Prichard Alabama Files Bankruptcy Over Pensions; Wildcat Strike In Philadelphia; Oregon's Financial Gamble

Inquiring minds are noting another city has been driven to bankruptcy because of pension promises that cannot possibly be met.

Please consider Prichard Alabama Files For Bankruptcy.

Prichard Mayor Ron Davis released the following statement Wednesday morning:

?I have looked at every opportunity available to obtain money to help fund the retirement plan for the City of Prichard. After careful review of all of our options, bankruptcy protection seems to be the only solution left at this time.

Over the past 50 years, the pension plan was amended by the Legislature more than fifteen times, and always the economic burden on the City was increased. This has been a long term problem that was unfortunately inherited by this administration.

After several lawsuits filed by pensioners, it has forced us to come to this decision, one that will protect the city and its residents. I hope that a solution can soon be found that will be fair to all. As Mayor, it is my duty to make sure that the City of Prichard continues to move forward by providing essential municipal services and to operate for the benefit of its citizens.?

Commuter Strike in Philadelphia

The unions in Philadelphia have not gotten the message there is no money and their over-bloated pension plans are unsustainable.

Proof of the above is in the Philly report SEPTA strike catches commuters off guard.

Tue, Nov. 3, 2009
Hundreds of thousands of commuters scrambled this morning to find a way to work or school after SEPTA's largest union staged a surprise predawn strike, shutting down all subway, bus and trolley service in the city.

The walkout by Transport Workers Union Local 243, which began at 3 a.m. and caught commuters off guard, also affected Frontier Division buses in Bucks, Montgomery, and Chester counties.

The walkout even caught some members of the striking union unaware. Sly Wagner, a train operator for 17 years, showed up at the Fern Rock station ready to go to work. "I'm like everybody else," he said. "The only way I found out was when I went to the station and the gates were locked."

In the end, it was a difference over wages that sparked the walkout. Earlier Monday, transit officials disclosed that both sides had reached a tentative agreement on health care and were reportedly close on wages.

"Nobody wants to leave something on the table," U.S. Rep. Bob Brady, who had been involved in the negotiations since last week, said during yesterday evening's break.

But union president Willie Brown, in a telephone interview, painted a different picture early today.

"They wouldn't provide the proper numbers" during negotiations, Brown said. "When it comes right down to it, they've underfunded our pension for years."

Governor Rendell said the union chose to walk away from an "excellent" contract offer that includes 11 percent in wage increases over five years, and 11 percent increase in pension contributions, and no increases in workers' contribution for health care.

"Think about that," Rendell said. "Whose pension has been increased in this day and age?"

SEPTA's 5,100 unionized bus drivers, subway and trolley operators earn from $14.54 to $24.24 an hour, reaching the top rate after four years. Mechanics earn $14.40 to $27.59 an hour.

I would offer the unions a take it or leave it pay cut to $12.00 an hour. The city would be flooded with workers willing to take that wage. Pensions need to be cut, not added to. It is nearly unbelievable that unions would walk out that way when so many are unemployed begging for any job.

Lorain Ohio Budget Woes

Please consider Lorain asks unions to take pay cut in order to avoid layoffs.

As many as 39 employees could be laid off if Lorain city unions do not agree to take a 7 percent pay cut or City Council does not find ways to quickly bring cash into the city.

Mayor Anthony Krasienko's administration sent letters to bargaining unit presidents Wednesday afternoon asking them to consider pay cuts in order to avoid layoffs. Layoff notices will be sent Monday if the units decline to accept the pay cut. The layoffs will most likely be made based on seniority, according to the administration.

The Lorain Ohio Patrolmen's Benevolent Association Telecommunications and Fraternal Order of Police Lodge 3 declined to take a pay cut. The International Association of Firefighters Local 267 will not even respond to the request, union president Jonathon George said.

"As far as Local 267 is concerned, we are currently under an agreement that prohibits the city from laying off any of our members," George said. "Therefore, there is no need for us to entertain, much less respond to, any threats of such action from the administration. Until written notification of the city's intention to opt out of the current agreement is received, it would be inappropriate to enter into any discussions of layoffs for the remainder of 2009."

Buddy Sivert, president of FOP Lodge 3, said the city improperly asked his group to take a pay cut and he will not take the request to his membership. Instead, he said he hopes City Council will find ways to generate the income necessary to keep the police force at its current level.

The article does not detail the budget shortfall but if it is severe enough (and I suspect it is both severe and growing), I recommend the city to declare bankruptcy.

The unions can then see what they can get out of bankruptcy court. Please see Judge Rules Vallejo Can Void Union Contracts for a synopsis of the situation in Vallejo, California.

Alternatively or in addition to bankruptcy, the city just ought to privatize everything it can, including the fire department.

Houston Is Bankrupt

In case you missed it, Bob Lemer, CPA, Retired Partner at Ernst & Young; Aubrey M. Farb, CPA, Retired Partner at Grant Thornton; and Tom Roberts, CPA, Retired Partner at Fitts Roberts have combined to declare the City of Houston is Bankrupt.

The culprit is pension benefits.

Gambling Over Pensions In Oregon

Inquiring minds are concerned about Oregon's Financial Gamble.

A financial investment that has helped fill gaps in pension funding since 2002 quickly turned sour with the stock market's misfortunes last year, losing $1.9 billion for nearly 140 government agencies in the state, according to a Statesman Journal analysis.

The investment strategy called for selling bonds and investing the proceeds. It was backed by the financial companies that stood to profit from the investment move.

That financial gamble might force school districts, cities and counties to consider layoffs or service cuts in 2011, when pension contribution rates reset. That amount will reflect 2008-09 investment returns, including 27 percent losses in 2008.

In 2001 and 2002, state legislators passed laws that essentially allowed, for the first time in Oregon, the majority of public agencies to "refinance" their pension obligations by making a financial move called arbitrage.

Here's how arbitrage play works: Cities, counties and school districts took advantage of low interest rates at the time and issued pension bonds. They then deposited bond proceeds into "side accounts" with the state pension system. The side account created a way to invest bond proceeds with other pension assets in the investment portfolio.

If the rate of return on the investments (say, 8 percent) is higher than the bond interest rate (say, 5 percent), the agency makes money on the difference (in this example, 3 percent). That translates into a savings to an agency's pension costs, as the difference helps an agency pay its pension contributions.

PERS, Oregon's Public Employees Retirement System, aims to earn 8 percent return on its investments. Historically, pension investments earned 10.25 percent from 1970 to 2008, said PERS actuarial-services manager Dale Orr.

Since 2002, agencies have issued pension bonds with interest rates of 4.7 percent to 7 percent, according to a Statesman Journal analysis of bonds issued in Oregon.

A handful of agencies issued bonds with a 7 percent interest rate, according to bond data from the state treasurer's office ? a smaller margin than most for the arbitrage play.

"If everything goes right ? but of course, there's risk," Orr said. "There is risk that our portfolio won't earn 8 percent."

'Caught up in the ? mania'

In Oregon, more than 90 percent of the 140 agencies that issued pension bonds did so from 2002 to 2005, according to a Statesman Journal analysis of pension bonds in Oregon. The time frame is significant because it coincides with the housing market boom, Thoma said.

"There's an exact parallel," Thoma said. "It's the same things that were happening in housing: People were convinced that there were these riskless ways to make money. It turns out it wasn't risk-free. People wanted to believe that housing prices would always go up. They wanted to believe that this time was different."

'Looming crisis'

In a year, the economy unraveled and the arbitrage play showed signs of running into problems.

The housing boom busted. Financial giants failed. Lending tightened and borrowing stalled. Investments nose-dived. Unemployment soared.

As a result of one investment year, Oregon's unfunded actuarial liability in the pension system skyrocketed. In 2008, pension investments lost 27 percent, the largest loss in the agency's history.

"Our investment strategies are for the long term, and we recognize that the market is going to be volatile," Orr said. "Twenty-seven percent is a lot to try and recoup. Most likely, it will not be recouped in one year or even two years."

Borrowing Money At 5-7% Betting On The Stock Market Is Madness

It is economic madness to think risk-free returns of 8% can be had when 2-year treasuries are yielding .9% and 10-year treasuries are yielding a mere 3.4%. The years 1980 to 2000 are NOT the norm. In 1980 one easily could have locked in 12% returns just by throwing it all into the 30 year long bond.

Moreover, pension funds cannot count on dividends. Please consider the Dividend Yield for Stocks in the S&P 500.

139 S&P 500 stocks do not have any dividend. The average yield for the group is a mere 1.84%.

I think pension plans will be lucky to average 5% a year for the next 5 years. Indeed it is quite likely the bottom in equities is not even in. If that pans out we might see negative returns for the next 5 years.

Even IF the bottom is in, the best one can hope for in a buy and hold index strategy is 5-7% The pension plans need 8% in a 3%-5% world. It cannot be done.

Expect More City Bankruptcies

Expect to see many plans blow up betting the bottom is in or chasing risk because they need 8%. We are in a major pension crisis and this one is not going to blow over. Meanwhile the unions in Philadelphia are on a wildcat strike asking for more.

The mayor needs to show them the door. Unless he does, I can predict the future. The future is Prichard. It's already too late for Houston and Detroit. It's probably too late for Baltimore as well. Please see Time for Baltimore to "Pull a Vallejo" and Declare Bankruptcy for details.

Look for more city bankruptcies over wage and pension benefits. They are without a doubt coming.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction.
Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

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