Wednesday, May 9, 2012

The New Big Thing ... City Bankruptcies

Why would any city threaten to voluntarily enter into Chapter 9 (federal bankruptcy law concerning reorganization for municipalities)?

Because sadly, that's often the only way to bring about a serious and realistic discussion with public sector unions about the city's precarious financial situation and its potential solutions.

Public sector unions want to keep a firm grasp on whatever benefits they've negotiated regardless of whether those benefits are realistic or even affordable for unsuspecting taxpayers.

In other words, unions negotiated outsized pension and retiree health care benefits from local government officials and outside the view of taxpayers.

These expensive retirement benefits were never properly funded, and now these same unions want to play the delay game as long as they can and then, when that put-it-off-as-long-as-possible game is over, be in the political position to say, "Don't blame us. We did all we could. Blame the city or anybody else, but don't blame us."

In other words, it's not a grown-up adult game the public sector unions are playing. It's a blame avoidance existential game. They could care less about any adverse financial effect on the taxpayers.

In the end, I'm betting on the taxpayers bringing sobriety to the table and against the non-value added public sector unions.

Distressed Cities Weigh Bold Tactics in a New Fiscal Era summarizes a recent national conference about the severe financial issues faced by municipalities. Here's a sample:

"Attempts to plug budget holes with one-time transactions are giving way to other approaches, Mr. Stanton said. The conference was devoted to a discussion of the strengths and weaknesses of the more powerful tools being used in many cities these days, including receiverships, emergency declarations and even bankruptcy. . . .

In Jefferson County, Ala. — which filed the biggest Chapter 9 municipal bankruptcy in American history this fall after its sewer-construction financing fell apart and a court threw out one of its taxes — county commissioners were voting to default on a general obligation bond payment.

In Detroit, city and state officials were sparring over how much emergency aid the city might be able to get, and how much state oversight and control would accompany it.

Stockton, Calif., was in negotiations in a last-ditch effort to avoid becoming the biggest American city yet to declare bankruptcy. And just two hours west of Philadelphia, Harrisburg, the state capital, recently announced that it would default on a payment coming due to general obligation bondholders.

It all gave a certain urgency to the discussions.

Richard L. Sigal, a lawyer who has played roles in many fiscal crises, including New York City’s in the 1970s, was wary of bankruptcy, arguing that the Chapter 9 law does not bestow the power to tax, cut spending or borrow — the tools that struggling governments need. “I have yet to see a situation where bankruptcy is the right option for any municipality,” he said.

But Robert G. Flanders Jr., the state-appointed receiver for Central Falls, R.I., said his city’s declaration of bankruptcy had proved invaluable in helping it cut costs. Before the city declared bankruptcy, he said, he had found it impossible to wring meaningful concessions out of the city’s unions and retirees — who were being asked to give up roughly half of the pensions they had earned as the city ran out of cash.

“The municipality is on bended knee asking the retirees and unions to come to the table and give up their contract rights,” he recalled. “All of that leverage shifts once you have the gumption to pull the Chapter 9 trigger. And guess what? That produces agreements quicker and more effectively than otherwise.”

Others preferred the approaches some states had taken to avoid bankruptcies. Two of Michigan’s new emergency fiscal managers — Joseph L. Harris in Benton Harbor and Joyce Parker in Ecorse — talked about the sometimes unpopular steps they could take under a new state law giving them the power to reject contracts, including labor contracts.

Pennsylvania officials explained their state oversight program, in which Harrisburg and 25 other municipalities are enrolled. Natwar M. Gandhi, the chief financial officer of Washington, D.C., spoke about how giving budgetary powers to an independent officer had helped put the nation’s capital on more solid financial footing.

But some of the most urgent exchanges concerned bankruptcy, which, in the past, cities sought to avoid at all costs.

Naomi Richman, a managing director at Moody’s Investors Service, wondered aloud whether it might become more acceptable for cities to declare bankruptcy.

“Back in the ’80s, the stigma against corporate bankruptcy fell away, and it became viewed as a strategy a corporation might pursue for various reasons,” Ms. Richman said. “Recently, with the residential housing collapse, individual bankruptcy has less of stigma in society — it’s a strategy that a person might be advised to follow if they have a debt that they can’t afford. Could the same thing happen for municipal bankruptcy?”"

Summing Up

The threat of municipal bankruptcies will become increasingly commonplace as recalcitrant public sector unions remain unwilling to address the very real and severe financial issues confronting many cities today. To solve these issues will require tackling pension and retiree health promises which were made without proper consideration and certainly without providing funds adequate to meet those promises.

Many sad stories will unfold, but the problems are real and their solutions will prove to be very expensive, both for employees and taxpayers alike. In a world of scarce resources, choices must be made. And especially in a world where adult fiscal responsibility was often neglected and even absent, the alternatives aren't painless.

To what extent future payments will need to be adjusted isn't known and can't be decided without full and transparent consideration being given to the interests of all affected parties.

Since the public sector unions and employees prefer to keep all they've been promised, even if now unaffordable, they won't endorse common sense viable solutions to these financial problems without first experiencing a great deal of external pressure to do so.

With respect to the views of taxpayers, newly found transparency will open lots of eyes and solid decisions will then be forthcoming.

Of course, in the end taxpayers, present and future, will be the source of funds for all payments to all concerned.

It's time to get started down the path to recovery, stability, predictability and fiscal sanity in many of our cities.

Thanks. Bob.