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Scale Invariance: Is Your Neighborhood Sliding into Recession?  
(February 6, 2007)


Our U.K. correspondent recently sent in a brief description of scale invariance, which is one of the traits of fractals: (emphasis added)
The thing about most complex systems is that they are scale invariant so an understanding could also offer insights into smaller systems. For example, in an economy you see the same interactions on the scale of a neighborhood, city, region, country and internationally. The scale of the interactions varies with the size of the system - but the pattern remains the same. Think of a simple line drawing of a coastline. Without some sort of reference, it would be very difficult to tell whether the map was of 1 mile, 10 miles or 100 miles of coastline. Scale invariant.
This got me thinking: how's my neighborhood/city doing financially? Well, let's see:

  • The firefighters union just left a flyer in every mailbox in the city (102,000 residents) begging us to squeeze the city council to limit "rolling closures" of the city's seven fire stations due to budget cuts.


    • Poor firefighters; they only get to retire at 50 with a pension equalling 90% of their highest lifetime salary. Meanwhile, the city's pension contributions have risen 384% in a few years:
    In fiscal year 2005, $15 million of Berkeley’s $115 million general fund will pay for contributions to the California Public Employees System (PERS). Last year, the city spent $8 million on retirement benefits. The year before, the city spent only $2.8 million.

    A lot of that money is going to cover stock market losses, but a good chunk will pay for improved pension benefits to Berkeley’s growing ranks of retirees who threaten to strangle the city’s general fund for the foreseeable future.

    Berkeley Police Lieutenant Sherrie Aldinger, who is retiring after 28 years on the job, will receive 84 percent of her highest annual salary from the city for the remainder of her life. The salary for a Berkeley Police Lieutenant ranges from $104,568 to $119,136.

    “Basically they’ve given away the store,” said Ron Roach of the California Taxpayers Association, one of the few groups to oppose the higher pension plan. For local police and firefighters the bill meant they could now retire at age 50 with a pension that equaled three percent times their years of service—75 percent of his or her highest yearly salary, for instance, for an officer who retires at age 50 after spending 25 years on the force. Subsequently the state passed a law allowing police and firefighters to receive a pension as high as 90 percent of their highest annual salary. (source: Berkeley Daily Planet)
    This means 13% of the city's general fund is going to pensions, and it's slated to inexorably rise--and that's counting on the existing pension fund being able to generate 8% returns far into the future. What if the pension fund takes a string of 8% losses? Nobody even mentions that as a possibility.

  • One of the city's largest independent bookstores closed after 50 years in business.
    • New York Times: a Store's End Clouds a Street's Future

  • The city's largest stationers closes its doors after 98 years in Berkeley.


  • The city's only ice rink, a local institution for 66 years, closes in March.


    • Do you see a pattern here? Municipal unions secure gold-plated pensions and medical benefits for life, while the source of all those tax revenues--old-line businesses--are failing left and right. These businesses are irreplaceable; a new ink cartidge refilling outlet (just about the only new retail operation in downtown) does not provide anywhere near the same payroll or sales tax revenues as the large, established retailers who have called it quits.

    I have long predicted that a showdown between public employee unions and residents (taxpayers) is brewing and will explode once the recession drives down pension fund returns and city tax revenues. The firefighters are already gearing up to protect their fiefdom and their pensions; if they care so much about the fire stations staying open, how about working a few extra hours for no more pay or benefits that they already receive? You won't hear any talk of sacrifice from public unions, though; it's all about the money, and preserving pensions and lifetime benefits which are unmatched in the private sector.

    Before any irate firefighters reach for the keyboard, let me disclose that my cousin is a cop, my business partner was a cop, and several of my oldest friends are cops--(detectives and up). If you know any cops, you know the drill: the firefighters union sets the pace, and the cops try to catch up. How many cops do you know that have the leisure and energy to run lucrative side businesses? None. How many fire dept. employees have side businesses? Plenty. Nuff said. As for danger on the job: your basic private security guard gets shot on a regular basis, and they get paid about a fourth of a union city employee. Sure, they're not cops, but it's always a good idea to take a look at what the private sector is paying for risking your life.

    For the record: if any municipal employees deserve 90% pensions, it would be police officers, but only with 30 full years of service, and only starting at age 55. Police work burns out people, because you're dealing with the dregs of humanity, a messed-up judicial system and constant human tragedy, day after day, month after month, year after year. You don't get paid 8 hours for 4 hours' work; you get paid for 8 and work 10 or 12.

    {RANT ON} My sympathy for criminals, crazies and buyers of hard drugs: zero. Sorry. We pay humongous taxes to lavish money on our public schools, our own city health department, including a good mental health clinic, and an array of social services for the homeless. But if you can't be bothered to make an effort in school despite all the resources available to you, or you refuse the social services we offer and don't take your meds, or you need meth or coke just to get through the day, then exactly why should the rest of us suffer as a result of your self-generated plight? I live in a near-ghetto; come live in my neighborhood for a couple years and see how much sympathy you have left.{/RANT OFF}

    The firefighters, of course, want the city to slash somewhere else--like social services, or the Library, which has seen its budget gutted by skyrocketing pension costs, too. So the public will see library hours cut and fire stations closed so its city employees can retire at 50 with pensions of $80,000 a year and up, and gold-plated (fully paid) healthcare benefits for the next few decades.

    And before any irate city employee touches the keyboard, let me also disclose one of our old friends retired from the city at 52--maintenance department. He'd suffered a work injury, but he readily admits he could have worked for years longer on "light duty." As it is, he's been tapping the pension fund longer than he worked for the city. How can any employer, municipal or otherwise, afford to pay retirement cash and benefits for a longer period of time than the employee actually worked? It simply doesn't pencil out, and telling us (citizens and taxpayers) "I deserve it" doesn't alter the unsustainable math.

    We have another friend who worked part-time for the city in a routine clerk position for about seven years and then quit over personal conflicts at 54 years of age. The next year, he turned 55 and started drawing a modest pension--after 7 years of 25 hours per week work. He's in good health, and there's no reason why he won't collect his pension for 25 or 30 years--a pension "earned" after a mere 7 years of part-time labor--and well-paid labor ($18/hour, about double what a clerk would earn "in the real world," i.e. the private sector). Is this kind of largesse sustainable? Quite obviously not.

    If the situation is so dire now, what happens in a recession? Tax revenues plummet, pension fund returns plummet, and then the city has to cover the shortfall in investment returns. So how much of city revenues will be going to gold-plated pension plans then? 25%? 35%? No one knows, but there will be a showdown: either the public unions give back some of their ill-gotten pension gains, or the cities will have to raise taxes substantially, or basically eliminate entire departments of heretofore "essential" services.

    And if established retailers are closing their doors in "prosperous times" (bitter laugh), how many more will close in the upcoming recession? And so where will the cities turn to raise new tax revenue when their independent business sector has been effectively gutted? Property owners, who are watching their home values drop every month?

    Generally speaking, municipalities don't go bankrupt, so they're locked into paying the pensions regardless of what other services get slashed. The solution will be a public so incensed by their reduced services that the state Legistature will be forced to act. It will be a battle royale, though, for the public unions are the Democratic Party's largest contributors, along with the Trial Lawyers lobbying group. The Legislature will have to act against their largest donors--something they won't do unless their defeat at the polls is certain. That will only happen when the public is so enraged that Party affiliations no longer have much meaning, i.e. Throw the Bums Out! The 2008 Election, when the nation is mired in a recession which only deepens by the day, will be very interesting.


    For more on this subject and a wide array of other topics, please visit my weblog.

                                                               


    copyright © 2007 Charles Hugh Smith. All rights reserved in all media.

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