City Files for Chapter 9 Bankruptcy

The Rhode Island city of Central Falls is the latest in a string of poorly managed cities to have to file for bankruptcy.  Check this link for the story.

What?  Did you think it was going to be Goodyear?

It might have been, and as I continue to show by example below, with the people currently in charge of managing our city money I believe it is only a matter of time.

If you read the article above about little Central Falls, RI, you would know that Central Falls had to go bankrupt because they have about $21 million in total debt, $80 million in future unfunded pension liabilities, and ignoring the outstanding debt, their pension liabilities were, “nearly four times their operating revenue of about $17 million per year” (4:1).  They threw in the towel. They decided that they would NEVER be able to pay back a 4:1 ratio of debt to general fund revenues.

I don’t know what Goodyear’s pension liabilities are.  I asked for details about it nearly a year ago and all I got back were a couple of condescending emails and this one power point slide Retirement Costs 120210 from Mr. Fischbach back in November and December of 2010.  You will note when you open the slide that this slide makes two very critical assumptions in order to come to Fischbach’s conclusion that retirement costs are no big deal to Goodyear.

First, the slide assumes that GY’s employee costs will be just about flat from the date of the slide until at least 2020 which is as far out as the slide projects.  No increases in employee costs over the next 10 years? Do the employees know this? Here are the two emails where Fischbach tries to explain all of this complicated stuff to me. Fischbach emails Nov 4 and Dec 2 2010 .  In the Dec 2 email he explains that, “the City’s portion of the pension costs in 2019/20 is $3.9 million, which is based on existing payroll (# of employees, salary amounts) so we can compare evenly.”  So Fischbach is just being fair? In order to compare evenly, he makes the assumption that the number of employees and salary amounts remain the same for the next 10 years?

And here is the second very important assumption. In Fischbach’s Nov 4 email on the same topic he tells me that he is including the city contribution at the current unfunded rates for 3 different state run retirement programs for city workers.  Sounds good, eh?  He’s included the “underfunding” amounts that are in place as of November 2010 and keeps them the same throughout.

But here is what the ASRS director, Paul Matson, had to say about that as reported May 2010, by AZ Capitol Times, 6 months prior to Fischbach’s email to me;

“while Matson says ASRS members have no need to be concerned about the stability of the fund, a key step toward keeping ASRS healthy is that contribution rates will continue to increase annually for the next several years for active members and employers by 0.3 percent, or possibly 0.4 percent. Initially, the pension contribution rate will increase to 9.6 percent from 9 percent starting July 1.” *

But it’s only 0.3 percent per year, you say. A mere oversight by Mr. F?  Not quite.  Matson is saying that rates will have to be added to by 0.3 to 0.4 percent per year and gives the example of going from 9.0 to 9.6 in July of 2010.  (In July of 2011 the contribution rate went up again from 9.6 to 10.5, a lot more than Matson predicted )  On a 9 to 10% rate, an addition of 0.3 to 0.4 is a 3% to 4% increase per year in the RATE.  (if you don’t understand the math around what I just wrote, ask someone who knows math to explain it to you. It’s important.  Warren Buffett refers to it as “the snowball”).

Do you know how much 3% per year is compounded for 10 years?  Thirty four percent (34%)! And 4% for 10 years is nearly 50%!

So was Mr. F just blowing smoke at me when he replied or does he really not get this? In 2010 GY contributions were $3.3 million in a $60 million general fund budget. At the rate they are going up (over 10% per year) in 10 years they could be 260% of this or nearly $9 million per year and that is only if employee costs do remain flat for the next 10 years. At the time of F’s email all three pension plans were underfunded, ASRS was predicting contribution rates would continue to rise, and GY was assuming that employee costs would be flat. No problem. That’s the kind of planning that drives private enterprises into bankruptcy.  Why not city governments too?

In essence, what GY is saying is,”we don’t have to worry about calculating GY’s retirement costs in any more detail as long as we assume that they will never go up from here”.  That makes sense doesn’t it?

Did I also tell you that Mr. Fischbach is the real Santa Claus?

A couple of things I do know. One is that Goodyear’s debt burden is over $300 million and that Goodyear’s general fund revenues are only about $60 million.  That’s a 5:1 debt to general revenue ratio. I also know that Wally says that Westcor wants to re-negotiate the $47 to $70 million mall deal again with the same GY staff who re-negotiated it the last time. (Did all that dirt with curbs really cost $47 million?  Someone should look into that.)  And based upon GY’s response to my questions about their retirement liability I also know that GY has not done the thorough job it needs to do in order to understand its worst case scenario for its pension liabilities.

Central Falls called it quits at 4:1.  Goodyear is at 5:1 and counting.

* Link to the entire article.


2 Responses

  1. Right on…

  2. […] Get a real handle on where retirement and benefit costs are going in GY with some realistic numbers and define a plan to limit their future increases to no more than annual average AZ employee income increases or some other similar measure.  Here is my article explaining how GY has ignored it. […]

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