-- Federal Reserve Chairman Ben S. Bernanke, seeking ways to stabilize money markets, will ask Congress for authority to pay interest on commercial-bank reserves this year, a person familiar with the discussions said.
The central bank isn't authorized by Congress to begin making such payments until 2011. Allowing interest on bank reserves may enable the Fed to pump more funds into the banking system without pushing its main policy rate lower, in effect separating action to boost liquidity from monetary policy.
Presumably this means Vallejo's outstanding debts will not be paid.
What does it mean for the people who live there? No more fire department? Closing public libraries? Closing schools? No more collection of local taxes? No more jobs or wages for any city employees? Are pensions of city employees affected? What about trash collection?
Allowing interest on bank reserves may enable the Fed to pump more funds into the banking system without pushing its main policy rate lower, in effect separating action to boost liquidity from monetary policy.
Sounds like the farm subsi... um, I mean liquidity program.
"Can't they just legalize prostitution and tax that? There's got to be a lot of Realtors (TM) looking for work now."
Ah, a student of Vallejo history. Had quite a red light district back in the day. I remember it well. AS A CHILD (ahem).
As somebody else said, this is a tree in the forest. Vallejo never recovered from the loss of Mare Island. It had no other industries to compare except for said red light district, long gone, but a rather large demand for services.
The business and political elite, such as it was, was never up to the task of turning things around. The current Mayor, Davis, was always the lone voice of reason on his days on the council.
Vallejo is an outlier. When most Mare Island facilities closed they lost their traditional economy. Add to that they are small enough to fail.
The specifics of why they failed however are a great big somethingburger with cheese. Public sector employee compensation in California is obscene and the employee unions are incredibly powerful. There is also a demographic bubble at exactly the wrong time. Early retirement doesn't help either as retiree costs often approach worker costs. With the california economy and cost of living it won't be possible to even replace these overpaids with people being paid more.
By Fall expect CA muni debt to be the new subprime.
more good news for stocks right? more potentially unemployed, meaning greater competition for remaining jobs, and thus lower wages = increased company margins. Whoo hoo. I'm adding signficantly here!
I know my locale, on a state and local level, is dependent on its presumed future revenue as a second-rate gambling destination. It is desperate to extend services rather than pay down debt, despite the crippling size of the debt monster in the closet and the absolutely gigantic infrastructure renewal costs that are coming due.
But, they can meet ongoing expenses so let's see what else we can spend money on. I bet there are a lot of places just like my town. I reckon they are gonna go TU in droves.
The emphasis here really should be on "ballooning labor costs" more than "declining house prices". Vallejo is a relatively small poor municipality ... but their fire and police municipal staff are some of the best paid in the greater Bay Area. The city is facing some truly enormous pension costs. In this sense, Vallejo is the canary in the coalmine. Numerous other communities here are in the exact same situation. The Chronicle ran an interesting series on the issue ...
Someone asked are there other municipalities facing the same fate?
Well, of course, my home county, Jefferson, in Alabama (where Birmingham, the biggest city is located) is now in default on about $3.5 billion in sewer bonds. But its problems are not directly related to housing woes, or at least not to the local housing market. It played heavily in the auction rate securities markets, trying to turn long-term rates into short-term rates to save money on interest charges. It backfired when the auctions began failing a few months back.
Jefferson County's problems, though, are simpler than that. Its leadership borrowed more than its citizens were willing or able to pay back. Trying to arb the interest rates was just a symptom of that essential problem.
When it files for BK, it will be the biggest municipal BK ever, and we'll finally be first at something!
This portends to larger problems as cities have already spent projected property tax revenue for the next five years. In San Francisco many police and fireman make over 100K+ and are guaranteed 90% of their pay after they retire. SF has a budget deficit and it has a larger tourism industry and wealthy tax base. If the housing downturn is just begun and cities are already face a shortfall what will happen in the future. This is unsustainable and is only a matter of time before other cities fall in line.
30 years of citizen activist tax watchdogging has left California with nothing else to tax. Not just taxes but fees for everything. The freakin' top tax bracket is ~$46k. 9.3% income, 8.25% sales, fees for everything and a pervasive anti-productive business hostile environment have limited the State to borrowing. This year's 'balanced budget' projects spending $18.5b more than revenues.
You bet. Everyone flying into the Muni bond market to get yields is going to get burned. California may be known as a liberal democratic state but they are also cheap and they will fight tooth and nail against any tax hikes. Interesting to see what V-town's credit rating will be in a few months. If this is successful I am sure other cities will file as a easy way to get out of union negotiations.
Pending Home Sales news is not widely available on many sites it seems. But I saw this:
"Things are beginning to improve, but the availability of affordable mortgages is uneven around the country and sometimes within metropolitan areas," said NAR chief economist Lawrence Yun in a statement.
uh oh....if Yun says "beginning to improve" I guess that means things are ....
Pending home sales data for March are out. Sales fell 1% (right on the median forecast), but February was revised to -2.8% from -1.9% (so the actual number of sales was below the implied median estimate by 0.9%). The trend (3-month average) in pending sales had been flat from September to around January, but has now turned lower again. Unless there is a sharp decline in the number of broken contracts, that means existing home sales, for which the 3-month average had been steady for the three months to March, is due for a dip. That is consistent with reports that the late-winter/early-spring bump in sales failed to materialize.
Bob Dobbs,
Ah! Back in the days! I grew up in Fairfield back in the 50s and remember ahem, certain districts. I also remember that it had a rather vibrant black community.
I think the bankruptcy court appoints a special master to run the city, sort of like a unelected dictator. The state also plays a role. That is what happened during school district bankruptcies that I read about here in Nor Cal. Don't know what role the city council plays during the bankruptcy.
The City of Half Moon Bay may face the same situation resulting from the loss of a lawsuit.
Don't worry it is all contained.
Anonymous, take a look at the Sac Bee --"California May Run Out of Cash by August" 404 - Not Found - sacbee.com Without a budget in place, the state would have to borrow money from banks at higher interest rates than those they can secure with internal borrowing. Such a move also could negatively affect the state's credit rating, making future borrowing even more expensive.
"In essence, it's taking a subprime loan for the state, and it comes with greater costs," said state Controller John Chiang.
...Unlike last year, when the state started with a $10 billion reserve, finance officials say California begins planning for the 2008-09 fiscal year with far less cash on hand.
Chiang said state accounts continue to deteriorate as a result of housing and stock market losses. Those factors, coupled with continued growth in state spending, would trigger a cash shortage.
It's a shame. I've noticed a lot of nice new state buildings that have popped up recently. Looks like CA may have also gotten a little to caught up in the housing boom.
No way this is an isolated/single tree incident - there are so many municipalities that have skated by on promises of ever-greater future pension and health payouts to retirees while refusing to raise taxes that it's just not possible that at this point in the cycle we won't see others begin to drop. I would be willing to bet we could even see similar troubles at the state level. How on earth does New Jersey close that deficit? How does California?
The cities to watch are in my opinion the Inland Empire boomburgs. They've got some incredible infrastructure debt and a large reliance on special assessment districts with funding tied to property.
In Ca we have this tree called General Sherman. Look it up. If this thing fell it would take a whole lotta trees down with it. Didn't the gov't guarantee pensions from the old steel mills? The Pension Guarantee corp I think its called. I also heard that its bankrupt though.
The emphasis here really should be on "ballooning labor costs" more than "declining house prices". Vallejo is a relatively small poor municipality ... but their fire and police municipal staff are some of the best paid in the greater Bay Area. The city is facing some truly enormous pension costs.
You folks are funny. Haven't you heard? Housing costs have been off the charts for years. No one could possibly afford to live in SF on a "normal" firefighter salary. Of course the city workers made high salaries.
Won't this help in the long run? From my experience in playing video games, if you are losing a good strategy is to hit the reset button. Sure you piss off whoever you are playing with, but isn't it better to hit the reset button sooner?
Personal bankruptcy leaves what, a 7 year black hole on people's credit scores? Isn't it better just to reset the whole thing now, when we are only down 30-0 and take our 7-year medicine rather than hold out until the score is 100-0?
I have zero idea if this idea transfers over to municipalities, but now this city will at least live within their means for a little bit.
I suppose as a country we could be entering some 20 or 30 year period were numerous states cycle into and out of bankruptcy for a period of time... at least better to have some go through this sooner than others...
You folks are funny. Haven't you heard? Housing costs have been off the charts for years. No one could possibly afford to live in SF on a "normal" firefighter salary. Of course the city workers made high salaries.
And now the municipality is bankrupt, aren't you clever! Looks like throwing money at the problem didn't work! Maybe next time, you can try a strategy that doesn't implicitly peddle the treasury for union votes.
In my county, Fresno County in central California, county jobs were the second fastest growing job sector for three years, aside from housing. I am predicting a bankruptcy or massive layoffs. Our county is, like other California counties, under the power of the monopoly union.
CA's legislature is always late with the budget. I'd expect this one to be no different -- probably worse as the issue is how to fill a $20B hole.
IMO, the real elephant in the room is prop 13's limitation on property taxes. A lot of the gap could be made up there. Of course, the impact on housing values...
The other idea would be to simply stop prosecuting MJ convictions and let all of those people out on the street again. The prison system is a big drain on the budget as well...
"Bob Dobbs,
Ah! Back in the days! I grew up in Fairfield back in the 50s and remember ahem, certain districts. I also remember that it had a rather vibrant black community."
Oh yeah. Vallejo. I'll never go back, but I'll always have a soft spot for it. God knows why.
Fairfield is Vallejo's smarter brother. Vallejo just wallowed in federal money while Fairfield, which also was a military town -- and still is -- put money into industrial development, new roads, education, etc. If Travis AFB was to shut down -- fat chance -- Fairfield would be in much better shape than Vallejo is now.
Although Vallejo may be a worst case, all up and down California cities are trying to figure out how to meet their bills as revenue from every source drops. California cities depend on a great deal of their funding from the state as well, more so than many other states, so one decision at the state level can affect the funding for all cities.
It's more of a gamble than it used to be. I wouldn't trust Fidelity: they just want the sale.
SS writes:
...the issue is how to fill a $20B hole.
IMO, the real elephant in the room is prop 13's limitation on property taxes. A lot of the gap could be made up there. Of course, the impact on housing values...
How does that work? Right now property taxes are allowed to rise 2% per year. Repeal Prop 13 and it would take a vote of the people to raise property taxes. Sounds like a formula for less tax revenue to me.
Bankruptcy was the best option that Vallejo had. Salaries for fire fighters was a very big portion of their budget. Vallejo firefighters were paid more than the surrounding ones. The bankruptcy will give them a chance to redo those contracts and give the city some breathing space. It has a ferry terminal and a nice bayfront. There is some potential for a nice main street there.
Vallejo is in Solano county which leads the Bay Area counties in #of foreclosures. A lot of people got their first home there because it is on the outside of the Bay Area and somewhat cheaper. Unfortunately the subprime loans caught them.
Someone stated that public sector employee compensation is OBSCENE. That is the truest statement of the year. Look at the salary tables at the SF Chronicle (sfgate.com). It is absolutely out of control. Yeah, I like cops and firemen - but they are way, way overpaid and they really don't do that much. Vallejo spends 74% of its budget on cops and firemen. How many fires are there? 10 Vallejo firemen were paid over $200K last year - 100 made over $100K. I would rather let the fires burn and get a 74% cut on my taxes. The next time I get a call from one of those police benefit organizations (which I often contribute to) I am going to ask them to give me money. San Francisco could go BK too - except they can just keep raising the parking fees and fines.
Repeal Prop 13 and it would take a vote of the people to raise property taxes
I believe that's backwards. Prop 13 requires a vote-of-the-people to raise property taxes. Without 13, the legislature could (and did) set taxes.
IIRC.
A bizarre redefinition of the concept of retirement in the public sector is at the root of the problem. Used to be that retirement = a comparatively brief period of living quietly at home, not working, hopefully not starving, winding down one's life. Now it's decades of high consumption vacation financed by hefty deferred compensation masked by the term "pension." Cruises, RVs, second homes, free healthcare, survivor benefits, and on and on.
"A bizarre redefinition of the concept of retirement in the public sector is at the root of the problem. "
What you say is true, but it goes beyond that. Retirement for many civic workers in California, especially public safety, is based on an average of their last three years' salary including overtime.
So cops and firemen routinely volunteer for all the overtime they can in their last three years and shoot their "average" salary far over base. And are rewarded for it ever after.
That said, my brother-in-law the fireman, who did all the above, justified it by saying that firemen have a shorter lifespan because of all the crap they breathe, despite the respirators. He died at 58, three years into a medical retirement.
.
I watched the last 2 1/2 hours of the Vallego city council meeting last night as they streamed it on the internet. Yea I know get a life. I was also watching the Texas/Seattle baseball game so multitasking!
The whole 6 hours and 59 minutes of it is now on their web site @
The thing is that when you look at death rates, firefighting is a fairly safe profession. The really dangerous jobs are the ones you might not expect, like being a gas station attendant. I also find it funny that urban firefighters (who have the safest jobs) typically are paid over $100k per year while the wildland firefighters (who face actual danger) often only make around $30K.
California cities will be facing these kinds of problems until public employee compensation (especially for public safety employees) is brought under control. In my town, the cops and firefighters all make over 100K while the median family income is only 75k. This is way out of proportion.
JoeB sez:
"I would rather let the fires burn and get a 74% cut on my taxes. The next time I get a call from one of those police benefit organizations (which I often contribute to) I am going to ask them to give me money."
FYI: Those "police benefit organizations" that call you on the phone are scams 95% of the time. In SoCal, the PD's have openly discouraged people from donating to them; they say they are not related at all.
And just who else will provide medical response to your heart attack or car accident? Some homeless guy who witnessed it?
SeattleSun,
The feds have a singular advantage that no other strata of governance has; the printing press.
Vallejo used the nuclear option. It is my hope that the result is a wake up call to police, fire, DWP, prison guard, CHP, Caltrans, et al about their compensation structure. We have people pulling two full pensions and a full salary. Things have to change.
Orange County came out of its bankruptcy pretty well. The biggest impact to residents is that some freeways that were planned to be free got built as toll roads (and work better because of it). Then again Orange County's problems were much less systemic than Vallejo's (OC had an overly aggressive pension fund manager who racked up over a billion dollars in derivatives losses IIRC).
Rob Dawg,
The true nuclear option in this case would have been to lock out the public employee unions. I think it likely that the county sheriff would be obligated to respond to 911 calls even if the city PD were locked out.
Rob dawg what is the DWP? I don't know any public safety workers who are pulling in 2 pensions. I think you have to differentiate between workers and Administrators although both are overpaid.
The other nuclear option would be what Half Moon Bay is considering - to dissolve the city and let the county take over. Of course, as a politician that's not necessarily the most desirable one because you don't have anything to govern anymore.
Thanks to Prop 13, residential development rarely generates enough income for a city to pay for the needed services. Vallejo's leaders refused to allow a Walmart; and there has been minimal redevelopment at the old Navy base. Had it increased its retail base, it could have made it through without bk. The city leaders were much worse at planning than their neighbors. So I don't think it is a systemic problem - there may be other badly managed towns, but most will make it through.
Ravenor,
I am not sure but I think public safety employees are not subject to lockouts by the same practice that forbids them (makes near impossible to legally) to strike.
Chapter 9 looks like the right thing. "you won't negotiate? Fine, see how you like being unilaterally recontracted by a special master."
Drawing two pensions is VERY common among firefighters. You have to have worked for a department that has its own pension system and one that uses Calpers. If you play it correctly you can make both Calpers and your local department pay your full pension and retire with higher pay than the $150k/year you made when you were working (a relative of mine is doing just that).
Vallejo used the nuclear option. It is my hope that the result is a wake up call to police, fire, DWP, prison guard, CHP, Caltrans, et al about their compensation structure.
Ya know, I'd like to think it would be.
But then I remember the saga of Continental back in the early '80s, and how bankruptcy was used as a "nuclear option" against the incessant and overbearing demands of the unions.
And it worked. For them. Once.
Did the airline unions take it as a wake-up call? Not so much. Instead they dedicated the next decade to lobbying Congress to ... change the bankruptcy laws to make union contracts harder to discharge! Poof - problem solved!
Why would anyone expect a more optimistic outcome when it comes to our public-sector unions?
I am surprised by everyone who is so Anti-Hero. So what these guys pull in 150k plus medical care over a twenty year retirement.=) Who cares let the Muni bond holders pay for it
Tim writes:
Rob dawg what is the DWP? I don't know any public safety workers who are pulling in 2 pensions. I think you have to differentiate between workers and Administrators although both are overpaid.
DWPs are water and power. Semi-autonomous government service providers.
The police chief of Fillmore I believe is pulling two and serving.
My experience is that administrative positions have been cut beyond reasonable and prudent thus leaving many municipalities with unresponsive hidebound departments with waste and resistance to change.
Forensic economist writes:
Thanks to Prop 13, residential development rarely generates enough income for a city to pay for the needed services.
This is classic munish¡t as delivered by the elitist urban planner overlords. Not even close to true in practice. Municiplites hate Prop 13 and will say any lie as long as it involves dissing Prop 13. The usual line is "roads, sewers, water, landscaping, lighting... how can the city pay for these?" Newer developments in California get roads, sewers, etc. donated to the city plus assessment districts. Municipalities have been using development fees and districts to supplement existing budgets for more than a decade.
It's obvious these pension schemes are unsustainable... heck, most lawyers won't have that kind of income in retirement.
But what interests me more is not the municipal situation, it's the state and federal situations. I'm sure state pensions are just as out of control in many cases, and the 14th Amendment prevents states and the federal government from using bankruptcy to repudiate debts. It's unclear whether the states will be able to wiggle out of this. I suspect the only alternative is going to be enormous state tax increases, as Kotlikoff and others have been predicting for a while.
flarn2 - I did not mean to denigrate the valuable service that firemen and law enforcement do - but, the question needs to be asked - how many do we need and how much should we pay them? $200K for life with full medical benefits and retirement at age 50? How often has anyone on this blog ever had a house fire and the need to call an ambulance? Obviously we need these services - but I think that most fire departments are vastly overstaffed and underworked. These guys rarely do any real work. Why are they paid like prices? And the cops (at least in San Francisco) don't solve many crimes. I'm glad they are around - but what we need are more responsible citizens. Has anyone ever had to call the police because of the actions of anyone on this blog? Look, I support and respect our public safety servants - I just think that they are paid way too much for the actual work they do.
Regarding investing in Muni bonds, I don't see the point. For that matter I wouldn't invest in corporate bonds or bond funds either. I would rather invest in stocks that provide a good dividend and provide for the possibility of growth also. I look at it like, if I want to risk some money I'll put it in the stock market rather than the bond market. With a bond, you're sitting there for years wondering if you're going to get your principle back if the corp or muni goes bankrupt. The bond market isn't that liquid and you have both interest risk and investment risk that could cause your bond to lose a lot.
In summary, If you want a "safe" investment, just buy a CD, if you want some risk, invest in stocks.
The above is not investment advice.
Regarding CA financial problems, lets face it, state taxes are going up. I would rather see income taxes rather than property taxes go up. Property taxes are like trying to get blood from a turnip.
Matt writes:
In my county, Fresno County in central California, county jobs were the second fastest growing job sector for three years, aside from housing.
Matt - I thought meth was the growth industry in Fresno County.
Tim - I'm in East Bay (where my town and many others and CoCo county are facing budget issues). The thing about the Vallejo crisis and the Chronicle's publishing the tables of public employee salaries was how surprising it was to most people that there are so many high-paid positions in these public agencies. Most people I know where stunned - I guess we weren't paying attention and asking where our tax dollars we're going. It's not just cops and firemen - how about $140K for an assistant welder in SF? How about all the $120K water meter readers? And the UC system is the worst offender. Just check out the database at sfgate.com.
Look, I support and respect our public safety servants - I just think that they are paid way too much for the actual work they do.
Wow, that was brave!
I think it's kind of curious how much we love to under pay some folks in society and over pay others. Perhaps the best answer is that we pay what the market demands. In high cost of living areas, you have to pay more to get folks to teach your kids and pick up your garbage (human or otherwise).
Paul - the marketplace determines the salaries of private security guards, private ambulance services, and private school teachers. I think that the public service unions and our gov't officials have well insulated themselves from the market. At least until our cities go bankrupt (or the taxpayers revolt).
Infinitely far behind, I would guess, since there's no concept of bankruptcy protection for a state. People (myself included) often equate bankruptcy to running out of money, but they are different things.
Bankruptcy is good for cities: it lets them force new labor contracts with unions which otherwise won't budge on their demands, and renegotiate (partially default on) debt obligations, for the low price of a hit to credit ratings.
Running out of money, on the other hand, is generally a bad thing. When the state runs out of money, it'll run a deficit through accounting gymnastics for a while, as borrowing costs increase (as it has been doing to some extent, even during good times). It's when the state can't borrow money any more that the "really bad things" happen.
When Fire Departments have open position calls the ratio is hundreds, sometimes thousands of applicants for every slot. All I want is pay and benefits reduced until there are mere dozens of qualified candidates for each opening.
If you let every residence burn to the ground when combustion occurred NOT due to arson, and rebuilt them on some larger insurance pool policy,
it still would be many, many times cheaper than keeping fireman on at overinflated wages...just so they can watch movies on their barcoloungers and barbeque, and cheat on their wives.
To Rob Dawg - I wasn't talking about the capital cost of infrastructure - that is often paid by the developer - but the operating cost of a subdivision: police, fire, road maintenance - not to mention schools etc. Which is why city governments in California compete for sales tax generating businesses. The Vallejo city government was too stupid to do so - much of the new commercial development went to Fairfield or Vacaville down the road. Which is why Fairfield is not going bankrupt. In other words, Vallejo may have gone bankrupt even without the housing crisis - it was that badly managed. Are there other badly managed cities? Yes. Is there a systemic municipal crisis? No - but badly managed cities on the edge of disaster will be pushed over.
I don't understand this. Where I live, we've got a mil rate. Total of all assessed property values x mil rate = revenue from property tax. The mil rate gets adjusted. Are there screwball states/counties where the mil rate DOESN'T get adjusted, such that tax revenues rise and fall in lockstep with assessed real estate values? Because that would be just retarded, the opposite of best practices.
Forensic economist writes:
To Rob Dawg - I wasn't talking about the capital cost of infrastructure - that is often paid by the developer - but the operating cost of a subdivision: police, fire, road maintenance - not to mention schools etc.
The operating costs for nearly new infrastructure of the types approved in the last decade are tiny and almost always incremental.
Second, you mention schools. They are often independent of municipalities. They are IMO some of the worst liars. For instance you might hear that California is 27th in school spending. Well, not exactly. You see State issue general obligation bonds that go to schools are counted like they are in other States. And then there's funny little quirks like semi-autonomous special learning centers within schools.
California local spending is more opaque than a movie director's expense report.
Prop 13 in California essentially has that effect. Prop 13 does 2 things, it caps the maximum property tax rate at 1%. It also caps increases in assessments to 2% per year, which is below the rate of inflation. This means that when property values fall everyone who's house is worth less than it was when they bought it + 2% per year has their property reassessed to the lower value. It's retarded, but it is also popular.
Many local and state governments, I suspect, are headed for this type of trouble. Compensation for employees per actual hour of work far exceeds comparable private sector jobs here in Ohio.
John Moorlach and Chriss Street have invested hundreds of millions of dollars into SIV's that are now worthless. Orange County CA will also file bankruptcy...again.
Troy:
Prop 13 should be repealed for commercial and rental properties.
This should be obvious since taxation of the landlord's rents cannot be passed on to the renter.
Not in the short term, but in the long-term because it reduces supply. Please not another renter-discriminating legislation!
Ideally, the tax system should be a Split Tax, where capital improvements are not taxed at all.
I own a house only about 40 miles from Vallejo-aka. Illegal Immigrant Central. I expect all of the surrounding valley cities to drop like dominoes soon. I paid 360k for my fairly modest house in 2004, and I couldn't even short sale it for 250k at the moment. All it takes is for 1 in 100 homes to tank, and California easily has 1 illegal for every 10 people. They gave them houses with ITIN numbers in place of SS numbers on stated income. Realtors professed that ITIN numbers were equivalent to SS numbers for buying houses, which can't be further from the truth according to the IRS. They were making decent money during the housing boom, so they could afford the teaser rates. The median price in my city was around 7x-8x the annual household income at the peak. It still has a way to go before it settles to a more reasonable 3-4x (which is where I was at when I bought). Bottom line- get the hell out of California. Move to a place where the median home price is less than 2x your annual income. California isn't all that great. The tacos were good.
I suspect this is a tree fallen in a forest, rather than first piece of the dominoes.
Does anyone know of any other municipalities in a similar situation? Now that tax-revenues are declining. . .
Thanks
Anybody know roughly what percentage of Vallejo city revenue is raised from property taxes?
Can't they just legalize prostitution and tax that? There's got to be a lot of Realtors (TM) looking for work now.
PRINT PRINT PRINT
-- Federal Reserve Chairman Ben S. Bernanke, seeking ways to stabilize money markets, will ask Congress for authority to pay interest on commercial-bank reserves this year, a person familiar with the discussions said.
The central bank isn't authorized by Congress to begin making such payments until 2011. Allowing interest on bank reserves may enable the Fed to pump more funds into the banking system without pushing its main policy rate lower, in effect separating action to boost liquidity from monetary policy.
Bernanke Wants Fed to Pay Interest on Bank Reserves (Update3) - Bloomberg.com
... nothin to look at here ... keep movi
Can California be far behind?
Ahh-nold, worst governator ever!
The lated in jingle mail: the key to the city.
Presumably this means Vallejo's outstanding debts will not be paid.
What does it mean for the people who live there? No more fire department? Closing public libraries? Closing schools? No more collection of local taxes? No more jobs or wages for any city employees? Are pensions of city employees affected? What about trash collection?
"latest," even. sigh. need coffee.
PPT directives are clear. Not below 1400, not below 13000.
They are intent on manufacturing a stock bubble. Problem is, they left the consumers behind.
Allowing interest on bank reserves may enable the Fed to pump more funds into the banking system without pushing its main policy rate lower, in effect separating action to boost liquidity from monetary policy.
Sounds like the farm subsi... um, I mean liquidity program.
"Can't they just legalize prostitution and tax that? There's got to be a lot of Realtors (TM) looking for work now."
Ah, a student of Vallejo history. Had quite a red light district back in the day. I remember it well. AS A CHILD (ahem).
As somebody else said, this is a tree in the forest. Vallejo never recovered from the loss of Mare Island. It had no other industries to compare except for said red light district, long gone, but a rather large demand for services.
The business and political elite, such as it was, was never up to the task of turning things around. The current Mayor, Davis, was always the lone voice of reason on his days on the council.
I wonder who insured their municipal debt?
Vallejo is an outlier. When most Mare Island facilities closed they lost their traditional economy. Add to that they are small enough to fail.
The specifics of why they failed however are a great big somethingburger with cheese. Public sector employee compensation in California is obscene and the employee unions are incredibly powerful. There is also a demographic bubble at exactly the wrong time. Early retirement doesn't help either as retiree costs often approach worker costs. With the california economy and cost of living it won't be possible to even replace these overpaids with people being paid more.
By Fall expect CA muni debt to be the new subprime.
more good news for stocks right? more potentially unemployed, meaning greater competition for remaining jobs, and thus lower wages = increased company margins. Whoo hoo. I'm adding signficantly here!
I know my locale, on a state and local level, is dependent on its presumed future revenue as a second-rate gambling destination. It is desperate to extend services rather than pay down debt, despite the crippling size of the debt monster in the closet and the absolutely gigantic infrastructure renewal costs that are coming due.
But, they can meet ongoing expenses so let's see what else we can spend money on. I bet there are a lot of places just like my town. I reckon they are gonna go TU in droves.
The emphasis here really should be on "ballooning labor costs" more than "declining house prices". Vallejo is a relatively small poor municipality ... but their fire and police municipal staff are some of the best paid in the greater Bay Area. The city is facing some truly enormous pension costs. In this sense, Vallejo is the canary in the coalmine. Numerous other communities here are in the exact same situation. The Chronicle ran an interesting series on the issue ...
but we owe the debt to ourselves, right?
Someone asked are there other municipalities facing the same fate?
Well, of course, my home county, Jefferson, in Alabama (where Birmingham, the biggest city is located) is now in default on about $3.5 billion in sewer bonds. But its problems are not directly related to housing woes, or at least not to the local housing market. It played heavily in the auction rate securities markets, trying to turn long-term rates into short-term rates to save money on interest charges. It backfired when the auctions began failing a few months back.
Jefferson County's problems, though, are simpler than that. Its leadership borrowed more than its citizens were willing or able to pay back. Trying to arb the interest rates was just a symptom of that essential problem.
When it files for BK, it will be the biggest municipal BK ever, and we'll finally be first at something!
This portends to larger problems as cities have already spent projected property tax revenue for the next five years. In San Francisco many police and fireman make over 100K+ and are guaranteed 90% of their pay after they retire. SF has a budget deficit and it has a larger tourism industry and wealthy tax base. If the housing downturn is just begun and cities are already face a shortfall what will happen in the future. This is unsustainable and is only a matter of time before other cities fall in line.
Jefferson County got itself into $7K of debt per man, woman, and child. I wonder what the number for Vallejo is.
30 years of citizen activist tax watchdogging has left California with nothing else to tax. Not just taxes but fees for everything. The freakin' top tax bracket is ~$46k. 9.3% income, 8.25% sales, fees for everything and a pervasive anti-productive business hostile environment have limited the State to borrowing. This year's 'balanced budget' projects spending $18.5b more than revenues.
Ca debt is the New Subprime.
You bet. Everyone flying into the Muni bond market to get yields is going to get burned. California may be known as a liberal democratic state but they are also cheap and they will fight tooth and nail against any tax hikes. Interesting to see what V-town's credit rating will be in a few months. If this is successful I am sure other cities will file as a easy way to get out of union negotiations.
Is the Housing Crisis a Public Health Nuisance?
Is the Housing Crisis a Public Health Nuisance? - Freakonomics Blog - NYTimes.com
Pending Home Sales news is not widely available on many sites it seems. But I saw this:
"Things are beginning to improve, but the availability of affordable mortgages is uneven around the country and sometimes within metropolitan areas," said NAR chief economist Lawrence Yun in a statement.
uh oh....if Yun says "beginning to improve" I guess that means things are ....
Pending home sales data for March are out. Sales fell 1% (right on the median forecast), but February was revised to -2.8% from -1.9% (so the actual number of sales was below the implied median estimate by 0.9%). The trend (3-month average) in pending sales had been flat from September to around January, but has now turned lower again. Unless there is a sharp decline in the number of broken contracts, that means existing home sales, for which the 3-month average had been steady for the three months to March, is due for a dip. That is consistent with reports that the late-winter/early-spring bump in sales failed to materialize.
Bob Dobbs,
Ah! Back in the days! I grew up in Fairfield back in the 50s and remember ahem, certain districts. I also remember that it had a rather vibrant black community.
I think the bankruptcy court appoints a special master to run the city, sort of like a unelected dictator. The state also plays a role. That is what happened during school district bankruptcies that I read about here in Nor Cal. Don't know what role the city council plays during the bankruptcy.
The City of Half Moon Bay may face the same situation resulting from the loss of a lawsuit.
Don't worry it is all contained.
I'm ready for the day...
which market big mouth wants in first.
Anonymous writes:
Can California be far behind?
Anonymous, take a look at the Sac Bee --"California May Run Out of Cash by August" 404 - Not Found - sacbee.com
Without a budget in place, the state would have to borrow money from banks at higher interest rates than those they can secure with internal borrowing. Such a move also could negatively affect the state's credit rating, making future borrowing even more expensive.
"In essence, it's taking a subprime loan for the state, and it comes with greater costs," said state Controller John Chiang.
...Unlike last year, when the state started with a $10 billion reserve, finance officials say California begins planning for the 2008-09 fiscal year with far less cash on hand.
Chiang said state accounts continue to deteriorate as a result of housing and stock market losses. Those factors, coupled with continued growth in state spending, would trigger a cash shortage.
It's a shame. I've noticed a lot of nice new state buildings that have popped up recently. Looks like CA may have also gotten a little to caught up in the housing boom.
No way this is an isolated/single tree incident - there are so many municipalities that have skated by on promises of ever-greater future pension and health payouts to retirees while refusing to raise taxes that it's just not possible that at this point in the cycle we won't see others begin to drop. I would be willing to bet we could even see similar troubles at the state level. How on earth does New Jersey close that deficit? How does California?
The cities to watch are in my opinion the Inland Empire boomburgs. They've got some incredible infrastructure debt and a large reliance on special assessment districts with funding tied to property.
Yet ABK is still AAA
In Ca we have this tree called General Sherman. Look it up. If this thing fell it would take a whole lotta trees down with it. Didn't the gov't guarantee pensions from the old steel mills? The Pension Guarantee corp I think its called. I also heard that its bankrupt though.
The emphasis here really should be on "ballooning labor costs" more than "declining house prices". Vallejo is a relatively small poor municipality ... but their fire and police municipal staff are some of the best paid in the greater Bay Area. The city is facing some truly enormous pension costs.
You folks are funny. Haven't you heard? Housing costs have been off the charts for years. No one could possibly afford to live in SF on a "normal" firefighter salary. Of course the city workers made high salaries.
Won't this help in the long run? From my experience in playing video games, if you are losing a good strategy is to hit the reset button. Sure you piss off whoever you are playing with, but isn't it better to hit the reset button sooner?
Personal bankruptcy leaves what, a 7 year black hole on people's credit scores? Isn't it better just to reset the whole thing now, when we are only down 30-0 and take our 7-year medicine rather than hold out until the score is 100-0?
I have zero idea if this idea transfers over to municipalities, but now this city will at least live within their means for a little bit.
I suppose as a country we could be entering some 20 or 30 year period were numerous states cycle into and out of bankruptcy for a period of time... at least better to have some go through this sooner than others...
The future looks guaranteed to be painful!
YSLP,
Yes - the fight is all about who is going to do the hurting...
You folks are funny. Haven't you heard? Housing costs have been off the charts for years. No one could possibly afford to live in SF on a "normal" firefighter salary. Of course the city workers made high salaries.
And now the municipality is bankrupt, aren't you clever! Looks like throwing money at the problem didn't work! Maybe next time, you can try a strategy that doesn't implicitly peddle the treasury for union votes.
YSLP,
Agree 100% hit the reset before you lose.
California needs its version of TABOR.
In my county, Fresno County in central California, county jobs were the second fastest growing job sector for three years, aside from housing. I am predicting a bankruptcy or massive layoffs. Our county is, like other California counties, under the power of the monopoly union.
And yet, government hiring is powering the employment statistics.
CA's legislature is always late with the budget. I'd expect this one to be no different -- probably worse as the issue is how to fill a $20B hole.
IMO, the real elephant in the room is prop 13's limitation on property taxes. A lot of the gap could be made up there. Of course, the impact on housing values...
The other idea would be to simply stop prosecuting MJ convictions and let all of those people out on the street again. The prison system is a big drain on the budget as well...
DonKei
FWIW I live in Homewood, Jefferson County Alabama
"Bob Dobbs,
Ah! Back in the days! I grew up in Fairfield back in the 50s and remember ahem, certain districts. I also remember that it had a rather vibrant black community."
Oh yeah. Vallejo. I'll never go back, but I'll always have a soft spot for it. God knows why.
Fairfield is Vallejo's smarter brother. Vallejo just wallowed in federal money while Fairfield, which also was a military town -- and still is -- put money into industrial development, new roads, education, etc. If Travis AFB was to shut down -- fat chance -- Fairfield would be in much better shape than Vallejo is now.
Fidelity is trying to convince me to put my cash into a tax-free CA muni money market fund.
I have my doubts that this is a good idea right now. Seems like a train wreck waiting to happen. Thoughts?
Fidelity is trying to convince me to put my cash into..... Thoughts?
It's probably good for Fidelity. Maybe not so good for you.
Kis:
Although Vallejo may be a worst case, all up and down California cities are trying to figure out how to meet their bills as revenue from every source drops. California cities depend on a great deal of their funding from the state as well, more so than many other states, so one decision at the state level can affect the funding for all cities.
It's more of a gamble than it used to be. I wouldn't trust Fidelity: they just want the sale.
Has a municipality ever gone all the way thru with a bk filing?
And if so, how has the city fared coming out the other side?
Is there a precedent for this?
SS writes:
...the issue is how to fill a $20B hole.
IMO, the real elephant in the room is prop 13's limitation on property taxes. A lot of the gap could be made up there. Of course, the impact on housing values...
How does that work? Right now property taxes are allowed to rise 2% per year. Repeal Prop 13 and it would take a vote of the people to raise property taxes. Sounds like a formula for less tax revenue to me.
Bankruptcy was the best option that Vallejo had. Salaries for fire fighters was a very big portion of their budget. Vallejo firefighters were paid more than the surrounding ones. The bankruptcy will give them a chance to redo those contracts and give the city some breathing space. It has a ferry terminal and a nice bayfront. There is some potential for a nice main street there.
Vallejo is in Solano county which leads the Bay Area counties in #of foreclosures. A lot of people got their first home there because it is on the outside of the Bay Area and somewhat cheaper. Unfortunately the subprime loans caught them.
Someone stated that public sector employee compensation is OBSCENE. That is the truest statement of the year. Look at the salary tables at the SF Chronicle (sfgate.com). It is absolutely out of control. Yeah, I like cops and firemen - but they are way, way overpaid and they really don't do that much. Vallejo spends 74% of its budget on cops and firemen. How many fires are there? 10 Vallejo firemen were paid over $200K last year - 100 made over $100K. I would rather let the fires burn and get a 74% cut on my taxes. The next time I get a call from one of those police benefit organizations (which I often contribute to) I am going to ask them to give me money. San Francisco could go BK too - except they can just keep raising the parking fees and fines.
Repeal Prop 13 and it would take a vote of the people to raise property taxes
I believe that's backwards. Prop 13 requires a vote-of-the-people to raise property taxes. Without 13, the legislature could (and did) set taxes.
IIRC.
"Has a municipality ever gone all the way thru with a bk filing?"
Not a municipality, but Orange County did. Don't know about how well they did. CR would know. CR?
A bizarre redefinition of the concept of retirement in the public sector is at the root of the problem. Used to be that retirement = a comparatively brief period of living quietly at home, not working, hopefully not starving, winding down one's life. Now it's decades of high consumption vacation financed by hefty deferred compensation masked by the term "pension." Cruises, RVs, second homes, free healthcare, survivor benefits, and on and on.
Nuckin futz, imo.
"A bizarre redefinition of the concept of retirement in the public sector is at the root of the problem. "
What you say is true, but it goes beyond that. Retirement for many civic workers in California, especially public safety, is based on an average of their last three years' salary including overtime.
So cops and firemen routinely volunteer for all the overtime they can in their last three years and shoot their "average" salary far over base. And are rewarded for it ever after.
That said, my brother-in-law the fireman, who did all the above, justified it by saying that firemen have a shorter lifespan because of all the crap they breathe, despite the respirators. He died at 58, three years into a medical retirement.
.
I watched the last 2 1/2 hours of the Vallego city council meeting last night as they streamed it on the internet. Yea I know get a life. I was also watching the Texas/Seattle baseball game so multitasking!
The whole 6 hours and 59 minutes of it is now on their web site @
City of Vallejo - Current City Agendas
Plus I started a "string" over at ticker forumn that captured others comments as we all watch.
Did Vallejo, CA Vote Bankruptcy Tonight (Tuesday) - YES!!! [General] - MarketTicker Forums
I HAD THIS BAD FEELING WE WERE WATCHING A PREVIEW OF THE US CONGRESS DECIDING TO FILE BANKRUPTCY AND DEFAULT ON TREASURES.
NOW THAT IS SOMETHING TO KEEP YOU UP AT NIGHTS.
.
I did a quick check of the federal court statistics and it looks like there have been 5-10 Chapter 9 bankruptcy filings each year for the past decade.
Bob Dobbs,
The thing is that when you look at death rates, firefighting is a fairly safe profession. The really dangerous jobs are the ones you might not expect, like being a gas station attendant. I also find it funny that urban firefighters (who have the safest jobs) typically are paid over $100k per year while the wildland firefighters (who face actual danger) often only make around $30K.
California cities will be facing these kinds of problems until public employee compensation (especially for public safety employees) is brought under control. In my town, the cops and firefighters all make over 100K while the median family income is only 75k. This is way out of proportion.
JoeB sez:
"I would rather let the fires burn and get a 74% cut on my taxes. The next time I get a call from one of those police benefit organizations (which I often contribute to) I am going to ask them to give me money."
FYI: Those "police benefit organizations" that call you on the phone are scams 95% of the time. In SoCal, the PD's have openly discouraged people from donating to them; they say they are not related at all.
And just who else will provide medical response to your heart attack or car accident? Some homeless guy who witnessed it?
SeattleSun,
The feds have a singular advantage that no other strata of governance has; the printing press.
Vallejo used the nuclear option. It is my hope that the result is a wake up call to police, fire, DWP, prison guard, CHP, Caltrans, et al about their compensation structure. We have people pulling two full pensions and a full salary. Things have to change.
Bob Dobbs,
Orange County came out of its bankruptcy pretty well. The biggest impact to residents is that some freeways that were planned to be free got built as toll roads (and work better because of it). Then again Orange County's problems were much less systemic than Vallejo's (OC had an overly aggressive pension fund manager who racked up over a billion dollars in derivatives losses IIRC).
Right now property taxes are allowed to rise 2% per year. Repeal Prop 13 and it would take a vote of the people to raise property taxes
Prop 13 should be repealed for commercial and rental properties.
This should be obvious since taxation of the landlord's rents cannot be passed on to the renter.
Ideally, the tax system should be a Split Tax, where capital improvements are not taxed at all.
cf Georgism, which got its start in SF, then was eventually memory-holed by the moneyed interests.
Rob Dawg,
The true nuclear option in this case would have been to lock out the public employee unions. I think it likely that the county sheriff would be obligated to respond to 911 calls even if the city PD were locked out.
Rob dawg what is the DWP? I don't know any public safety workers who are pulling in 2 pensions. I think you have to differentiate between workers and Administrators although both are overpaid.
Ravenor,
The other nuclear option would be what Half Moon Bay is considering - to dissolve the city and let the county take over. Of course, as a politician that's not necessarily the most desirable one because you don't have anything to govern anymore.
Thanks to Prop 13, residential development rarely generates enough income for a city to pay for the needed services. Vallejo's leaders refused to allow a Walmart; and there has been minimal redevelopment at the old Navy base. Had it increased its retail base, it could have made it through without bk. The city leaders were much worse at planning than their neighbors. So I don't think it is a systemic problem - there may be other badly managed towns, but most will make it through.
In all of this lets not forget all the administrators in Vallejo who make over 200k a year to preside over the bankruptcy.
Ravenor,
I am not sure but I think public safety employees are not subject to lockouts by the same practice that forbids them (makes near impossible to legally) to strike.
Chapter 9 looks like the right thing. "you won't negotiate? Fine, see how you like being unilaterally recontracted by a special master."
Tim,
Drawing two pensions is VERY common among firefighters. You have to have worked for a department that has its own pension system and one that uses Calpers. If you play it correctly you can make both Calpers and your local department pay your full pension and retire with higher pay than the $150k/year you made when you were working (a relative of mine is doing just that).
Vallejo used the nuclear option. It is my hope that the result is a wake up call to police, fire, DWP, prison guard, CHP, Caltrans, et al about their compensation structure.
Ya know, I'd like to think it would be.
But then I remember the saga of Continental back in the early '80s, and how bankruptcy was used as a "nuclear option" against the incessant and overbearing demands of the unions.
And it worked. For them. Once.
Did the airline unions take it as a wake-up call? Not so much. Instead they dedicated the next decade to lobbying Congress to ... change the bankruptcy laws to make union contracts harder to discharge! Poof - problem solved!
Why would anyone expect a more optimistic outcome when it comes to our public-sector unions?
Rob Dawg,
You are very likely correct. I find your posts here to be generally very thoughtful and informative. Keep 'em coming...
I am surprised by everyone who is so Anti-Hero. So what these guys pull in 150k plus medical care over a twenty year retirement.=) Who cares let the Muni bond holders pay for it
Tim writes:
Rob dawg what is the DWP? I don't know any public safety workers who are pulling in 2 pensions. I think you have to differentiate between workers and Administrators although both are overpaid.
DWPs are water and power. Semi-autonomous government service providers.
The police chief of Fillmore I believe is pulling two and serving.
My experience is that administrative positions have been cut beyond reasonable and prudent thus leaving many municipalities with unresponsive hidebound departments with waste and resistance to change.
To see how overpaid CA municipal employees are, you can get their names and salaries here:
Bay Area Cities' Over-$100,000 Earners
or here:
State Salaries - Sacramento News - Local and Breaking Sacramento News | Sacramento Bee
Note that these two databases are different and neither is complete, it will give you the idea.
Forensic economist writes:
Thanks to Prop 13, residential development rarely generates enough income for a city to pay for the needed services.
This is classic munish¡t as delivered by the elitist urban planner overlords. Not even close to true in practice. Municiplites hate Prop 13 and will say any lie as long as it involves dissing Prop 13. The usual line is "roads, sewers, water, landscaping, lighting... how can the city pay for these?" Newer developments in California get roads, sewers, etc. donated to the city plus assessment districts. Municipalities have been using development fees and districts to supplement existing budgets for more than a decade.
It's obvious these pension schemes are unsustainable... heck, most lawyers won't have that kind of income in retirement.
But what interests me more is not the municipal situation, it's the state and federal situations. I'm sure state pensions are just as out of control in many cases, and the 14th Amendment prevents states and the federal government from using bankruptcy to repudiate debts. It's unclear whether the states will be able to wiggle out of this. I suspect the only alternative is going to be enormous state tax increases, as Kotlikoff and others have been predicting for a while.
flarn2 - I did not mean to denigrate the valuable service that firemen and law enforcement do - but, the question needs to be asked - how many do we need and how much should we pay them? $200K for life with full medical benefits and retirement at age 50? How often has anyone on this blog ever had a house fire and the need to call an ambulance? Obviously we need these services - but I think that most fire departments are vastly overstaffed and underworked. These guys rarely do any real work. Why are they paid like prices? And the cops (at least in San Francisco) don't solve many crimes. I'm glad they are around - but what we need are more responsible citizens. Has anyone ever had to call the police because of the actions of anyone on this blog? Look, I support and respect our public safety servants - I just think that they are paid way too much for the actual work they do.
JoeB mostly agree. Where do you work in SF?
Regarding investing in Muni bonds, I don't see the point. For that matter I wouldn't invest in corporate bonds or bond funds either. I would rather invest in stocks that provide a good dividend and provide for the possibility of growth also. I look at it like, if I want to risk some money I'll put it in the stock market rather than the bond market. With a bond, you're sitting there for years wondering if you're going to get your principle back if the corp or muni goes bankrupt. The bond market isn't that liquid and you have both interest risk and investment risk that could cause your bond to lose a lot.
In summary, If you want a "safe" investment, just buy a CD, if you want some risk, invest in stocks.
The above is not investment advice.
Regarding CA financial problems, lets face it, state taxes are going up. I would rather see income taxes rather than property taxes go up. Property taxes are like trying to get blood from a turnip.
Matt writes:
In my county, Fresno County in central California, county jobs were the second fastest growing job sector for three years, aside from housing.
Matt - I thought meth was the growth industry in Fresno County.
Tim - I'm in East Bay (where my town and many others and CoCo county are facing budget issues). The thing about the Vallejo crisis and the Chronicle's publishing the tables of public employee salaries was how surprising it was to most people that there are so many high-paid positions in these public agencies. Most people I know where stunned - I guess we weren't paying attention and asking where our tax dollars we're going. It's not just cops and firemen - how about $140K for an assistant welder in SF? How about all the $120K water meter readers? And the UC system is the worst offender. Just check out the database at sfgate.com.
Look, I support and respect our public safety servants - I just think that they are paid way too much for the actual work they do.
Wow, that was brave!
I think it's kind of curious how much we love to under pay some folks in society and over pay others. Perhaps the best answer is that we pay what the market demands. In high cost of living areas, you have to pay more to get folks to teach your kids and pick up your garbage (human or otherwise).
Paul - the marketplace determines the salaries of private security guards, private ambulance services, and private school teachers. I think that the public service unions and our gov't officials have well insulated themselves from the market. At least until our cities go bankrupt (or the taxpayers revolt).
JoeB: OK - you think unions are unfair. We just disagree.
Anonymous writes:
Can California be far behind?
Infinitely far behind, I would guess, since there's no concept of bankruptcy protection for a state. People (myself included) often equate bankruptcy to running out of money, but they are different things.
Bankruptcy is good for cities: it lets them force new labor contracts with unions which otherwise won't budge on their demands, and renegotiate (partially default on) debt obligations, for the low price of a hit to credit ratings.
Running out of money, on the other hand, is generally a bad thing. When the state runs out of money, it'll run a deficit through accounting gymnastics for a while, as borrowing costs increase (as it has been doing to some extent, even during good times). It's when the state can't borrow money any more that the "really bad things" happen.
When Fire Departments have open position calls the ratio is hundreds, sometimes thousands of applicants for every slot. All I want is pay and benefits reduced until there are mere dozens of qualified candidates for each opening.
If you let every residence burn to the ground when combustion occurred NOT due to arson, and rebuilt them on some larger insurance pool policy,
it still would be many, many times cheaper than keeping fireman on at overinflated wages...just so they can watch movies on their barcoloungers and barbeque, and cheat on their wives.
To Rob Dawg - I wasn't talking about the capital cost of infrastructure - that is often paid by the developer - but the operating cost of a subdivision: police, fire, road maintenance - not to mention schools etc. Which is why city governments in California compete for sales tax generating businesses. The Vallejo city government was too stupid to do so - much of the new commercial development went to Fairfield or Vacaville down the road. Which is why Fairfield is not going bankrupt. In other words, Vallejo may have gone bankrupt even without the housing crisis - it was that badly managed. Are there other badly managed cities? Yes. Is there a systemic municipal crisis? No - but badly managed cities on the edge of disaster will be pushed over.
Agree that Rob Dawg always makes great points.
OT -- The Revolt of the Renters in NY Sun
I don't understand this. Where I live, we've got a mil rate. Total of all assessed property values x mil rate = revenue from property tax. The mil rate gets adjusted. Are there screwball states/counties where the mil rate DOESN'T get adjusted, such that tax revenues rise and fall in lockstep with assessed real estate values? Because that would be just retarded, the opposite of best practices.
Forensic economist writes:
To Rob Dawg - I wasn't talking about the capital cost of infrastructure - that is often paid by the developer - but the operating cost of a subdivision: police, fire, road maintenance - not to mention schools etc.
The operating costs for nearly new infrastructure of the types approved in the last decade are tiny and almost always incremental.
Second, you mention schools. They are often independent of municipalities. They are IMO some of the worst liars. For instance you might hear that California is 27th in school spending. Well, not exactly. You see State issue general obligation bonds that go to schools are counted like they are in other States. And then there's funny little quirks like semi-autonomous special learning centers within schools.
California local spending is more opaque than a movie director's expense report.
Ralph Cramdown,
Prop 13 in California essentially has that effect. Prop 13 does 2 things, it caps the maximum property tax rate at 1%. It also caps increases in assessments to 2% per year, which is below the rate of inflation. This means that when property values fall everyone who's house is worth less than it was when they bought it + 2% per year has their property reassessed to the lower value. It's retarded, but it is also popular.
Many local and state governments, I suspect, are headed for this type of trouble. Compensation for employees per actual hour of work far exceeds comparable private sector jobs here in Ohio.
The city should cut spending and raise its taxes. What's the big deal. No sane judge will agree with the bankrupcy.
John Moorlach and Chriss Street have invested hundreds of millions of dollars into SIV's that are now worthless. Orange County CA will also file bankruptcy...again.
Lastest.
Troy:
Prop 13 should be repealed for commercial and rental properties.
This should be obvious since taxation of the landlord's rents cannot be passed on to the renter.
Not in the short term, but in the long-term because it reduces supply. Please not another renter-discriminating legislation!
Agreed.
I own a house only about 40 miles from Vallejo-aka. Illegal Immigrant Central. I expect all of the surrounding valley cities to drop like dominoes soon. I paid 360k for my fairly modest house in 2004, and I couldn't even short sale it for 250k at the moment. All it takes is for 1 in 100 homes to tank, and California easily has 1 illegal for every 10 people. They gave them houses with ITIN numbers in place of SS numbers on stated income. Realtors professed that ITIN numbers were equivalent to SS numbers for buying houses, which can't be further from the truth according to the IRS. They were making decent money during the housing boom, so they could afford the teaser rates. The median price in my city was around 7x-8x the annual household income at the peak. It still has a way to go before it settles to a more reasonable 3-4x (which is where I was at when I bought). Bottom line- get the hell out of California. Move to a place where the median home price is less than 2x your annual income. California isn't all that great. The tacos were good.