Bankruptcy - Coming to a City near you

Many US cities are starting to look a bankruptcy as an option to deal with the crushing weight of the cost of pensions, benefits and wages for city employees.

In America's 7 junkiest cities CNN highlights

cities' operating expenses continue to soar; pension and debt payments don't go away. And as their credit gets worse, the cost of borrowing for municipal projects -- such as sewer plants and roads -- just gets more expensive.

"The fiscal stress is severe in cities around the country, and it's likely to stick around for at least a couple of more years," 

The first major city in the US to go bankrupt was the City of Vallejo in California.

In 2008, Vallejo, Calif., was nearly broke. Faced with falling tax revenues, rising pension costs, and unmovable public-employee unions, the city was unable to pay its bills and declared bankruptcy

Like other municipalities, its public-sector unions had driven its budget deep into the red. A report issued by the Cato Institute last September noted that 74% of the city's general budget was eaten up by police and firefighter salaries and overtime along with pension obligations. The average city in the state spends 60% of its budget on those things.

lavish pay and benefit packages were a root cause of the city's problems. In Vallejo compensation packages for police captains top $300,000 a year and average $171,000 a year for firefighters. Regular public employees in the city can retire at age 55 with 81% of their final year's pay guaranteed. Police and fire officials can retire at age 50 with a pension that pays them 90% of their final year's salary every year for life and the lives of their spouses.

It was thought that going into bankruptcy was a way to get out from under the stranglehold that the public sector unions had on the city and taxpayers in Vallejo.

The city found out it was not that easy. The city has also cut funding for a senior center, youth groups, and arts organizations and has done little to restore an increasingly decrepit downtown, develop waterfront properties, or attract new businesses.
But when it came to voiding those contracts on pensions—a major driver of public expenses—the city blinked. The "workout plan" the city approved in December calls for cuts in services, staff and even some benefits, such as health benefits for retirees. However, it does not touch public-employee pensions. Indeed, it increases the pension contributions the city pays.  

Vallejo turned out to be a test case for many American cities. Now 2 years later many cities are finding the crush of the employee compensation packages unbearable.

In R.I. an receiver was appointed to look into the finances of Central Falls.Once again a major factor has been the high cost of pensions for its city workers. Now both San Diego and Sacramento are looking at bankruptcy as an option to end its fiscal pain. 

We have followed for a long time the outrageous concessions that have been given to city workers. They include platinum pensions and gold-plated benefits but now it seems that the breaking point has been reached. Taxpayers are on the hook and public sector unions will not budge even if it means bankruptcy.

Epic Battle 
Now the battle for unions to preserve their entitlements has begun. It appears bankruptcy may be no solution.

That leaves bankruptcy as probably the most effective tool in the drawer for lowering pension obligations. But if officials are unwilling to demand pension concessions in bankruptcy, there will be few choices left to balance their budgets other than support from the state that itself is facing steep budget deficits, or local tax hikes that could undermine local economies and thereby drive down tax revenues over the long term. That's a sobering thought in what is an already struggling economy, and an argument for government officials to be much more stingy in granting pension increases in the first place.Greenhut

Talk of municipal bankruptcy has not escaped California's politically powerful public employee unions. A number of them are pressing the legislature to pass a bill that would require local governments to get the approval of a state board before filing for bankruptcy. Since the board could be stacked with union-friendly appointees, bankruptcy pleas could be rejected or delayed.Rueters

It will be interesting to watch this battle between public sector unions and taxpayers. But I think I know who is going to lose.

Bill Tufts
Fair PensionsFor All