The Week in Public Finance: Fight Club Edition

This week's roundup of money (and other) news that governments can use.

The city told a judge it would need to end its union contracts with police and fire in order to exit bankruptcy.
FlickrCC/shawn alladio

San Bernardino picks a new fight

The same day it finally reached an agreement with the nation’s largest pension fund, bankrupt San Bernardino, Calif. turned its sights on the city’s firefighter’s union. In a June 19 hearing, city officials told a judge that in order to properly get out of bankruptcy, it had to terminate its public safety union contracts.

The city is in talks with both firefighter and police unions. If those fail, Bloomberg News reports, the city may try to use a federal bankruptcy law to cancel the contracts. The news comes on the same day that San Bernardino and the California Public Employees’ Retirement System announced they had a deal. After it filed for bankruptcy in August of 2012, the city took an unprecedented step and stopped making payments to its retirement system for a full year. CalPERS said San Bernardino owed it more than $16 million plus interest. The details of this week's deal have not yet been made public.

Now that the city has shifted to tackling its public safety unions, firefighters are preparing to strike back. (The city appears close to a deal with police.) In court this week, San Bernardino officials said they evaluated average annual pay for the top 120 firefighters and found it ranged from $130,000 to $190,000.

The San Bernardino Professional Firefighters Association responded by filing a brief alleging that the city had $75 million in “stockpiled” money. The city immediately issued a detailed statement refuting the claim, noting that the funds were in fact restricted and could only legally be used for certain, pre-determined purposes.

“The SBCPF union is aware of the restricted nature of these funds and we are disappointed that union leadership is attempting to confuse and mislead residents,” Mayor Carey Davis said in the statement. “The budget and bankruptcy process is already an arduous process and spreading misinformation to union members and city residents is simply irresponsible.”

D.C.’s new CFO takes on council over budget

Washington, D.C. CFO Jeff DeWitt sent the city council back to the drawing board after the legislative body made changes to the mayor’s 2015 budget that DeWitt said render it unacceptable. Specifically, the council added in an income, business and estate tax relief provision recommended by the city’s Tax Revision Commission earlier this year, but did not also throw in the commission’s recommended policies to pay for that tax decrease.

Instead, the council said the city could cover the difference with cash from its PAYGO fund, which is the account the city uses to pay in full for capital improvements (so it doesn’t have to finance everything). In a letter to the council chairman, DeWitt, who started his job last fall after the 2014 budget was approved, said that the council's solution to the tax relief had two major problems. One, it lacked a long-term vision as using cash to cover the tax break is a one-time solution to an ongoing budgeting item. (For more examples of budgeting gimmicks, check out this month’s Finance 101 feature, The 7 Deadly Sins of Public Finance.)

“Thus the net revenue loss from tax cuts increases from approximately $3.3 million in FY 2015 to over $174 million per year by FY 2020,” DeWitt said in his letter. As a result, he said, “the Council’s proposal removes over $513 million in PAYGO during the six-year capital plan period, a significant source of financial flexibility.”

The kicker is the second problem. If the city wanted to keep up its capital improvements, it would then have to finance the projects it would have paid cash for instead. That would put D.C. over its legal debt limit starting in the 2018 fiscal year. (The city’s self-imposed borrowing cap is 12 percent of its annual general fund expenditures, which this year totals around $7 billion.)

DeWitt said that the council could keep its tax cuts if it also implements some of the revenue-generating measures recommended by the tax commission such as phasing out some exemptions for high-wage earners or broadening the sales tax base. The city could also begin instituting the cuts, most likely in a delayed fashion, if revenues begin exceeding forecasts. D.C.’s new fiscal year starts on Oct. 1.

Public pensions fire back at SEC

Major government associations are chastising the Securities and Exchange Commission’s Daniel Gallagher for his public slamming of pension fund management during a speech he gave last month at a Municipal Securities Rulemaking Board summit. You may recall that Gallagher took a hard line on the way that public pension fund liabilities are calculated, chiming in on the side of conservative-minded economists who say that funds hide their true liabilities. In particular, he pointed to the now familiar argument about which discount rate to use in calculating a pension’s liability (the higher the discount, or investment rate of return, the lower the assumed liability).

Gallagher accused plans of not being transparent and for playing numbers games. This week, in response, 11 government associations including the National Governor’s Association and the National Association of State Retirement Administrators, called him out for highlighting a few bad apples. “We understand the SEC’s interest in appropriate disclosure of state and local government pension obligations,” the June 16 letter said. “However, your comments could lead many to believe that the disclosure issues are systemic, rather than individualized problems.”

Almost snidely, the letter adds that the commissioner “may not be aware of” governments’ actions in this arena and goes on to list the many types of pension reforms that they have implemented in recent years to manage their liabilities, in addition to establishing a pension funding task force that made recommendations to elected officials. The letter concludes by offering to discuss these reforms and upcoming disclosures changes further with the commissioner. 

Liz Farmer is a former GOVERNING fiscal policy writer.