Compare and Contrast

[giandujakiss]

San Diego and San Jose Lead Way in Pension Cuts

Residents of San Diego and San Jose voted overwhelmingly to cut the pension benefits they give city workers. And they did so in a way governments traditionally avoid: moving to cut not just the benefits of future hires, but also those of current city workers...

It is not just Republicans seeking savings. Mayor Rahm Emanuel of Chicago, a Democrat, has been seeking to suspend the annual automatic cost-of-living adjustments for retirees.

In Illinois, which has the nation’s largest unfunded pension liability, Gov. Pat Quinn, a Democrat, has been struggling to reach a deal with lawmakers that would cut the pensions of current workers without running afoul of the pension protections in the state’s Constitution. And in Providence, R.I., unions are being asked to ratify a tentative deal their leaders made last month with Mayor Angel Taveras that would suspend the cost-of-living adjustments for retired city workers.

Many states and municipalities are struggling with rising pension costs. In many cases benefits were set when the stock market was booming and investments seemed to deliver nothing but gains. It was widely assumed at the time that investment returns would cover most of the cost of people’s pensions.

Now, though, the expected investment gains have fallen far short, and municipalities everywhere must make up the missing money, sometimes by raising taxes, sometimes by cutting government services. Laws and court precedents in many states have long been interpreted as saying that public workers’ pensions cannot be reduced.

NB: The reason the law says they can't be reduced is that these are contractual rights; part of your salary for your work is your pension.

The union representing San Jose police officers filed a lawsuit in Superior Court on Wednesday seeking to block the cuts, arguing that they are illegal under California law and that they violated the vested rights their members have to their pensions.

Mayor Chuck Reed of San Jose, a Democrat ... said he expected other cities to follow San Jose’s lead.

How Banks Could Return the Favor

LIKE millions of homeowners, shrewd state and local governments are looking to refinance. Interest rates have hit rock bottom. So why not save some public money by replacing old debts with new ones at lower rates.

The bad news for taxpayers is that such easy refis are out of the question for many governments and agencies short on cash. And that’s because these borrowers have been trapped by Wall Street.

Behind all of this is — you guessed it — derivatives. Bankers have embedded interest-rate swaps in many long-term municipal bonds. Back when, they persuaded states and others to issue bonds and simultaneously enter into swaps. In these arrangements, the banks agreed to make variable-rate payments to the issuers — and the issuers, in turn, agreed to make fixed-rate payments to bond holders.

These swaps were supposed to save the public some money. And, for a while, they did. Then the financial crisis hit — and rates went south and stayed there. Now issuers are paying bond holders above-market rates as high as 6 percent. In return, they are collecting a pittance from banks — typically 0.5 percent to 1 percent.

Why not just refinance the old bonds? Well, if you think it’s costly to refinance a home mortgage, try refinancing a derivatives-laced muni. The price, in the form of a termination fee, can be enormous. New York State, for one, has paid $243 million in recent years to extricate itself from swaps-related debt. That money went straight from taxpayers’ pockets to Wall Street.

LAST week, a study was published by the Refund Transit Coalition, a group that supports public transit, detailing some of these harmful deals. Entitled “Riding the Gravy Train,” it said it had found 1,100 swaps deals at more than 100 government agencies that are costing taxpayers $2.5 billion a year.

When issuers do decide to escape these snares, the hefty termination fees are typically paid for with new debt deals. For example, of the $243 million that New York State paid to terminate its swaps deals recently, $191 million was financed by new debt issuance. This may dull the immediate pain, but it only adds to taxpayers’ burden by piling an interest rate onto the termination cost.

The trillion-dollar question is why debt issuers don’t push the banks to cut or reduce these exit fees. Yes, swaps are contractual arrangements that were agreed to in better days. But issuers that raise a lot of money in the debt markets have considerable leverage, given how much they pay Wall Street banks to underwrite their debt.

In New York, for example, the Metropolitan Transportation Authority plans to issue $2.2 billion in new debt this year and may refinance an additional $6 billion.

Why doesn’t the M.T.A. use that leverage to prod banks to lower exit fees on some of the $3.3 billion in debt issued with swaps? Patrick McCoy, the M.T.A. finance director, was asked precisely that when testifying in a recent arbitration case between the Amalgamated Transit Union and New York City Transit.

First, Mr. McCoy expressed surprise at the idea. Then he said he had no plans to use any leverage the M.T.A. might have, like suggesting that the agency wouldn’t place new bonds with a bank unless it agreed to renegotiate on the swaps.

That led the arbitration panel’s chairman to say, “Such renegotiations may not be successful, but it is more than difficult to understand why the authority is of the opinion that it should not even try.”

James A. Parrott, deputy director and chief economist at the Fiscal Policy Institute in New York, criticizes these deals along with officials who don’t try to get out of them.

“Government officials need to acknowledge that they made a mistake when they signed up for these ill-conceived, high-risk financial bets,” Mr. Parrott said. “But that mistake is woefully compounded when they then impose austerity rather than stand up to the banks.”

The takeaway: Some contracts are sacred. Others, not so much.

(and yeah, this is exactly like when in the heart of the financial crisis, there was loud insistence that banks "had" to pay their traders multimillion dollar bonuses because - contract! While simultaneously the same voices cried out that Chrysler and GM "had" to sacrifice union pensions, no matter how contractual)