By JAY REEVES | Associated Press
March 5, 2012

BIRMINGHAM, Ala. (AP) — A judge has cleared the way for an Alabama county to move forward with the largest municipal bankruptcy in U.S. history, overruling Wall Street claims that state law didn't allow the county to file the case.

U.S. Bankruptcy Judge Thomas Bennett issued his order late Sunday, allowing Jefferson County, the state's largest county, to remain in bankruptcy as it attempts to sort out more than $4 billion debt linked to borrowing for the county's sewer system.

Bennett's decision could be reviewed by the 11th U.S. Circuit Court of Appeals, which already has been asked to consider another question in the case.

Home to the state's largest city of Birmingham and more than 650,000 people, Jefferson County filed the largest municipal bankruptcy ever in November after three years of negotiations failed to result in a settlement to pay off the debt. Lenders asked Bennett to throw out the case during a hearing December, arguing that Alabama's 1901 Constitution doesn't allow Jefferson County to file a municipal bankruptcy.

Trying to stop the bankruptcy in a move that could have resulted in more negotiations, a dozen lenders led by trustee The Bank of New York Mellon claimed Alabama law permits bankruptcy only for bond debt. Jefferson County has a different type of debt called warrants, they argued.

The county argued that bankers were misapplying state law in hopes of getting the case dismissed, and that any government in the state can go bankrupt no matter what kind of debt it has.

Bennett ruled Jefferson County is an insolvent municipality under state law and negotiated in good faith to resolve its debts, so the bankruptcy can move ahead.

Jefferson County cited $4.15 billion in debt when it filed Chapter 9 bankruptcy, far exceeding the previous record set in 1994 by Orange County, Calif., over debt totaling $1.7 billion. Jefferson County's financial problems resulted from a mix of outdated sewer pipes, the economy, court rulings and public corruption.

County officials say higher sewer rates will result from the debt. Faced with budget shortfalls after courts threw out a separate job tax, the county has cut staff, reduced services and closed outlying courthouses as it attempts to balance its books. Residents routinely wait in lines for hours to conduct simple business like renewing their car tags.
In Alabama, a County That Fell Off the Financial Cliff
By MARY WILLIAMS WALSH, NYTIMES
February 18, 2012

ONE county jail here is so crowded that some inmates sleep on the floor, while the other county jail, a few miles down the road, sits empty.

There is no money for the second one anymore.

The county roads here need paving, and the tax collector needs help.

There is no money for them, either.  There is no money for a lot of things around here, not since Jefferson County, population 658,000, went bankrupt last fall. There is no money for holiday D.U.I. checkpoints, litter patrols or overtime pay at the courthouse. None for crews to pull weeds or pick up road kill — not even when, as happened recently, an unlucky cow was hit near the town of Wylam.

“We don’t do that any more,” E. Wayne Sullivan, director of the roads and transportation department, said of such roadside cleanup.

This is life today in Jefferson County — Bankrupt, U.S.A. For all the talk in Washington about taxes and deficits, here is a place where government finances, and government itself, have simply broken down. The county, which includes the city of Birmingham, is drowning under $4 billion in debt, the legacy of a big sewer project and corrupt financial dealings that sent 17 people to prison.

If you want to take a broad view, the trouble really began with the Constitutional Convention of the State of Alabama in 1901. The document that emerged there — written to empower business interests and disenfranchise African-Americans and poor whites — gives towns and counties little authority over local issues. Local taxing power rests with the state, though state lawmakers are loath to wield it today, in an age of anti-tax populism. Last summer, the Supreme Court of Alabama struck down a tax that was a crucial source of revenue for Jefferson County, finally pushing the county over the brink.

Officials here have only begun to grapple with the implications of life under Chapter 9 of the federal bankruptcy code, a municipal form of debt adjustment, rather than reorganization or liquidation. Until now, the most famous example was Orange County, Calif., which filed for Chapter 9 in 1994, after risky investments went horribly wrong. Many local governments are struggling to pay their bills these days, but hardly any have filed for bankruptcy. Notable exceptions include Harrisburg, the capital of Pennsylvania, Vallejo, Calif., and Central Falls, R.I.

“This is really a journey without a road map,” said John S. Young, the civil engineer who was appointed by an Alabama court to figure out how to fix Jefferson County’s sewer system. Today he is that project’s official receiver in name only: a federal bankruptcy court has suspended his powers, ruling that the federal bankruptcy law trumps state laws that protect bondholders.

Ordinary citizens can’t do much at this point. Jefferson County has even canceled municipal elections scheduled for this August. It seems that there’s no money for voting booths, either.

IN late 2010, a Wall Street analyst, Meredith Whitney, caused a stir during an appearance on “60 Minutes.” The $4 trillion market for municipal bonds, Ms. Whitney said, was headed for trouble. Within 12 months, 50 to 100 sizable defaults, possibly more, would rattle the market, she predicted.  The reaction was stunning. In a blink, billions of dollars flew out of the muni market. Mutual funds that specialized in such bonds were hit especially hard.

Ms. Whitney’s prediction hasn’t come to pass, and the muni market — usually a dull-as-dishwater corner of Wall Street — has since recovered.

Many muni experts called Ms. Whitney an alarmist, but she clearly touched a nerve. States, counties, cities and towns issue many billions of dollars worth of new munis every year, and those bonds pay for all sorts of things. Government bodies nationwide can borrow those billions at a low cost because munis are traditionally considered among the most conservative of investments. Without quick and easy access to this market, local government as we know it would fall apart.

That’s why the developments in Jefferson County are so unnerving. About 300 municipalities nationwide are in default on their debt, but most of them are so tiny that they draw little attention. What is more, after New York City ran into financial trouble in the ’70s, and Cleveland fell into a hole in the ’80s, the federal bankruptcy code was changed to ensure that certain types of muni bonds would keep paying interest and principal even if the issuing government authority sought bankruptcy.

Yet Chapter 9 bankruptcies have been so rare, and Chapter 9’s involving lots of bonded debt rarer still, that there is almost no legal precedent for what is happening in Jefferson County. Its lawyers are negotiating with roughly 4,000 creditors, from suppliers to hedge funds. The federal bankruptcy judge in the case is exerting enormous influence. By the time this is over, the lines between state and federal power may be redrawn when it comes to who, if anyone, can force a community to make good on its promises.

“It could set a precedent for the whole market,” said Matt Fabian, a managing director at Municipal Market Advisors, a research firm.

One possibility is that bonds backed by revenue from a particular public works project — fees from a sewer system like Jefferson County’s, for instance — will come to be viewed as riskier investments in general. Until now, many municipal bond investors assumed that they would be paid back almost entirely in the event of a bankruptcy. Orange County ultimately set a reassuring example; although it postponed a debt repayment, it made up for the delay by paying a higher rate of interest.

Now, who knows? Officials in places like Harrisburg are watching the developments in Alabama closely. Harrisburg’s Chapter 9 filing was rejected by a federal bankruptcy court, but officials in that city still hope to wrest some concessions from creditors. Pennsylvania has passed a law that prevents Harrisburg from filing for Chapter 9 again, but that law expires on July 1.

NOT long after Jefferson County went bust, John S. Young was sitting under the arched windows of the Yale Club in Midtown Manhattan, trying to explain how all this started. Mr. Young, 58, had been brought to New York City by the Municipal Analysts Group of New York, a professional society, to give a briefing on the developments down south.

Mr. Young quickly recapped what just about everyone here knew: in 1996, the Environmental Protection Agency accused the county of dumping raw sewage into the Black Warrior and Cahaba rivers. Elected officials had to figure out what to do, and to figure it out fast.

Birmingham, which had thrived from Reconstruction to the mid-1960s as an iron and steel town, had been declining for years. Why not embark on a giant public works project, a Taj Mahal of sewage systems, to foster jobs and development?

Jefferson County began to borrow vast sums of money, but that money, it turned out, was a perfect medium for graft and contract-padding. Rather than replacing more than 2,000 miles of decrepit sewer pipes, the county dispensed contracts to build water treatment plants, pumping stations and administrative buildings, some on slag heaps left behind by closed steel mills.

All this debt was supposed to be paid off with revenue from the new sewer system — in other words, by fees the county would charge residents whose homes were hooked up to the system. As the debt grew, so did those fees — and the public outcry. By 2002, the average sewer bill in the county had doubled, to $18 a month.

One thing led to another. In an attempt to expand the system and add new ratepayers, the county tried to bore a giant tunnel beneath the Cahaba River, Birmingham’s main source of drinking water. But the tunnel was so unstable that the endeavor was abandoned. The county spent millions just to extract the boring machine, which had become entombed underground.

“That cost $19 million,” Mr. Young told the bond analysts. “Now it’s called ‘the Tunnel to Nowhere.’ ”

Despite all this, the county still hadn’t fixed its sewers, as the E.P.A. had required. It needed more money, but people were so angry that officials were afraid to raise rates further.

Desperate, Jefferson County turned to Wall Street, particularly to JPMorgan Chase. The bank was able to persuade the county to agree to a bond deal with terms that included complicated interest-rate swaps. Those swaps blew up during the financial crisis of 2008, leaving the county with even more debt than it had started with.  In addition, the project and its financing led to a variety of criminal and civil charges, with several officials and others receiving prison time. In one case, Larry Langford, a former president of the Jefferson County Commission and former mayor of Birmingham, was sentenced to 15 years in prison.

In another case, J.P. Morgan Securities dropped claims to $647 million in termination fees it had tried to make the county pay on the swaps, as part of a settlement that also called for J.P. Morgan to make payments of $25 million to the Securities and Exchange Commission and $50 million to the county.

As residents of the county saw more officials go to prison, public opinion hardened against paying the debt.

“I don’t accept the legitimacy of this debt,” said Allyn Hudson, 32, an Occupy Birmingham organizer camping near the bankruptcy court. “It shouldn’t ever have been issued, and therefore it shouldn’t exist. It shouldn’t have been spent. Since it shouldn’t have existed, we’re not going to pay it.”

Although JPMorgan, in its settlement, let the county out of its swaps deal, the county’s underlying debt remains outstanding. Today, the county is effectively shut out of the muni bond market and is coasting on reserves, further delaying work on sewers that don’t function properly. “I’ve never seen a utility that had such big financial needs, and no access to the financial markets,” Mr. Young said.

EVEN before the bankruptcy, the old industrial core of metropolitan Birmingham looked like a monument to urban blight. About a quarter of the people in Birmingham live below the poverty line. It’s different in the suburbs, where the money is, and where many homes have private wells and septic systems.

Downtown, at the courthouse, the line for car license tags snakes down a corridor. The county has shut its satellite courthouses, so everything now gets done here. Every department is short-staffed. The sheriff, Mike Hale, can’t afford to pay overtime. There is also outrage that the county paid Mr. Young, the court-ordered receiver, a little more than $1 million for 14 months’ work.

The county’s road crews are patching only big potholes; resurfacing can wait. The tax collector has laid off four agents, at a savings of $180,000. But the math of bankruptcy doesn’t always work well. Last year, those four agents collected $2.7 million from delinquent taxpayers, so it’s possible the county is losing money in this arrangement.

Down U.S. 11 from Birmingham is the city of Bessemer, where the second county jail, refurbished a few years ago at a cost of $11 million, sits empty and unused. The county can’t afford to pay for the guards. At the county jail in Birmingham, meanwhile, a 20-year-old program under which certain inmates were released pending trial, provided they wore electronic monitors and underwent drug tests, has been cut. That saved $2 million, but now the jail is overcrowded.

David Carrington, the president of the Jefferson County Commission, has floated the idea of freeing several hundred inmates. “We can’t be in contempt of court,” Mr. Carrington said.

Sheriff Hale refuses to consider that. The county, he said, has a duty to protect its citizens.

Here and there, new projects have sprouted up as if nothing has happened. The Logan family just broke ground on a $64 million ballpark for the Birmingham Barons, the minor league baseball team. Over in Hoover, a bedroom community that stretches over parts of Jefferson and Shelby counties, the police department bought 30 new Chevy Tahoes last year and sold a few of its old ones to Sheriff Hale.

And yet David Sher, a local businessman, said everyone wonders how the county will ever get out of this financial mess.

“People are desperate to think of anything they can to get the money,” he said.

The federal bankruptcy judge overseeing the case, Thomas B. Bennett, has already rendered a sobering appraisal. It is “highly unlikely,” he wrote in a decision in January, that “what was loaned can ever be repaid.”
Ala. County Votes to Settle Debt, Avoid Bankruptcy
NYTIMES
By THE ASSOCIATED PRESS
September 16, 2011

BIRMINGHAM, Ala. (AP) — Leaders of Alabama's largest county on Friday chose to settle with Wall Street over $3.1 billion in debt from a sewer system overhaul rather than go through with what would have been the largest municipal bankruptcy in U.S. history.

Jefferson County Commissioners voted to endorse the deal, but the state legislature must take action in a special session to complete the deal and commissioners said bankruptcy was still possible if that legislation doesn't go through.

Commissioner Jimmie Stephens, who oversees county finances, said there was no certainty legislators would approve the mix of local tax hikes and budget changes required to make the deal final. "It's a problem," he said.

Jefferson County has been trying to avoid filing bankruptcy over the sewer system debt since 2008. Its problems stem from a mix of outdated sewer pipes, the economy, court rulings and public corruption.

The main effect of a settlement for county residents would be higher monthly bills for sewer service. Jefferson County has about 658,000 residents and is home to both Alabama's largest city, Birmingham, and its medical and financial centers.

The settlement proposal with Wall Street investors led by JPMorgan Chase & Co includes the lenders agreeing to forgive about $1 billion in debt, the county refinancing about $2 billion, and a series of annual sewer rate increases.

The Alabama constitution gives state lawmakers a high level of control over county finances, so the legislature will have to take several steps to seal the debt deal. They will need to approve formation of a public corporation to take over the sewer system from the county, agree to fund the settlement if the county comes up short and pass legislation allowing the county to reallocate money already earmarked for other uses and to somehow replace lost revenues.

It was not immediately clear if there is enough support in the legislature. But Gov. Robert Bentley welcomed the deal and said he would work with lawmakers and the county so that the necessary laws can be passed.

"It may have been easier for the Commission to file for bankruptcy, but this settlement will result in a much better deal for the ratepayers and citizens of Jefferson County and for the state, with more than a billion dollars in debt reduction for the county," Bentley said in a statement.

A bankruptcy filing in this case would have overshadowed the record one filed by Orange County, Calif., in 1994 over debts totaling $1.7 billion.

JPMorgan welcomed the agreement. "We are encouraged by the county's decision to refinance the sewer debt and look forward to working toward a successful resolution in the coming months," a bank spokesman said.

A federal court forced Jefferson County to begin a huge upgrade of its outdated and overwhelmed sewer system to meet federal clean-water standards in the 1990s, and officials used bonds to finance the improvements. Outside advisers suggested a series of complex deals with variable-rate interest that were later shown to be laced with bribes and influence-peddling.

Loan payments rose quickly because of increasing interest rates as global credit markets struggled, and the county could no longer afford its payments. Meanwhile, a string of elected officials, public employees and business people were convicted of rigging the transactions that helped put the county in so much trouble.

Those convicted in the graft investigation include then-Birmingham Mayor Larry Langford, a former president of the Jefferson County Commission; and ex-Commissioner Chris McNair, whose daughter was one of the four black girls killed in an infamous Ku Klux Klan church bombing in Birmingham in 1963. Langford and McNair both are in federal prison.

The sewer debt isn't Jefferson County's only problem, though. It already has laid off about 550 of its 2,300 workers and reduced government services because courts struck down an occupational tax and business license that provided more than $74 million annually for its operating budget. The county has closed satellite offices and reduced hours, and long benches now line a hall in the main courthouse where residents often have to wait hours for the simplest of transactions, like getting a new car tag.
Debt Crisis? Bankruptcy Fears? See Jefferson County, Ala.
NYTIMES
By CAMPBELL ROBERTSON and MARY WILLIAMS WALSH
July 29, 2011

BIRMINGHAM, Ala. — A few hundred miles north of here, politicians are fighting over debt. It is a spirited debate, full of discussions about what kind of country will be left for future generations and pledges not to kick the can down the road.

But one does not have to go far to see that possible future. Welcome to Jefferson County. This is the end of the road, where the can cannot be kicked any farther.

There are lessons for everyone here, and they are all painful: lessons for those who are not concerned about the prospect of mounting debt, for those who insist that steep cuts can be relatively painless, for those who think the bill for big spending can safely be put off into the future, for those who have blind faith in the market and for those who think the government can always be relied upon to protect the interests of the people.

All of these beliefs have led to a place where the government can no longer borrow and the little cash on hand is being demanded by creditors, where the Sheriff’s Department cannot afford to respond to traffic accidents and hundreds of county workers are sitting at home, temporarily or possibly permanently out of work. They have also led to a widely held conclusion among residents that no one is on their side.

“I get tired of them dumping on the little people,” said Deb Passmore, 58, who had to shut down her Laundromat several years ago when the sewer and water bills reached $500 a month.

The prospect of county bankruptcy, which would be the largest of its kind in United States history, has gone from being an unwelcome mark of distinction to something that many residents insist should have happened a long time ago.

It still stings to think about how things got this way, how county residents are stuck with the tab from a reckless binge by Wall Street bankers, middlemen and crooked politicians, a greed-fueled spree that none of the voters actually wanted or even knew was happening. But residents know that complaints about fairness have not made that debt, all $3.2 billion of it, go away.

“What are you going to do?” said Steve Mordecai, 50, who was eating lunch at Ted’s, a meat-and-three place here that is somewhat less crowded than usual on Fridays, given that so many county employees are no longer working. “The county created the mess,” Mr. Mordecai said. “Now we have to pay it back.”

The story that ends in overspending excess began in neglect: in 1996, the federal government accused Jefferson County of sending raw sewage into area rivers and demanded that it rebuild its dilapidated sewer system. Such a project would be costly, but officials hoped to avoid unpopular rate increases first by pushing that cost into the future, and then by adding a maze of derivatives that were supposed to shield the county from interest-rate increases.

But the bond deals were fraught with pay-to-play scandals. Four county commissioners were convicted of taking bond-related bribes. Two bankers are fighting federal accusations that they made secret payments, and in 2009 J.P. Morgan forfeited $752 million to settle a complaint by the Securities and Exchange Commission.

The complicated bond-and-derivative structures failed during the financial turmoil of 2008, leaving the county with a $3.2 billion debt to pay, faster than planned. Sewer revenues that were pledged to pay the debt cannot keep up. The problems keep compounding: federal prosecutors have taken a derivatives consultant to court on bid-rigging charges. And the Internal Revenue Service is investigating whether the sewer bonds really should have been marketed as tax exempt.

But the fiscal crisis went from a simmer to a full boil in April, when the Alabama Supreme Court declared a major county tax unconstitutional. Shortly afterward, with the county reeling from the severe shortfall in general funds, a court-appointed receiver recommended a steep increase in county sewer rates, and also laid claim to the county’s only cash reserves, saying they were needed to bolster the sewer system’s finances.

At the end of June, Gov. Robert Bentley declared a shaky truce while negotiations took place. On Thursday, the County Commission announced that it was entering a seven-day standstill period to consider a settlement offer from the creditors, an announcement that was met with grumbles across most of the county.

“They should have filed for bankruptcy 10 years ago,” said Howard Faulk, an owner of Sophie’s Deli across the street from the county courthouse, where the lines for county business are hours long but the parking is free because the county cannot afford parking attendants. “If you’re standing in water this deep,” Mr. Faulk asked, his hand at his neck, how much deeper can it get?

But any residents who think a bankruptcy will simply wipe the debt clean are probably in for a bleak surprise. Chapter 9 of the federal bankruptcy code, the one local governments use, does not work like Chapter 11, where corporations restructure and bondholders routinely suffer losses.

In fact, Chapter 9 was amended in 1988 with the specific goal of making clear that certain types of municipal bonds would keep on paying even in bankruptcy, said James E. Spiotto, a bankruptcy specialist with the firm of Chapman Cutler. The bonds issued to finance Jefferson County’s giant sewer project are this type.

“The whole purpose is to assure the market that in times of distress, the bonds will be paid,” Mr. Spiotto said in an interview.

Many citizens of the county speak bitterly of a perception that other parts of Alabama think of the county as unworthy of help. Even one of the county’s own state senators blocked a plan to allow Jefferson to raise revenue to replace some of what was taken away by the April court decision, thus forcing layoffs.

“In Alabama, Jefferson County is Chinatown,” said David Mowery, a Montgomery political consultant, using the metaphor for hopeless inscrutability from the Roman Polanski film of the same name. “Forget it,” he said, summing up the general attitude toward the county. “There’s nothing you can do about it.”

But as Alabama’s own governor learned over the spring and summer, you cannot just forget Jefferson County, where Birmingham is the county seat. If it goes down, it takes the state — and the state’s credit — with it. This realization prompted the governor to intervene when the county was near declaring bankruptcy at the end of June.

Still, little of this reassures the people slogging through here, who realize that life will get harder before it gets better. The only consolation is gallows humor and signs they might not be alone.

“I used to think what awful leadership we have in Jefferson County,” said Phillip Winette, 58, who runs a printing company. “But now I’m watching the debate on a national level. It’s an epidemic.”
Ala. county readies for possible record bankruptcy
YAHOO
AP
By JAY REEVES - Associated Press
July 26, 2011, 4pm

BIRMINGHAM, Ala. (AP) — Alabama's largest county began laying the groundwork Tuesday for what would be the largest-ever U.S. municipal bankruptcy after three years of trying to work out a solution with Wall Street to more than $3 billion in debt linked to a massive sewer rehabilitation project tainted by corruption.

Officials in Jefferson County hope to avoid new layoffs but may have to raise sewer rates or trim public services. On Tuesday, county commissioners approved resolutions to hire prominent bankruptcy lawyers and to sell bonds later in case money is needed to emerge from a Chapter 9 bankruptcy, the type that can be filed by governments.

Two of the five commissioners said there's an 80 percent chance the county will file bankruptcy, and a vote could come at a meeting scheduled for Thursday in Birmingham, the county seat and Alabama's largest city.

The commission president, David Carrington, said other possibilities include extending talks with creditors led by JPMorgan Chase & Co. or accepting a settlement offer. But something must be done to resolve a crisis that has cast a shadow over the county for so long, hurting economic development and industrial recruiting amid the uncertainty, he said.

"This county deserves a resolution to this problem. We cannot let this thing go on another three years," said Carrington. "We will do what we were elected to do."

Jefferson County's bankruptcy filing would be nearly twice as large as the record one filed by Orange County, Calif., in 1994 over debts totaling $1.7 billion. One of the attorneys retained by Jefferson County had a leading role in representing Orange County.

Jefferson County Commissioner Jimmie Stephens said he favors bankruptcy unless there's "meaningful progress" in talks with creditors, and quickly.

The county already has laid-off hundreds of workers and reduced services because of problems unrelated to the bankruptcy threat, and commissioners said they did not anticipate additional immediate reductions should the county file for bankruptcy.

But Andrew Bennett, who works in a courthouse annex in Bessemer, said he worries that the county will repay lenders at the expense of needy people who cannot afford to pay more for sewer service and would be harmed by any possible cuts in county services.

"It's always the poor people who get left behind," he said.

The county — Alabama's historic economic hub with some 658,000 residents — has been trying to avoid filing bankruptcy since 2008. The deal it offered last week to JPMorgan Chase and other creditors would erase more than $1 billion of its debt with the promise of repaying the remaining amount through a combination of modest sewer rate increases and loans. But lenders have yet to respond to what amounted to a last-ditch effort to avoid bankruptcy.

"The fact that we have not received a counteroffer speaks volumes to me," said Commissioner Joe Knight.

JPMorgan Chase declined comment.

A court-appointed official last month recommended a 25 percent rate hike for sewer customers, whose average residential bill would increase from $37.74 a month to $46.88, calling it a necessary step toward financial viability. Commissioner Sandra Little Brown said the 25 percent increase is too high, and she prefers filing bankruptcy since cost increases could be limited to the single digits.

The county's problems result from a mix of outdated sewer pipes, the rough economy, court rulings and public corruption.

A federal court forced Jefferson County to begin a huge upgrade of its outdated and overwhelmed sewer system to meet federal clean-water standards in the '90s, and officials used bonds to finance the improvements. Acting at the suggestion of outside advisers in a series of deals that were later shown to be laced with bribes and influence-peddling, the county borrowed money for the project in a complex and risky series of transactions.

Loan payments skyrocketed because of increasing interest rates as global credit markets struggled, and the county could no longer afford to repay the money. In the meantime, a string of elected officials, public employees and business people were convicted of rigging the sweetheart deals that helped put the county in dire straits.

Those convicted in the graft investigation include then-Birmingham Mayor Larry Langford, a former president of the Jefferson County Commission; and ex-Commissioner Chris McNair, whose daughter was one of the four black girls killed in an infamous Ku Klux Klan church bombing in Birmingham in 1963. Langford is in federal prison, and McNair's lawyer is now asking President Barack Obama to pardon him for his crimes.

As if the sewer debt wasn't enough, the county has another major problem: Jefferson County already has laid off about 550 of its 2,300 workers and scaled back government services because courts struck down an occupational tax and business license that provided more than $74 million annually for its operating budget. Callers to a main county telephone number now get a recording telling them the automated system has been taken out of service because of the budget and to look up department numbers the old-fashioned way, in a phone book.

Commissioner Stephens, whose duties include overseeing county finances, said residents wouldn't immediately feel any fallout from a decision to file bankruptcy, but it is unclear what would happen in the coming weeks or months.

Likewise, a decision to file bankruptcy in Jefferson County may not affect the broader municipal bond market.

Matt Fabian, managing director at research firm Municipal Market Advisors, said a filing by Jefferson County was not likely to rattle investors across the country since many have been anticipating the move for years and already have factored it into their risk assessments of municipal bonds in general.

"Probably half the muni market thinks Jefferson County is in bankruptcy already," he said. "It's been so well telegraphed."



Two different takes on state's finances, economy
Keith M. Phaneuf, CT MIRROR
February 22, 2012

Cromwell -- Leaders of Connecticut's small towns were left to read the fiscal tea leaves Wednesday as state leaders offered two starkly contrasting views of Connecticut's finances.

Gov. Dannel P. Malloy and his fellow Democrats leading the House and Senate declared fiscal stability and pledged to continue trying to bolster municipal budgets, but GOP legislative leaders cited projected deficits, a bond rating downgrade and cash flow problems as evidence of another impending fiscal crisis.

"What a difference a year makes," Malloy said to open a 16-minute address at Wednesday's annual council meeting at the Cromwell Plaza Hotel and Conference Center.

"A year ago we were literally standing at a cliff, looking over that cliff and making a decision whether we would do what other states were doing," Malloy said, adding that nearly all states except Connecticut attacked state budget deficits but ordering deep cuts to municipal aid and to social service programs, passing burdens onto property taxpayers and the poor. "We went a different way. Our economy is beginning to grow, and we are taking on other, systemic issues."

The governor reminded municipal leaders that he inherited a budget with a built-in deficit that topped $3.6 billion in the 2011-12 fiscal year, a gap equal to nearly one-fifth of all spending. "We promised not to balance our budget on your backs and we didn't," he said, adding it probably was a "daunting fear" in many communities that town aid would be slashed.

The administration is committed to "maintaining a level of fiscal discipline that was not present in state government a short while ago," Malloy said, adding that this, coupled with the tax hikes and spending cuts ordered one year ago, now leave his administration poised to focus even more strongly on economic development.

Malloy said he plans to build on new programs that offer companies incentives to add jobs,  and to move to or expand in Connecticut. "If we don't get that pipeline going again, if we don't rebuild our economy, ... then we are going to be far worse in the coming years."

Connecticut was one of just three states, along with Michigan and Rhode Island, that created no net new jobs over the 22 years before his administration began in January 2011, Malloy said.

Besides promoting job growth, the administration also is working to dramatically reform Connecticut's education system, the governor said, noting that 42 percent of 8th graders in the Hartford school system are not proficient at reading.

"If we are going to grow jobs, we have to have a workforce prepared to take those jobs," Malloy said.

Besides refocusing the educational agenda, Malloy said the current fiscal stability also is enabling him to fix the cash-starved state employee pension system. Though that means hundreds of millions of dollars in additional spending on pensions in the next few years, starting in the mid 2020s Connecticut will begin saving on pensions annually, with cumulative savings topping $5.8 billion by 2032.

"What would happen to state aid to municipalities" in two decades if the system isn't fixed? Malloy asked. "What it would mean, in the out years ... is you would have people trying to balance their budgets on your backs again."

Shortly before Malloy's address, Democratic legislative leaders offered a similarly optimistic outlook on the state budget.

"We did what we had to do to stabilize our state," House Speaker Christopher G. Donovan, D-Meriden, said, adding that lawmakers remain determined not to balance state finances on the backs of cities and towns. "I think we want to keep that cooperation going."

Senate President Pro Tem Donald E. Williams Jr., D-Brooklyn, predicted state government would finish this fiscal year with either a small surplus or a small deficit, adding that legislators' focus has moved on to doing more to stimulate the economy. "It's time to do more to lift up our Connecticut businesses, he said.

But Republican legislative leaders said the signs point to something considerably less rosy than Democrats would have town leaders believe.

"We were hopeful we would be able to come before you this year and say things are different," said House Minority Leader Lawrence F. Cafero, R-Norwalk.

But Cafero said several recent developments have demonstrated that Connecticut's fiscal outlook is at risk:
 "What it means, in short folks, is we are not bringing in the money we thought we would bring in, we are not achieving the savings we thought we would achieve and we have not controlled spending the way we thought we would," Cafero said. "We're still unstable. We're still unsure. It was not supposed to be this way. We have to prepare for the worst."

Further complicating matters, the administration's own numbers show its new budget proposal is in balance for just one year, noted Senate Minority Leader John P. McKinney, R-Fairfield. The plan is projected to fall $424 million in deficit, and to exceed the constitutional spending cap by $650 million in 2013-14.

"What I hope to accomplish over the next session is to communicate that we're spending too much money," McKinney said, adding that Malloy's budget proposal would raise spending more than 8 percent in total over the next two fiscal years.

"It's not easy" to discern where state finances are going, Bart Russell, director of the Connecticut Council of Small Towns, said.

"On the one hand, we are extremely pleased that the governor presented a budget for the second year in a row that towns can take to the bank and develop their budgets around," Russell said, referring to the $20.7 billion state spending plan Malloy proposed two weeks ago for the fiscal year that starts July 1.

That plan not only spares the $2.9 billion municipal aid package from any major cuts, but also includes a $50 million increase in the Education Cost Sharing program, the single-largest municipal grant.

Malloy and the legislature approved a budget last spring that closed a historic budget deficit without cutting municipal aid. That package also gave towns nearly $50 million in new assistance by sharing state sales and other tax revenues.

Russell called for, and received, a round of applause from the audience for Malloy for his record on municipal aid. "For that governor, I want to thank you," he said.

But Russell also noted during an interview Wednesday that when COST's oversight board met last week to develop an agenda for the coming year, "there was quite a bit of discussion about the future and even some fear about the future some of the assumptions state policy makers are making about the economy."

Municipal leaders from both sides of the aisle also said that while they believe state finances are better off than they were 12 months ago, they aren't convinced everything is stable.

"It does look like things are starting to turn around," said Sprague First Selectwoman Cathy Osten, a Democrat. "But does that mean we should stop being fiscally conservative? No."

Osten said that despite the ECS increase proposed by Malloy, she has asked her local school board to reduce its budget request for 2012-13. Local education officials are seeking a 2.6 percent hike, but Osten said teachers have agreed to accept a wage freeze and she now is trying to keep the school budget increase under 1 percent.

East Lyme First Selectman Paul Formica, a Republican, said that while he also appreciates the support Malloy and the legislature have shown for town aid, "we still need to control our spending. Just given the economic environment, it is clear that our residents don't have an appetite for any tax increases."

Then there is Greenwich, Connecticut..."neither a borrower nor a lender be" used to be the town motto - on the road to economic perdition?

Looking for low interest loan, Greenwich digs deep...will RTM makes this into a high drama?  Can they put out the fire of wildly increasing debt?
Construction of structures now to be paid for by bonds, just like the rest of the 169 towns - this is really big news - of course, their comptroller used to work for Weston!

Town borrows $56 million, reaps low interest rates
Neil Vigdor, Greenwich TIME
Updated 10:59 p.m., Wednesday, February 15, 2012

 The town recently took advantage of its sterling credit rating to borrow $56.6 million at what finance officials are characterizing as bargain-basement interest rates.

Of that total, $23 million is considered "new money," with the town having already committed in prior years to borrowing the $33.6 million balance.  The money will help pay for a host of capital projects, including the construction of a new high school auditorium and a central fire station, paving and sewer work.

"This is a super deal," said Peter Mynarski Jr., the town's comptroller. "These are the lowest rates I've ever seen."

The town issued $40 million in one-year bond anticipation notes on Jan. 18, borrowing the money from Bank of America Merrill Lynch at an interest rate of 0.13 percent through a competitive bidding process.

"So for one year, we're paying $52,000 to borrow $40 million. I think that's pretty remarkable," said Larry Simon, a former member of the Board of Estimate and Taxation.

The town borrowed another $15.6 million from UBS Financial Services Jan. 18 through a combination of five-year and 20-year general obligation bonds. The blended interest rate on those bonds is 1.52 percent.

"We should always be so fortunate to have those kind of rates," said Bill Finger, the Democratic caucus leader of the BET.

Of the $15.6 million, $1.3 million is for the architectural and engineering phase of an upcoming renovation project at the town-owned Nathaniel Witherell nursing home that is expected to cost $22 million.  Budget officials attributed the low interest rates to the town's AAA credit rating, saying that the cost controls implemented by the town enable it to borrow money on the cheap without saddling taxpayers with huge debt-service payments.

"By doing this, we've saved the town an enormous amount of money," said Michael Mason, chairman of the BET.

Bond anticipation notes, or BANs, are instruments that allows the town to extend the window of debt service. With a BAN, the town has the option to pay off the balance after one year, roll over its obligation to a second year or spread the payments out over an even longer period by issuing five-year general obligation bonds.  Fiscal stewards have turned to short-term borrowing to augment tax revenues to pay for capital items in recent years, resorting to long-term bonds for sewer improvements and other projects in which the town will get a guaranteed return on its investment through fees.

Simon said the ability to borrow money without burdening the town with excessive interest payments is a testament to the work of the finance board.

"I think it shows how strong we are as a town financially," Simon said.


GE Takes Constitution Plaza Building In Foreclosure
The Hartford Courant
By KENNETH R. GOSSELIN, kgosselin@courant.com
5:34 AM EST, January 19, 2012

The owners of the former Travelers Education Center on Constitution Plaza in downtown Hartford have lost the five-story office building to foreclosure.

The 132,000-square-foot building at 200 Constitution Plaza, near the clock tower, has been empty for about a year but was covered by a master lease that guaranteed rent payments until the lease expired a few months ago.

GE Asset Management took control of the building, whose ownership is separate from other structures on the plaza, in late December, according to a filing with the city dated Jan. 13. GE declined to comment Wednesday about its plans for the building.

The former owner — U.S. Bank, National Association, the trustee of the Walters Connecticut Venture Trust, couldn't be reached for comment.

The building at 200 Constitution Plaza is the latest high-profile office building in the city's central business district to get mired in foreclosure trouble. Two others -- CityPlace II and Goodwin Square -- appear to be in the final stages of foreclosure, both owned by Northland Investment Corp. Northland last year lost Metro Center One, also in downtown.

How Taxes Drive Down Home Values:
What state and local officials can do to help the housing market recover.
National Review
Nicole Gelinas
Dec. 1, 2011

Standard & Poor’s released the latest Case-Shiller data on house prices on Tuesday, and the results weren’t pretty. In the past five years, house prices have declined to 2003 levels, and the average home declined in price by 3.9 percent over the last year alone. National politicians are scrambling to reverse the trend. But the remedy lies in state houses and town halls.

Two weeks ago, both Republicans and Democrats in Congress cited the struggling housing market as their reason for extending an “emergency” subsidy for homebuyers. The taxpayer-backed Federal Housing Administration will continue to guarantee mortgages on houses worth as much as $729,500, something it has done for three years. No middle-class family can afford such a home. But the home-builders lobby argued that a reduction in the guarantee would mean less demand and thus lower home prices not just at the top, but throughout the market. If you can buy an “expensive” bottle of wine for cheap, why buy the cheap bottle? The same thing goes for houses: When expensive houses become cheaper, there is less demand — and thus lower prices — for even cheaper houses.

No matter how hard Washington tries, though, it can’t legislate away reality. And the reality is that even half a decade into a housing slump, Americans still have good reasons to be wary of plunking down their hard-earned cash and signing up for a long-term mortgage. These reasons are closer to, well, home, than to Washington.

A house is worth what a buyer is willing to pay for it in monthly costs. That’s why if mortgage interest rates go down, house prices go up (or at least fall less than they would have otherwise). When a potential homeowner has to spend less on mortgage interest, he can devote more money to paying principal, and therefore is willing to make higher bids. So the house is “worth” more — at least until interest rates rise again.

But when you buy a house, you’re not just committing to a mortgage. You are also promising to pay the future property taxes on that house. What drives those local property taxes are the future costs of paying state and local workers and retirees, particularly retirees’ pensions and health care. These costs are going in one direction: up.

Unless state and local governments take steps now to reduce future costs, or unless they plan on suddenly repudiating their promises to their public-sector work forces one day, every dollar in unfunded pension and health-care costs is up to a dollar less in the future value of a house.

Take one example, New York’s Westchester County, the highest-taxed county in the nation. According to the Tax Foundation, property taxes in Westchester average $9,044 annually — up by $1,707, or 23 percent, in the five years from 2005 to 2009. Inflation accounts for less than half of the increase.

What if property taxes in Westchester were to increase by another 23 percent, to $11,124, in the next half decade, or even the next decade? That’s an extra $2,080 in annual costs per house, or nearly $175 every month. Even after deducting these levies from his federal tax bill, a homeowner would end up losing $1,456 a year. Families that considered buying a house would sensibly lop that extra amount off the price they are willing to pay — and the seller would lose about $23,500 in investment value.

When houses prices were skyrocketing, nobody cared. The force of the bubble seemed strong enough to overcome such cash outflows. But now that the bubble has burst, these costs are much more real.

Westchester may be an extreme case. But in New York State, counties, villages, towns, and school districts (excluding New York City) have made about $28.7 billion in health-care promises to future retirees without setting aside any money to pay these bills. That money has to come from somewhere.

A home buyer should consider part of this projected burden to be a call on the future resale value of his house. New Jersey, California, and other states have made similar promises with their residents’ home equity.

Yes, it’s true that New York and New Jersey recently enacted caps on property-tax hikes, and California has long had such a cap. But unless state and local governments rein in costs, local governments will have no choices but to find a way around these caps. The New York and New Jersey caps already feature generous loopholes, allowing local governments to increase taxes above the cap to pay pension and some debt costs.

Moreover, if local governments can’t pay their bills through property taxes, they’ll try to get the money from taxpayers by some other route, likely state income taxes. In the past few days, New York governor Andrew Cuomo has seemed to be backing away from a pledge to allow a “temporary” income-tax surcharge on six- and seven-figure earners to expire.

Higher state income taxes similarly mean less discretionary income for taxpayers — and thus less money available to spend on housing. Less money in a future taxpayer’s pocket means less money for today’s homeowner when he wants to sell his house tomorrow.

Washington can continue to take extraordinary measures to prop home prices up. But forces at the state and local level are pulling prices down.
Municipal 'millionaires'
NYPOST
By LAWRENCE MONE
Last Updated: 3:38 AM, December 1, 2011
Posted: 10:27 PM, November 30, 2011

Gov. Cuomo, under enormous pressure from public-employee unions and Democrats in the Legislature to extend New York’s “millionaires’ tax,” is considering at least some higher taxes on higher incomes. The big irony here is that much of the money raised from any “millionaire” tax hikes would go to fund the growing phenomenon of public-sector millionaires.

How’s that? Well, most dictionaries define a millionaire as someone with wealth (i.e., assets) of $1 million. By that definition, many New York teachers and the vast majority of police and firefighters are millionaires, because the “net present value” of their retirement benefits is well in excess of $1 million.

That is, if they had to fund their retirements from their own savings, they’d have to set aside seven figures today.

Few who don’t work for the government sector have comparable assets. Over the last several decades, the private sector has moved increasingly to the 401(k)-style “defined contribution” model, which yields a retirement nest egg based on what both employers and employees have contributed to individual accounts.

Public-sector workers, on the other hand, still rely on “defined benefit” pensions, which provide a guaranteed stream of income based on career longevity and late-career peak salaries.

A New York City public-school teacher earning $100,000 can retire at 55 with a pension of $60,000. A private-sector worker would need $1.2 million to buy an annuity with the same yield and starting at the same (relatively young) age, according to the online pension calculator developed by the Manhattan Institute’s Empire Center.

It would take an even larger nest egg to replicate the pension income of city police officers, who typically retire in their 40s. According to data posted at SeeThroughNY, an Empire Center Web site, the average newly retired city cop collects a pension of $58,563 — plus a $12,000 annual supplement.

(Of course, public-sector workers also receive lavish health-care retirement benefits.)

Few private-sector workers have anything close to $1 million socked away in their retirement accounts. According to the Federal Reserve, the average worker in his late 50s has a balance of $85,600 in his retirement account, and a net worth of $222,300 overall.

To be sure, most public employees do contribute a small portion of their salaries to their pension funds, but the state and city contribute many times more. By contrast, private employers and employees more commonly do a one-to-one match.

And private-sector workers assume all the risk of these investments, while public-sector workers enjoy generous rates of guaranteed return. As former New York City Schools Chancellor Joel Klein quipped when he discovered his city pension offers a guaranteed 8 percent annual return, “Who but Bernie Madoff guarantees” such a return “permanently?”

Let me be clear: Many public-sector employees — especially frontline employees like teachers, cops and firefighters — have difficult, important and often dangerous jobs. They deserve to be well-compensated. And, for the most part, they are. After six years, police and firefighters can earn more than $90,000, excluding overtime.

Another irony: Salaries for public employees — math and science teachers, for example — could be raised if so much of their compensation wasn’t backloaded in pension costs.

In the popular 1950s TV show “The Millionaire,” a fictional character would hand out checks for a million dollars. Over the last few decades, we’ve developed a public-sector retirement system that basically does the same. It’s a system New York’s beleaguered taxpayers can simply no longer afford.

City pension costs have jumped from about 4 percent of city tax revenues to 20 percent over the past decade, crowding out other vital public investments. If New York is to avoid the fate of cities like Central Falls, RI, which have been driven into bankruptcy and are slashing promised retiree benefits, we must begin to fix the system now. Ideally, for new employees, by switching to the same type of “defined-contribution” retirement system now used by virtually everyone in the private sector.

There simply aren’t enough private-sector “millionaires” to support all the new public-sector millionaires being created every day.
Funny finance and the pension puzzle
NYPOST
By NICOLE GELINAS
Last Updated: 4:16 AM, November 21, 2011
Posted: 10:28 PM, November 20, 2011

Future city pensioners might wonder whether Comptroller John Liu, a guy who isn’t being up-front about his own funds, is being truthful about the disposition of their retirement benefits.

You’d think that the person responsible for New York’s finances would be meticulous about the money he oversees for his own benefit. Not so.

Last week, the feds charged a Liu campaign fund-raiser, Xing Wu Pan, with fraud. An undercover agent tricked Pan into thinking he was a businessman offering $16,000 for Liu’s re-election. To get around the city’s contribution limit, Pan said he could split the money into smaller “donations” from fake contributors. Pan told the donor that Liu would know where the cash came from.

Friday, Liu said the charges were “quite embarrassing, as the chief financial officer of the city.” But he still won’t release the names of his top fund-raisers, as the law demands, saying it’s not so easy.

How hard can it be? It looks as if Liu is just buying weeks, or months, to avoid harsher scrutiny.

Yet a true picture of the comptroller’s finances will inevitably emerge. Delaying gains him nothing.

Political shenanigans are a dime a dozen here, but city workers should pay attention in this case. Liu has built his reputation on one issue: public-pension benefits. His position, laid out in three reports over eight months, is that they’re fine the way they are.

Last month, Liu’s latest report concluded that New York taxpayers are getting a great deal on pensions, even as:

* Uniformed workers continue to retire after 20 years with oodles of overtime baked into their benefits.

* Other workers retire in their 50s with guaranteed benefits for life.

* Annual pension costs have more than octupled under Mayor Bloomberg, from $1 billion a decade ago to $8.4 billion.

In one year, New Yorkers spend four times on pensions what they’ve spent over five years to build the mayor’s signature infrastructure project, the No. 7 subway extension to Manhattan’s far West Side.

Future retirees are risking that Liu is playing just as fast and loose with their old-age security as he is with the campaign-finance rules. And it’s all about him: Just like he needs campaign money, he also needs union votes.

Unlike with the campaign-finance case, Liu likely will be long gone before a reckoning of pension costs can take place.

Liu’s not the only recent regional pol whose stance toward the public fisc has proved disastrous.

In New Jersey, back in 2006, the state’s new governor, Jon Corzine, said that much of that state’s pension problem could be solved if pension-fund managers would just take more risk. One union leader, Rae Roeder, fretted that “just like you’re sitting at the craps table, you can lose it all. And it’s not his money — it’s our members’.”

Yes. This year, former Gov. Corzine used the same strategy at the small brokerage firm he went on to manage, MF Global. He bet it all — and the company’s shareholders and employees lost everything three weeks ago. Investigators are probing whether Corzine’s firm used “segregated customer funds” to bet more than the legal limit. That is, they’re looking into whether Corzine’s firm stole customer money.

In the Corzine case, just as in Liu’s campaign-finance kerfuffle, the facts will come out — fast. But it will take years for Jersey public workers and retirees to understand the extent of their potential problems.

Many observers say that public workers shouldn’t care: Public pensions are guaranteed, so it’s the taxpayers’ problem.

But, absent serious reform, elected officials are going to have to choose among paying pensions, paying bondholders and keeping cops on the street. That’s happening in such poorer cities as Central Falls, RI, where current pensioners face big benefit cuts.

People say it can’t happen here because New York is rich. But it’s thinking like that that could make New York poor. The thinking that mortgages were safe, for instance, made them risky.

Future retirees had better look out for themselves. The pols — and today’s union leaders — figure they’ll be long gone before the bill comes due.

Nicole Gelinas is a contributing editor to the Manhattan Institute’s City Journal.


Gov.Paterson came to office after scandal sank Gov. Spitzer.

Weston CT's Board of Finance sets up funding mechanism for O.P.E.B.
To Pay New York Pension Fund, Cities Borrow From It First
By DANNY HAKIM, NYTIMES
February 27, 2012

ALBANY — When New York State officials agreed to allow local governments to use an unusual borrowing plan to put off a portion of their pension obligations, fiscal watchdogs scoffed at the arrangement, calling it irresponsible and unwise.

And now, their fears are being realized: cities throughout the state, wealthy towns such as Southampton and East Hampton, counties like Nassau and Suffolk, and other public employers like the Westchester Medical Center and the New York Public Library are all managing their rising pension bills by borrowing from the very same $140 billion pension fund to which they owe money.

Across New York, state and local governments are borrowing $750 million this year to finance their contributions to the state pension system, and are likely to borrow at least $1 billion more over the next year. The number of municipalities and public institutions using this new borrowing mechanism to pay off their annual pension bills has tripled in a year.

The eagerness to borrow demonstrates that many major municipalities are struggling to meet their pension obligations, which have risen partly because of generous retirement packages for public employees, and partly because turbulence in the stock market has slowed the pension fund’s growth.

The state’s borrowing plan allows public employers to reduce their pension contributions in the short term in exchange for higher payments over the long term. Public pension funds around the country assume a certain rate of return every year and, despite the market gains over the last few years, are still straining to make up for steep investment losses incurred in the 2008 financial crisis, requiring governments to contribute more to keep pension systems afloat.

Supporters argue that the borrowing plan makes it possible for governments in New York to “smooth” their annual pension contributions to get through this prolonged period of market volatility.

Critics say it is a budgetary sleight-of-hand that simply kicks pension costs down the road.

“You’re undermining the long-term solvency of these funds and making the pension fund even more of a gamble than it already is,” said Josh Barro, a senior fellow and pension expert at the Manhattan Institute, a conservative research organization. The state, he said, is betting that the performance of the financial markets will improve over the next decade and bail the system out.

“If performance continues to be weak, then contribution rates will be even higher than the rates we’re trying to avoid now, and you’ll produce even more fiscal pain down the road,” he said.

Nationwide, the cost of public retiree benefits has soared in recent years, and states including California, Connecticut and Illinois have been borrowing to pay, or even deferring, their pension bills. Many states are worse off than New York. New Jersey is still paying off bonds issued in 1997 to close a hole in its pension system.

And governors and lawmakers across the country have been trying to take steps to reduce future pension costs, with limited success.

But New York appears to be unusual in allowing public employers to borrow from the state’s pension system to finance their annual contributions to that system.

The state’s borrowing mechanism, approved in 2010 under Gov. David A. Paterson, was backed by public sector unions and by the state comptroller’s office, which oversees the pension fund and prefers to call the borrowing a form of amortization, or paying a debt gradually, with interest. The public employers that borrow from the pension system essentially contribute less than they owe in a given year, and agree to repay the difference, with interest, over a decade.

Contributions to the pension system, which covers more than one million members, retirees and beneficiaries, are due annually from the state and municipal governments. As they struggle to pay their obligations under the current system, municipalities are borrowing $200 million this year, up from $45 million last year, the first year the borrowing plan was available, according to the state comptroller’s office.

“I don’t think any financial manager likes to see the can kicked down the road, and would prefer to see all costs paid for in the years that they are incurred,” said Tamara Wright, the comptroller of Southampton. Southampton, on the East End of Long Island, recently borrowed a fifth of its pension bill — $1.2 million of $6 million — by decision of the town board.

“I certainly am sensitive to the board’s concerns about the current economic times,” she said.

The state is borrowing too — $575 million in the current fiscal year, and $782 million in the next, under a budget proposed by Gov. Andrew M. Cuomo.

The state’s comptroller, Thomas P. DiNapoli, said in a statement, “While the state’s pension fund is one of the strongest performers in the country, costs have increased due to the Wall Street meltdown.” He added that “amortizing pension costs is an option for some local governments to manage cash flow and to budget for long-term pension costs in good and bad times.”

The comptroller’s office noted that only a part of the overall pension contributions owed by the state and municipalities was being borrowed. And it said the number of borrowers had risen partly because the borrowing plan only recently became available.

“It would not be fair to draw a characterization about statewide municipal finances from these numbers,” said Kevin Murray, an executive deputy in the comptroller’s office.

But it is clear that a number of major public employers are having trouble affording the state’s current pension system.

“Sharp increases in pension costs are unsustainable and are devastating state and local governments,” Robert Megna, Governor Cuomo’s budget director, said in a statement.

Mr. Cuomo, a Democrat, is proposing changes that would require future state employees to share a greater portion of their pension costs, and would allow them to opt into a 401(k)-style retirement plan. The proposal is known as Tier VI because it would be added to five existing pension benefit categories.

The governor’s proposal has been met coldly by labor unions, as well as by many state lawmakers and Mr. DiNapoli, also a Democrat and an ally of the labor movement. The proposal is supported by Mayor Michael R. Bloomberg of New York as well as other municipal leaders, and by business groups.

“It’s the most significant rising cost that we have,” Scott Adair, the chief financial officer of Monroe County, said of pensions.

In Poughkeepsie, which is contributing $3.6 million into the state pension system this year and borrowing nearly $800,000, Mayor John C. Tkazyik, a Republican, said rising pension costs and new federal accounting requirements for retiree health coverage could have dire consequences.

“It could bankrupt the city,” Mr. Tkazyik said, adding that the city had cut its work force, to 367 from 418 employees, in four years as it struggled to compensate.

The New York Public Library is borrowing nearly $2.9 million of a $14.7 million pension bill this year. A library spokeswoman said the decision to borrow came at the urging of the city, which finances a majority of the library’s budget. The city has its own pension system, separate from the state, which has undergone its own fiscal stresses because of sharp contribution increases.

“After a strong recommendation from the city, the library decided to amortize its pension payments because of the cost savings to both the library and the city, which reimburses more than half of our pension costs,” said Angela Montefinise, the library spokeswoman.

But the Bloomberg administration played down its role.

“The library system decides how to manage their finances,” said Marc LaVorgna, a Bloomberg spokesman, adding, “The decision was made by the libraries.”

California facing higher $16 billion shortfall
YAHOO
Associated Press
By JUDY LIN
13 May 2012


SACRAMENTO, Calif. (AP) — California's budget deficit has swelled to a projected $16 billion — much larger than had been predicted just months ago — and will force severe cuts to schools and public safety if voters fail to approve tax increases in November, Gov. Jerry Brown said Saturday.

The Democratic governor said the shortfall grew from $9.2 billion in January in part because tax collections have not come in as high as expected and the economy isn't growing as fast as hoped for. The deficit has also risen because lawsuits and federal requirements have blocked billions of dollars in state cuts.

"This means we will have to go much farther and make cuts far greater than I asked for at the beginning of the year," Brown said in an online video. "But we can't fill this hole with cuts alone without doing severe damage to our schools. That's why I'm bypassing the gridlock and asking you, the people of California, to approve a plan that avoids cuts to schools and public safety."

Brown did not release details of the newly calculated deficit Saturday, but he is expected to lay out a revised spending plan Monday. The new plan for the fiscal year that starts July 1 hinges in large part on voters approving higher taxes.

The governor has said those tax increases are needed to help pull the state out of a crippling decade shaped by the collapse of the housing market and recession. Without them, he warned, public schools and colleges, and public safety, will suffer deeper cuts.

"What I'm proposing is not a panacea, but it goes a long way toward cleaning up the state's budget mess," Brown said.

Democrats, who control the Legislature, have resisted Brown's proposed cuts so far this year. Republican lawmakers criticized the majority party for building in overly optimistic tax revenues.

"Today's news underscores how we must rein in spending and let our economy grow by leaving overburdened taxpayers alone," said Assembly Republican leader Connie Conway in a statement.

The governor pursued a ballot initiative because Republican lawmakers would not provide the votes needed to reach the two-thirds legislative majority required to raise taxes.

Assembly Speaker John Perez, D-Los Angeles, acknowledged that lawmakers have "limited and difficult choices left to solve the deficit." Senate President Pro Tem Darrell Steinberg, D-Sacramento, said he wasn't surprised by the deficit spike given that state tax revenue have fallen $3.5 billion below projections in the current year.

"We will deal with it," Steinberg said Saturday. "And we know that more cuts are inevitable but we will do our very, very best to save more than we lose, especially for those in need."

Under Brown's tax plan, California would temporarily raise the state's sales tax by a quarter-cent and increase the income tax on people who make $250,000 or more. Brown is projecting his tax initiative would raise as much as $9 billion, but a review by the nonpartisan analyst's office estimates revenue of $6.8 billion in fiscal year 2012-13.

Supporters of the "Schools and Local Public Safety Protection Act of 2012" say the additional revenue would help maintain current funding levels for public schools and colleges and pay for programs that benefit seniors and low-income families. It also would provide local governments with a constitutional guarantee of funding to comply with a new state law that shifts lower-level offenders from state prisons to county jails.

A second tax hike headed for the November ballot is being promoted by Los Angeles civil rights attorney Molly Munger, whose initiative would raise income taxes on a sliding scale for nearly all wage-earners to help fund schools.

Anti-tax groups and Republican lawmakers say both tax increases will hurt California's economic recovery. State GOP Chairman Tom Del Beccaro has embarked on a statewide campaign to discuss alternatives to Brown's tax hikes.

The governor is expected to propose a contingency plan with a list of unpopular cuts that would kick in automatically if voters reject tax hikes this fall. In January, he said they would result in a K-12 school year shortened by up to three weeks, higher college tuition fees and reduced funding for courts.