Scranton Property Taxes to Rise by 33% to
Meet Pension Obligations: Is Your City Next?

Scranton PropertyWhat was once considered a basic, untouchable right is now on the chopping block: the public pension plan.

I have been writing about the massive budget deficits that municipalities and states have been dealing with, the largest contributor to those budget deficits being the public pension plans.

Many states and municipalities have cut pension plan benefits for new workers, but what were once considered the legal and embedded rights of current retirees and public workers have been torn down.

In both San Diego and San Jose, California, residents have voted overwhelmingly—close to 70% in both cities—to cut the pension benefits of current public workers. (Source: New York Times, June 6, 2012). The residents weighed the budget cuts when factoring public workers retiring after 30 years of service with 90% of their salaries—which is almost unheard of in the private sector—versus having basic services cut and libraries unopened because of the massive budget deficits.

Residents of San Diego and San Jose chose to implement budget cuts on what they perceived as very generous pensions for public workers in order to reduce the budget deficits.

Previous court cases have sided with public workers, but now these measures voted on by the residents themselves will be tested in court. Unions in both San Diego and San Jose will file motions to prevent these budget cuts to pensions in the name of meeting budget deficits. The other cities and states desperate to close their budget deficits are awaiting the rulings with keen interest.

The State of Illinois has the nation’s largest budget deficit and unfunded pension liability of all U.S. states. It is aiming to suspend the annual cost-of-living adjustments for retirees in order to help stop the bleeding in its budget deficit. The mayor of Providence, Rhode Island, is asking the same of its retired public workers.

The State of New York noted that 300 municipalities have a budget deficit, while over 100 don’t have enough money on hand to pay their current bills. (Source: Wall Street Journal, Aug. 1, 2012.)

Their budget cuts include cutting services to residents and laying off public employees. However, San Diego and San Jose have made these municipalities and states stand up and pay attention: there could be other budget cuts avenues that they thought were once untouchable.

I wanted to provide a quick update on Scranton, Pennsylvania, which proposed paying its public employees minimum wage, because it literally ran out of money and needed to find budget cuts somewhere. The mayor of Scranton has been able to reach an agreement with the State of Pennsylvania: the state will provide Scranton with money to pay full salaries to its public workers, in return for Scranton raising its property taxes by 33% over the next three years. (Source: Wall Street Journal, July 31, 2012.)

Someone has to pay for these budget deficits, dear reader, and if it isn’t going to be the public workers, the residents will have to do, until of course they stand up and revolt as well. (See: “Public Pension Budget Deficits: An Unmitigated Disaster.”)

The municipal crisis will continue to escalate and reach new unprecedented levels, as cities and states scramble to institute budget cuts to meet their gaping budget deficits. What was once considered untouchable—pension plans—are now under attack. That day is fast approaching when the desperation reaches the White House and more money will be needed to meet these budget deficits. Did someone say “printing press?”

Michael’s Personal Notes:

A gold bullion scam in China, similar to the Bernie Madoff scandal here in the U.S. could be very bullish for physical gold bullion and gold prices.

Thirty-three suspects were arrested in China for illegal gold-futures trading that allegedly robbed up to 5,000 Chinese citizens of 380 billion yuan. (Source: China Daily, July 18, 2012).

Although details are not clear, at its core, this trading scam entailed investors buying pieces of paper that were supposed to represent physical gold bullion held in London.

Now, 380 billion yuan ($59.62 billion) is a lot of gold bullion! Had this money actually bought the physical gold bullion, it would have sent gold prices higher. Instead, the firm is said to have simply taken the money for itself, leaving the investors holding useless pieces of paper, which had no impact on gold prices.

A few years ago, the largest commercial bank in China launched a gold-backed savings account similar to 401(k) plans here in the U.S. (Source: Forbes, July 31, 2012.) Over two million customers have signed up and with China’s insatiable demand for gold bullion, as I’ve been writing about in these pages, this number is only going to rise.

As real estate prices fall in China, the Chinese people will be looking for places to park their money. Their trust of and reliance on gold bullion goes back centuries, which is why China is set to become the largest gold bullion consumer in 2012 and why gold prices will remain strong.

Even though the Industrial and Commercial Bank of China should be trusted to actually have the gold bullion to back the savings account, after this scandal, the Chinese public may think it best to buy gold bullion coins or bars themselves.

After all, the Chinese consumer bought 30% of all jewelry around the globe (or over 156 tonnes of it) in the first quarter of this year, with most of it concentrated in the 24-karat category—the purest form of gold bullion. (Source: World Gold Council.)

Although demand for China’s exchange-traded funds (ETFs) of gold bullion may fall because of this scandal, it doesn’t mean that the Chinese people are not buyers of gold bullion. It simply means that they will choose to buy the physical instead, which will of course be supportive of gold prices.

So, if you are concerned about gold prices falling, remember there is a strong buyer of physical gold bullion, which will in turn support gold prices. (Also see: “China Wants to Be a Major Global Trader of Gold Bullion.”)

Where the Market Stands; Where it’s Headed:

Today, we got news that Italy’s economy shrunk for the fourth straight quarter for the three months ended June 30, 2012. (Source: Instat.) The government’s implementation of $25.0 billion in austerity cuts is having a big impact on consumer spending in Italy.

The U.K is in recession. Spain is an economic catastrophe.

Combined, the three countries I mention above have an annual gross domestic product (GDP) of over $6.0 trillion, equal to about 40% of the U.S. GDP. But these are only three countries! Many other European countries are in recession.

But have no fear, dear reader; stock prices in America are rising.

What He Said:

The year “2000 was a turning point of consumer confidence in high tech stocks. 2006 will be remembered as the turning point of consumer confidence in the housing market. That means more for-sale signs going up, longer time periods to sell homes, bloated for-sale inventory, and eventually lower prices for homes. But this time, the turnaround in consumer confidence will have a bigger impact on the economy. Hold onto your seats; this is going to be a nail biter.” Michael Lombardi in Profit Confidential, August 24, 2006. Michael started talking about and predicting the financial catastrophe we began experiencing in 2008 long before anyone else.