By Rick Lyman
Before Detroit filed for bankruptcy, there was Stockton.
Battered by a collapse in real estate prices, a spike in pension and retiree health care costs, and unmanageable debt, this struggling city in the Central Valley has labored for months to find a way out of Chapter 9. Now having renegotiated its debt with most creditors, cobbled together layoffs and service cuts and raised the sales tax to 9 percent from 8.25 percent, Stockton is nearly ready to leave court protection.
But what Stockton, along with pretty much every other city in California that has gone into bankruptcy in recent years, has not done is address the skyrocketing public pensions that are at the heart of many of these cases.
"No city wants to take on the state pension system by itself," said Stockton's new mayor, Anthony Silva, referring to the California Public Employees' Retirement System, or Calpers. "Every city thinks some other city will take care of it."
While a federal bankruptcy judge ruled this week that Detroit could reduce public pensions to help shed its debts, Stockton has become an experiment of whether a municipality can successfully come out of bankruptcy and stabilize its finances without touching pensions. It is an effort that has come at great cost to city services and one that some critics say will simply not work once the city starts trying to restore services and hire 120 police officers it promised to get the sales-tax increase passed.
"They wanted to get out of bankruptcy in the worst possible way, and that's just what they did," said Dean Andal of the San Joaquin County Taxpayers Association, which fought the sales-tax increase. "If they go ahead and hire those new police officers, the city will be back in insolvency in four years."
Stockton declared fiscal emergencies in 2010 and 2011, giving it the power to renege on annual pay increases for city workers. City services were slashed. Hundreds of municipal workers were laid off. And many retirees who had been promised health coverage for life learned that they would have to begin paying for it.
"That was the hardest part," Councilman Elbert Holman said, "looking people in the eye and telling them sorry, you are losing your health care, but it's absolutely necessary."
By the time the judge found Stockton eligible for Chapter 9 bankruptcy on April 1, the city had about $147 million in unfunded pension obligations and about $250 million in debt from various bond issues.
The years of fiscal emergency and bankruptcy have left their mark, including a skyrocketing crime rate, which city officials and many residents attribute to staffing and service cuts in the Police Department.
"I suddenly realized a few years ago that, just in my tiny, two-block neighborhood, there had been 11 residential burglaries in the previous nine months," said Marci Walker, an emergency room nurse.
Cities go bankrupt for many reasons: a collapse in real estate prices, a spike in pension and retiree health care costs, a burden of debt from expensive city projects. Stockton has experienced all three.
When real estate prices shot up in Silicon Valley in the last decade, many commuters decided that Stockton's cheaper housing was worth the long commute to the Bay Area. That drove up local housing prices, so when the bubble burst it had a bigger impact, giving Stockton one of the nation's highest foreclosure rates.
City leaders had also gone on a construction spree during the flush years, building a new sports arena, a minor-league baseball stadium and a marina. Citizens still bitterly mention the 2006 concert that opened the arena, where Neil Diamond was paid $1 million to perform.
And through it all, the pension costs for city workers — particularly for police officers and firefighters, who can retire early and draw on those pensions for decades — kept going up.
(Slideshow: Budget tricks of America's big cities)
No part of the city has been left unscathed. Ms. Walker's comfortable neighborhood near the University of the Pacific campus was hit with rising crime almost immediately after the police layoffs. "When the economy got bad and we lost police officers, it all started," she said.
So she started the Regent Street Neighborhood Watch, the first of more than 100 such organizations to sprout up in the city in the last few years.
"We don't confront anybody, we just let them know that we know they're there," Ms. Walker said. She added, "Criminals do not like eyeballs on them."
While the rising crime rate had the biggest effect on the city, other service cuts were also felt, including deteriorating streets and closed libraries and community centers. The other consequences of the downturn — shuttered storefronts, crumbling infrastructure, empty downtown sidewalks — only added to the sense of decline.
"There was just this perception that the city was not safe," Police Chief Eric Jones said. "Downtown was impacted. Many people were reluctant to go down there."
The crime problem is a big reason Stockton chose to keep paying into the Calpers system even as it pared other costs, including its payments to bondholders. Officials say that if the city cuts the rate at which its workers build up their pensions, workers will leave — especially police officers who were recruited with the promise of large, early pensions.
Last year, Stockton asked Calpers for a "hardship exemption," allowing it to slow its contributions. The huge state pension system said no, fearing that if Stockton fell behind, it might never catch up.
Now, even before the ink is dry on Stockton's proposed blueprint for getting out of bankruptcy, skeptics are worried that the plan is not comprehensive enough to solve its problems and that city leaders will not fulfill their promise to use some of that money to hire police officers.
City officials insist their plan will work. "We got the tax, and thank God it passed," Councilman Holman said. "I have confidence that the numbers line up."
Nor does the Detroit ruling this week make Stockton want to revisit pension reductions. Connie Cochran, a city spokeswoman, said that city workers had already seen their pay and retiree health benefits cut. In addition, she said, Calpers told the city that its only option was to pay a $970 million termination fee to leave the system, and Stockton could not afford it.
Mayor Silva said the city's plan would help it out of bankruptcy sometime late next spring, if all goes well, after the judge hearing the case has time to rule on its fairness and viability and negotiations can be completed with one final bondholding creditor.
"We will lose the stigma of bankruptcy, and it will buy us time," he said.
One of three new members elected to the City Council in November, Michael Tubbs, said he was convinced that the bankruptcy plan would work, providing $28 million to $30 million in revenue each year for the next decade and allowing the city to pay down its debt while still hiring police officers.
"I am incredibly optimistic," said Mr. Tubbs, 23, who grew up in Stockton.
Chief Jones said he was counting on the 120 new officers and planned to hire 40 a year for the next three years. In 2008, Stockton had 441 police officers. By this year, the force had fallen to 350, the second-lowest per capita staffing level in the country. The result, he said, is that all violent crimes rose in the city, which had 58 homicides in 2011 and 71 in 2012, both records.
Even before the sales-tax increase passed, Chief Jones said he had decided to reinstate some of the community outreach programs that were curtailed during the budget crunch, even if that meant slower response times for nonviolent crimes.
"We had to tell the community to be patient, we're going to focus on violent crime," he said.
The impact was immediate. As of mid-November, there had been only 28 homicides this year.
Still, bondholders complain that Calpers will get 100 cents on the dollar for its city debt, while they must make do with much less. Following months of negotiations, most of Stockton's bondholders said they would not try to block the city's plan, but Franklin Templeton Investments was girding for a fight, possibly strengthened by the Detroit ruling that federal bankruptcy law trumps state pension guarantees.
Two Franklin funds hold about $35 million of bonds that Stockton issued in 2009 and are now in default. Stockton is proposing to pay the two Franklin funds just $95,000 to discharge all the remaining debt on those bonds, amounting to less than a penny on the dollar.
Douglass Wilhoit Jr., chief executive of the Stockton Chamber of Commerce, agreed that "the elephant in the room is the pension stuff." But he said that he was confident this plan would ease the city out of bankruptcy and start a process that would inevitably come to include some sort of pension changes. "Over all, honestly, I think the bankruptcy process has been a positive experience for Stockton," he said. "We are going to come out of it stronger and better."
By Roger Runningen
President Barack Obama, setting a theme that he’ll pursue in the final years of his presidency, said growing income disparity in the U.S. is the “defining challenge or our time” and Washington must confront it.
Upward mobility for middle-income Americans has been stymied by economic changes and government policy, Obama said.
“The basic bargain at the heart of our economy has frayed,” he said in an address in Washington today that echoed a speech he gave two years ago in Osawatomie, Kansas, that set the stage for his 2012 re-election race. Increasing inequality “challenges the very essence of who we are as a people.”
After being bogged down for the past two months by the botched rollout of the Patient Protection and Affordable Care Act, the president offered arguments to press his stalled economic agenda and set a foundation for Democratic Party candidates in the 2014 congressional elections.
Illustrating the political agenda within the speech, Obama challenged Republicans in Congress to offer their own ideas for reducing inequality and providing opportunities for middle-income Americans. He said relying on free markets to solve the nation’s problems isn’t enough.
“You owe it to the American people to tell us what you are for, not just what you’re against,” he said.
Obama said the gap between rich and poor is an issue across the globe. He quoted Pope Francis, who in a speech last month warned that unfettered markets are increasing income disparities and that risks fomenting social unrest.
The president said the U.S. has fallen behind other advanced countries in income mobility. Turning that around and closing the income gap can be achieved by driving economic growth and productivity, he said, listing many of the policies and programs on education, infrastructure spending and targeted investments to create jobs that he’s outlined before.
The idea that a child might never be able to climb out of poverty “should offend all of us,” Obama said. “We are a better country than this.”
The trend toward income inequality, which he said dates back to the 1970s, is “a fundamental threat to the American dream,” he said. The nation must push through “myths” that mostly minorities are trapped in poverty.
The poverty rate in the U.S. was 15 percent last year, compared with a 26-year low of 11.3 percent in 2000, and median household income was $51,017, little changed from the previous year, according to Census data.
While the rise in home prices and stocks -- the Standard & Poor’s 500 Index has more than doubled since Obama took office - - has boosted the finances of the more affluent, those on the lowest tiers contend with high unemployment and stagnant wages.
An updated research paper published in September by University of California at Berkeley economist Emmanuel Saez found that the top 10 percent of earners -- those with household income above $114,000 -- collected more than half the nation’s total income in 2012, the largest proportion since the government started gathering such data in 1917.
To close the income gaps, Obama reiterated his backing for raising the federal minimum wage. He proposed in February lifting it to $9 an hour from $7.25 by 2015, with automatic adjustments for inflation. Such an increase would affect about 15 million people, the White House said. A proposal in the Senate, supported by Obama, would increase it to $10.10 an hour.
Even as Republican lawmakers in Washington argue that raising the rate would hurt small businesses, Democrats at the state and local level are attempting to increase the minimum wage for their constituents, including New York Mayor-elect Bill De Blasio, who made income inequality the centerpiece of his campaign.
“There’s no solid evidence that a higher minimum wage costs jobs,” Obama said, “and research shows it raises incomes for low-wage workers and boosts short-term economic growth.”
A CBS News poll conducted Nov. 15-18 found 69 percent of Americans back raising the minimum wage. The same poll showed low approval ratings for Obama and Congress, with the president at 37 percent and lawmakers at 11 percent. The margin of error for the poll was plus or minus three percentage points.
Obama defended the 2010 health-care law, his signature first-term initiative, as a key component of providing economic security for lower- and middle-income people.
With the law under attack by Republicans, and polls showing it unpopular, Obama said its benefits will ensure that it remains in force in the long run.
“This law is going to work,” he said. “And for the sake of our economic security, it needs to work.”
The president’s refocusing on the economy begins as the White House and lawmakers turn attention to the 2014 midterm elections and the risk Obama faces if Republicans maintain or increase their control of the U.S. House of Representatives.
“The wind is at the back” of Republicans for the midterm elections, said Chris Krueger said in a Dec. 3 market commentary for Guggenheim Securities LLC in Washington. “The House will very likely stay Republican.”
If that prediction holds, that would frustrate much of Obama’s agenda, including the minimum wage increase, making preschool available to all 4-year-olds, spending $50 billion on “urgent” infrastructure projects to generate jobs and creating manufacturing-innovation institutes that the administration says will maintain American competitiveness.
It also may stall action on a bill to revise U.S. immigration laws. While the Senate passed legislation with support from Republicans as well as Democrats to give an estimated 11 million undocumented immigrants a path to citizenship, the Republican-controlled House hasn’t taken it up.
Polls consistently show that the economy tops the list of voter concerns, especially with the recovery sluggish and an unemployment rate that’s been falling slowly since the end of the recession in 2009 and is now at 7.3 percent.
'Tis the season to be jolly. Unfortunately, 'tis also the season for charity scams.
Consumers often become more generously minded in December, thanks partly to the many appeals they see and hear in malls and on the streets. A survey by Charity Navigator found that charities receive 41 percent of their donations in the last few weeks of the year. The approaching year-end tax deadline also makes December a great month to take charitable deductions.
But the very impulses that make us want to give can make us less cautious about whom or what we give to—and scam artists are all too aware of this.
Currently, certain online types of charity scams are on the rise, according to several experts.
Crowdfunding, for one, offers increasing opportunities for charitable giving—and for scams, according to Bennett Weiner, chief operating officer of BBB Wise Giving Alliance, the charity-monitoring organization affiliated with the Better Business Bureau.
(Read more: Charities get holiday boost from crowdfunding)
"You can read stories about individuals in need, or organizations that may be soliciting for various projects," he said. "Don't assume that the organizations or individuals on those sites have necessarily been vetted to any great degree. They may have verified that the organization has tax exempt status, and that may be it." In other words, you may be able to take a deduction for your donation, but that doesn't mean the entity you are funding is putting your money to use in any way close to what you intend.
There are other scams lurking online for careless givers, said Bill Kowalski, director of operations at Rehmann Corporate Investigative Services, part of Rehmann Financial Advisors. "If you are online looking for a place to give, if you mistype, there are similar sites with similar names," he said. Scam artists buy up URLs that are similar to the names of charities, and if your'e not careful, you can make a donation on the wrong site.
Not all those charities are fraudulent per se, Kowalski said. But even so, they may misuse your money. "We saw this after 9/11. Some charities cropped up and gave 5 percent to actual victims. In my mind, that's a fraud."
(Read more: $2,500 donated: How much is going to charity?)
One challenge for charity monitors such as the Wise Giving Alliance is that they rarely receive complaints about charity schemes. "When people make a contribution, that's the end of the transaction. they're not expecting anything in return," Weiner said. "You don't know necessarily that there's a problem until much later on."
There are also added enforcement challenges if disasters occur around holiday time, since fraudulent charities often crop up in the wake of disasters. After Hurricane Sandy, the New Jersey Division of Consumer Affairs issued warnings about charity scams, and later settled a case with the operators of the so-called Hurricane Sandy Relief Foundation, which agreed to shut down its website and hand over more than $300,000 in donations to an administrator appointed by the court.
(Read more: After the hurricane, beware of scams named for Sandy)
Relatively few people fall for charity scams like telephone pitches for nonexistent or fraudulent organizations, Kowalski said, pointing to 2010 data showing that "probably under 6 percent" become victims of that kind of fraud.
To protect yourself from charity scams, Kowalski advises sticking to charities with a proven track record. "There is nothing inherently more dangerous about giving online as long as you've done your research," he said. "Anything that tugs on your heartstrings that's new and different, you should do your research before you contribute to things like that."
Organizations like the Wise Giving Alliance and Charity Navigator provide online information about charities, including whether they meet certain standards and how efficiently they spend their money.
It's also a good idea to avoid snap decisions about donations, even when the solicitor on the phone is telling a heartbreaking story.
Kowalski and Weiner say researching a charity is your best protection against fraud, but in a 2011 report on charitable giving, 90 percent of donors said a nonprofit's performance was important to them, but only 30 percent actually researched charities.
(Read more: Why the wealthy don't give more to charity)
"Most charities are honest and trustworthy," Weiner said. "But if you take no measures, you're going to be more susceptible to being taken when it happens."
To paraphrase Ronald Reagan, trust but verify, even when it comes to charitable giving.
By Heidi Przybyla & Brian Wingfield
Congress’s latest attempt at crafting a budget plan is on track to end up the same way as others have in the past decade: with little or no agreement.
Negotiators have little chance of breaking this string of futility, even after a 16-day government shutdown in October that cost the U.S. economy $24 billion. If they do, it’ll only be to curb automatic spending cuts, including $19 billion that hits the Pentagon starting in January.
Now budget experts, labor unions and business groups are saying enough’s enough, and questioning why lawmakers can’t live within their means the way ordinary Americans do and instead lurch from one budget standoff to the next.
“It’s a stupid way to run a country,” said Maya MacGuineas, head of the Campaign to Fix the Debt, a non-partisan advocacy group whose members include business leaders and former lawmakers. “Change comes from two possible things: a crisis or leadership.”
One of the co-chairmen of the campaign is Michael Bloomberg, founder and majority owner of Bloomberg News parent Bloomberg LP and the New York City mayor.
Unlike with previous budget panels, including the failed 2011 supercommittee, there are no immediate consequences if the budget conference misses its Dec. 13 deadline -- the U.S. won’t default on its debt and the federal government won’t shut down for lack of funding.
The committee’s lack of progress is frustrating outside groups, especially business executives, who say congressional lawmakers’ habit of governing by crisis and temporary spending bills is hurting the economy and costing jobs.
“The uncertainty has a chilling effect on job creators, households and anybody who’s trying to see around a corner,” said MacGuineas, who is also president of the Committee for a Responsible Federal Budget, a fiscal advocacy group.
Congress in 2009 last passed a budget resolution, the equivalent of a household budget that sets spending parameters for the federal government.
In 2010, disagreement over how to handle the scheduled expiration of tax cuts enacted under former President George W. Bush prevented agreement on a budget resolution and Republicans won the House majority, creating a divided Congress.
The current panel is the fifth bipartisan attempt in three years to address the nation’s debt and deficit. The others, starting with the 2010 debt-reduction commission appointed by President Barack Obama, ended in failure.
This one may, too, said Maryland Representative Chris Van Hollen, a panel member and the top Democrat on the House Budget Committee. “Negotiations have to accelerate significantly if we’re going to get something done,” he said.
The conference committee was supposed to mark a return to so-called regular order, where the chairmen and members instead of ad hoc negotiating groups work to craft a budget for the coming fiscal year and figure out a way to replace some of the automatic cuts known as sequestration.
Instead, they’re stumbling over the same obstacles that have prevented past agreements. Democrats want to end some corporate tax breaks while Republicans say they oppose any changes to the tax code outside a broader deal. Republicans want to cut spending on entitlement programs, which Democrats oppose without considerable revenue concessions.
The panel’s progress so far has been limited to agreeing that its objective should be to replace the automatic cuts for one to two years with more palatable spending reductions, Van Hollen said.
“That’s a much more narrow target, but that doesn’t mean we’ll hit the target,” said Van Hollen, noting the full committee has met just twice.
The conference, headed by Senator Patty Murray of Washington and Paul Ryan of Wisconsin, chairmen of their chambers’ budget committees, is the first panel in the past three years to set such a narrow goal. Murray, a Democrat, and Ryan, a Republican, made clear from their first meeting that they weren’t striving for a grand fiscal bargain.
Now, they’re struggling to achieve even a deal in the range of $50 billion to $100 billion just to reapportion automatic spending cuts that lawmakers of both parties agree are stunting investments in the military, scientific research and education.
“It’s demonstrating how difficult it is even to hit a very low bar, which is kind of depressing when you think of how much work really needs to be done,” said Robert Bixby, executive director of the Concord Coalition, a fiscal advocacy group.
For long-term deficit reduction, lawmakers would need to make changes to Social Security, Medicare and Medicaid, which make up almost half of federal spending. Many lawmakers are hesitant to trim the programs amid lobbying from interest groups including AARP, the nation’s largest seniors’ lobby with 37 million members.
It was in 2011, with the U.S. on the brink of a debt default, that Congress created the deficit-reduction supercommittee, empowering it with authority to expedite any agreement through Congress. No deal was reached.
The panel was the fourth such bipartisan commission formed in the preceding two years to deal with the nation’s growing debt and deficit. They included the president’s 2010 commission led by former President Bill Clinton Chief of Staff Erskine Bowles and former Wyoming Senator Alan Simpson, a Republican, who couldn’t get the votes to send their $4 trillion plan to Congress.
A separate bipartisan group of six senators negotiated a similar plan that never made it to Congress for consideration because of Republican opposition to revenue increases through proposed changes to the U.S. tax code.
Earlier, in mid-2011, Vice President Joe Biden led another group of congressional leaders in talks to raise the debt ceiling and curb the deficit.
The group fell apart after House Majority Leader Eric Cantor, a Virginia Republican, dropped out of talks over Democratic demands that tax revenue be included. With each attempt, the debt-reduction target was scaled back, with Biden’s group aiming for a $2 trillion reduction over 10 years.
In November 2011, the supercommittee struck out amid disagreements on revenues and entitlement programs. That triggered the automatic spending cuts to domestic and defense programs now in effect. Murray and Ryan are now trying to reapportion the cuts to blunt their effects on the Pentagon and domestic programs such as Head Start that serve poor children.
While the two continue to negotiate over the Thanksgiving holiday, aides say they haven’t come to terms on revenue.
Talks are further complicated by a recent demand by House Speaker John Boehner, an Ohio Republican, that a deal shouldn’t include cuts to farm subsidies, removing one of the few areas where both parties agree reductions are needed, Van Hollen said.
“The math doesn’t work if you start doing that,” he said.
Even if Ryan and Murray reach a compromise, it would have trouble winning approval by the full committee, let alone passage in a divided Congress.
“A budget conference committee of 29 representatives and senators is so unlikely to agree on anything that, unless they want to go hungry, they had better delegate to a single staffer the authority to decide what to order for lunch,” said Stan Collender, managing director of Qorvis Communications LLC in Washington and a former congressional appropriations aide.
The real deadline is Jan. 15, when government funding again expires, said Bixby, and there is a chance that Ryan and Murray can hammer out a deal by then.
Meanwhile, businesses are growing frustrated with Washington’s inability to bridge its differences to replace spending cuts that no one thinks are good policy.
“Uncertainty holds back growth and investment,” Dorothy Coleman, vice president of tax and domestic economic policy at the National Association of Manufacturers in Washington, said in an e-mailed statement, urging Congress and the administration to work for policies to provide stable growth.
“Given the divisions between the parties and our experience over the last three years, it’s difficult to be optimistic,” Dan Stohr, a spokesman for the Aerospace Industries Association, said in an e-mail.
The Arlington, Virginia-based industry group’s members include defense contractors General Dynamics Corp., Lockheed Martin Corp. and Raytheon Co. Lockheed, the largest U.S. government contractor, will cut 4,000 jobs in response to declining federal spending.
“We cannot keep lurching from crisis to crisis,” Stohr said. “It’s having a very detrimental effect on investments” for the trade group’s members, including layoffs and less money for research and development, that prevents businesses from being able to plan ahead.
By Olga Kharif
The price of Bitcoin surpassed $1,000 on the Mt. Gox online exchange, fueled by speculators snapping up the virtual currency as it gains wider acceptance.
Bitcoins, which exist as software and aren’t regulated by any country or banking authority, surged to a record $1,073 today, up more than 80-fold from a year earlier. The currency has rallied on growing interest from investors in China and the U.S., while merchants are starting to accept Bitcoins for everything from Gummi bears to tuition fees.
The virtual currency gained credibility this month after law enforcement and securities agencies said in U.S. Senate hearings that Bitcoin could be a legitimate means of exchange. The rally had gathered steam last month after regulators shut down the Silk Road Hidden Website, where people could obtain guns, drugs and other illicit goods using Bitcoins, generating optimism that the digital money would become more widely used for legal purposes.
“Milestones do tend to provide some validation, even though they are entirely arbitrary,” Nicholas Colas, chief market strategist at ConvergEx Group, wrote in an e-mail. “$1,000 for a Bitcoin would draw attention and certainly gives people positive on the currency another reason to laugh at the naysayers.”
Bitcoins were trading at $1,003 apiece today on Mt. Gox, one of the exchanges where the digital money can be traded for other currencies. On Bitstamp, the most active dollar-based marketplace among online exchanges, they were at $949.90. Bitcoins were trading at $12 to $13 a year earlier, and have quintupled this month.
Introduced in 2008 by a programmer or group of programmers going under the name of Satoshi Nakamoto, Bitcoins exist as software, which contain the rules governing their supply. New Bitcoins can only be created by solving complex problems embedded in the currency, keeping total growth limited. There are more than 12 million Bitcoins in circulation, according to Bitcoincharts, a website that tracks activity across various exchanges.
Bitcoin is being used to pay for everything from Gummi bears to smartphones on the Internet. The virtual curency can also be traded without being tracked, potentially reducing banking-transaction fees and making it an attractive tender for those seeking to buy and sell via the Web or in stores.
When Silk Road was shut down, the virtual currency lost a third of its value within days as holders sold, predicting a crackdown. Instead, the willingness of authorities to stamp out illegitimate use has come to be seen as an endorsement for Bitcoins, making users and investors more comfortable taking risks with digital money.
Bitcoin also gained further legitimacy and attention when a subsidiary of Baidu Inc. (BIDU), China’s top search engine, started accepting Bitcoins on Oct. 15. Chinese Bitcoin activity has exploded, with the number of yuan-based trades jumping 30-fold in the past two months and making BTC China the top online-exchange by volume.
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