Public Employees Take Governments
to Court—We Want Our Pensions!

budget deficitThe battle to tighten budget deficits has now reached a new level. Public employees are pushing back by taking their employers—the cities—to court.

In San Jose, California, the public unions are taking the city to court to contest the city’s attempt to force the public employees to either contribute more of their paycheck toward their pension or accept a reduced retirement pension plan (source: Reuters, May 8, 2012).

There are eight similar lawsuits nationwide!

I have discussed most of these troubled cities in these pages before the court dates were set. You know what I’m going to say now; this is just the beginning.

The San Jose Police Officers’ Association is ready to fight for years if it has to, to protect what it feels it’s entitled to for its service.

The City of San Jose attempted to explain to the police officers and the other city unions that, since the recession hit in 2008, the pension fund has lost money on its investments, which has widened the budget deficit. On top of this, with home prices falling and fewer people working, tax revenues to the city have declined, further exacerbating budget deficits.

And with interest rates near zero, it is proving very difficult for pension fund to generate any interest income to help fill the budget deficit hole.

The City of San Jose has to make cuts somewhere to make up the budget deficit. It has chosen to increase pension contribution rates instead of cutting basic services. Of course, if the battle in court continues, the city may have no choice but to cut essential services for the citizens of San Jose, because the cost of the case was not planned in the budget deficit.

I’ve talked about the plight of Detroit. Its budget deficit is enormous as the city’s home prices continue to languish. Just recently, the city outlined a severe plan to address the budget deficit. The City of Detroit is planning to cut 25% of its 10,000 workers—or 2,500 employees (source: Detroit Free Press, April 24, 2012).

The cuts are across the board, from public safety like police officers to healthcare workers. A citywide hiring freeze has also been put in place. The city doesn’t want to cut the fire department so it is asking the federal government for a grant to help retain 100 firefighters, because the city cannot afford to with its budget deficit.

San Jose and Detroit join the long list of municipalities that are cutting essential services to their citizens and are pushing the public unions to the point where disputes are now being handled in court.

The pushback will continue until the budget deficits get pushed from municipalities to the bankrupt states and eventually to the federal government. Where will the next round of bailout money come from?

And can you believe that economists thought earlier this year that the Fed would not delivery QE3? The audacity of thinking more money printing was not coming!

Michael’s Personal Notes:

A sign of things to come…

Outplacement firm Challenger, Gray & Christmas released a report last week illustrating that, for the month of April 2012, planned firings at corporations in America rose 11% from a year ago. From the month of March, planned firings were up 7.1%.

The report also expressed the opinion of its authors that, at the current level of demand for goods and services, companies in the U.S. don’t require additional workers to meet output; very bad news for May’s upcoming job numbers report.

Sure, this means the U.S. economy is weak. Without sufficient demand from the consumer, which is 70% of GDP, companies will not hire new workers, which is going to stall jobs growth. This is a bad sign that May’s job numbers could be worse than April’s.

This is further confirmed by the fact that the biggest sector of the economy that cut the most jobs thus far in 2012 has been the consumer products companies. If consumers are not spending, then the companies that make and sell consumer products will not lead jobs growth, but instead lead in layoffs.

The report also highlighted that layoffs at the government level—led by education—continued to increase, which is something I’ve been talking about in these pages.

As municipalities continue to cut the expenses to meet their budget deficits, jobs growth will be nonexistent at the state and municipal levels. And the monthly job numbers will continue to display the effect of this reality.

Challenger always prefaces its report by saying that a corporation’s intention to lay off will change if the economy improves, which will lead to improved job numbers. Given all of the economic headwinds I’ve detailed in these pages recently, like weak U.S. durable goods orders, weak job numbers and weak retail sales, the economy will most likely not improve.

Many are saying that April’s job numbers report was not the start of a downtrend in job numbers. I beg to differ.

Where the Market Stands; Where it’s Headed:

I believe the stock market has been putting in a huge top for months…what technical analysts call the right shoulder of a “head and shoulder” pattern.

The bear market knows that worldwide economic growth is declining rapidly…that Recession Part II is not far behind. It just doesn’t want investors to know, so they keep putting money into the stock market so the bear can take it away again!

What He Said:

“A low savings rate was eventually blamed for the length of the Great Depression. Consumers just didn’t have enough money to spend their way of the Depression. With today’s savings rate being so low, a recession could have a profoundly negative effect on overextended consumers.” Michael Lombardi in PROFIT CONFIDENTIAL, March 26, 2006. Michael started talking about and predicting the financial catastrophe we began experiencing in 2008 long before anyone else.