California’s finances have deteriorated rapidly since the beginning of the financial meltdown in 2007, and now it’s really getting bad.
“Los Angeles is facing a terminal fiscal crisis: between now and 2014 the city will likely declare bankruptcy,” former mayor Richard Riordan wrote in a Wall Street Journal opinion piece.
“Yet Mayor Antonio Villaraigosa and the City Council have been either unable or unwilling to face this fact.”
Riordan’s column was co-authored by Alexander Rubalcava of Rubalcava Capital Management.
The basic problem: pension and retiree healthcare costs will jump by about $2.5 billion annually during the next four years if city officials don’t take any action, the duo point out.
“Even if Mr. Villaraigosa were to enact drastic pension reform today — which he shows no signs of doing — the city would only save a few hundred million dollars per year.”
Like many cities, Los Angeles has projected an unrealistic rate of return on its pension fund investments: 8 percent.
Riordan and Rubalcava warned Villaraigosa that figure was a fantasy. But their warning was ignored.
The truth: annual investment returns of 3.5 percent and 2.8 percent for the city’s two main pension funds over the last decade.
Los Angeles isn’t the only city in trouble. Officials in Harrisburg, the capital of Pennsylvania, have begun discussing the possibility of bankruptcy.
And once one municipality declares bankruptcy, others are likely to follow, say experts including analysts at Fitch Ratings.
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