Since then, three cities in the Golden State have either entered bankruptcy or on the verge of it because of massive pension costs — Vallejo, Stockton and San Bernardino. I’m not aware of any other state with more than one such afflicted city, and most states don’t have any.

But are other states learning from California’s mistakes? Evidently not. On Monday, there were reports that New Jersey was copying the screw-up that San Diego elected officials made beginning in 1996:

“Gov. Chris Christie’s move to reduce New Jersey’s pension payment to help close a mid-year budget gap has Moody’s Investors Service concerned that the state is approaching the limit of steps to trim spending.

“The second-term Republican is cutting $694 million of spending to balance the budget for the year through June. That includes $94 million from recalculating the required pension contribution as a result of revised actuarial assumptions, Baye Larsen, a Moody’s analyst in New York, said in a report last week.

“While the fix will help balance budgets through fiscal 2018, pension costs will be higher in later years as a result, according to Moody’s.”

This is crazy. It’s especially crazy from a guy who likes to criticize President Obama for fiscal recklessness. But it’s also super-mega crazy for a politician who takes shots for his doughy appearance to be making like Wimpy of Popeye fame when it comes to indiscipline and the need for instant gratification.

By Chris Reed

In the sci-fi satire “Robocop,” we were treated to a glimpse of a future Detroit in which mechanized police ran amok. As my colleague John Seiler noted the other day, in modern-day Detroit, we’re being treated to a glimpse of a future California in which promised-but-unaffordable retirement benefits for public employees aren’t paid. They’re scaled back in bankruptcy court or by “czars” named to oversee the restructuring of the finances of insolvent cities.

This is from a Bloomberg News story outlining Emergency Manager Kevyn Orr’s 128-page plan to deal with the city’s default on its debt:

“Active and retired workers would see their pensions reduced under the plan, and the city wants to replace its retiree health-care plan with one relying on federal insurance exchanges under Obama’s Patient Protection and Affordable Care Act or Medicare with city supplements, according to the report.”

Post-retirement benefits to consume 65% of budget without changes

Here’s more from Bloomberg about why these benefits have to be Orr’s focus — because they’re about half Detroit’s unsecured debt, and even more than that if you count pension obligation bonds:

“According to Orr’s proposal, the $11.5 billion in unsecured claims include $5.7 billion in post-retirement benefits, $1.43 billion in pension-obligation certificates and $530 million in general-obligation bonds.”

The Detroit Free Press explains what that translates into:

“The emergency management team said legacy retirement costs are cutting deeply into city services.

“The report to creditors noted that total legacy expenditures are nearly 43% of total revenues in 2013, according to the preliminary forecast. That would grow to nearly 65% by 2017 without any action.”

A state law that California sure could use

As has much of the coverage of insolvent governments, the Bloomberg story notes the claim of public employee unions that pensions are inviolate contracts — although federal bankruptcy courts, thankfully, don’t always agree. But Orr has a tool in his work kit that makes him particularly cocky — one that is badly needed in California. The Free Press says a 2012 state law gives him authority to unilaterally reduce spending and services, and to impose new terms for employee contracts, both wages and benefits.

Why am I confident that Detroit-style radical cuts in benefits are coming to California?

Because, to paraphrase Instapundit, what can’t continue indefinitely doesn’t. There is no way that voters and thus politicians will tolerate a local government status quo in which more than one-third of the budget goes to pay for the benefits of retired employees.

Lots of cities are on track for just such spending in coming years, and the backlash will be huge. All the Maviglian whining and spin about evil hedge funds, the Koch brothers and pension envy can’t make this coming revolt go away.

By Katy Grimes

SACRAMENTO — Bankruptcy still haunts California cities six months after Gov. Jerry Brown signed into law AB 506. Written by Assemblyman Bob Wieckowski, D-Fremont, the bill made it more difficult for municipalities to file bankruptcy, such as requiring negotiations with creditors before a bankruptcy can be filed.

When AB 506 was only four months into law, Wieckowski started pushing a new bankruptcy bill, AB 1692. On Wednesday, Wieckowski told colleagues in the Assembly Local Government Committee that AB 1692 was a “cleanup bill” for AB 506. The new bill would prevent cities from filing for bankruptcy protection without first participating in a lengthy mediation process. The fur flew when he said he made so many concessions on the original bill just to get it passed and signed into law, that he created a new bill to rectify and retract those concessions.

But after Wieckowski’s testimony, some are questioning the real motives behind the new bill. Is this just a legal vanity bill, or a gift to the state’s labor unions?

New Bankruptcy Law

Under AB 506, local governments are now required to use a “neutral evaluator” for a minimum of 60 days before seeking full bankruptcy protection. This new mediation process can only be avoided if a municipality declares a financial emergency and heads straight for federal bankruptcy court.

Sitting with Wieckowski at the hearing was Christy Bouma with the California Professional Fire Fighters. She said, “We want to make sure it works.” But firefighters’ contracts could be nullified if cities enter into bankruptcy.

The California Labor Federation, the Teamsters, the United Association of Plumbers and Pipefitters, the Sheet Metal Workers’ International Association and many other labor unions were also represented at the hearing, all in support of AB 1692, and also obviously concerned about losing their rich union contracts.

But cities feel duped.

Cities Are Angry About Changes  

The League of California Cities reported in its fall 2011 newsletter, “In September 2011, after careful negotiations, which included Sen. Lois Wolk, D-Davis, and Gov. Jerry Brown, the League agreed to a compromise based on provisions that allowed for pre-bankruptcy facilitation by a mediator without state or other political intrusion, and unfettered local access to federal bankruptcy protection if an emergency fiscal situation exists.”

Wieckowski agreed to the League’s amendments in September 2011.

The cities of Stockton and Mammoth Lakes are precariously perched on the edge of bankruptcy, and are proceeding with mediation according to the provisions in AB 506. But Wieckowski’s new bill threatens to unravel any headway Stockton has made.

Wieckowski’s proposed changes to the six-month-old bankruptcy law took local government groups by surprise, the league newsletter said, “because AB 506’s passage was preceded by years of legislative battling and extensive negotiations, which led to the legislation being heavily amended to address the concerns of local governments and organizations like the League of CA Cities.”

AB 506 was amended 11 times before finally being passed by the Legislature.

Reversion

AB 1692 appears to revert back to earlier versions of AB 506, before the many amendments were agreed to. But early versions of Wieckowski’s bill had vehement opposition last year.

AB 1692 would remove provisions of AB 506 related to the mediation process, including giving the “neutral evaluator” independent decision-making authority. AB 1692 would allow other interested parties to create delays by allowing the process to continue without agreement by the public entity.

And a disturbing addition to AB 1692 adds “successor agencies” to the list of local public
entities that may file for federal bankruptcy protection. The bill’s analysis explains, AB 1692 “Expands the definition of ‘local public entity,’ to include a successor agency, as defined in the Health and Safety Code related to the dissolution of redevelopment agencies and designation of successor agencies, for the purpose of an entity eligible to file for federal bankruptcy.”

But there was no discussion at the hearing about including former redevelopment agencies in the definition of state public entities entitled to file for bankruptcy, dissolved after Brown and the Legislature this year ended redevelopment, .

Cities’ Opposition

The League of California Cities formally opposed early versions of AB 506 “because it created obstacles to municipal bankruptcy, and resulted in a process stacked against local agencies.” The League said it now is opposed to AB 1692 for the same reasons.

AB 1692 is designed to again insert the phrase “neutral evaluation” into the statute as “a form of alternative dispute resolution that has elements of mediation though, unlike mediation, it may be mandatory mediation.”

Many are concerned that the attempt to undo the agreed-upon provisions in AB 506 only four months after the law took effect, and say it is a bait and switch aimed at the cities of Stockton and Mammoth Lakes, which are currently engaged in mediation with their creditors under the provisions of AB 506.

This measure appears to tamper with that process when the parties have not even had a chance to determine if they can reach agreements.

Kathy Miller, representing Stockton, said the city is engaged in the mandatory mediation process, and is having success. However, because the negotiations are confidential, she could not report specifics, but insisted that the process is working.

Premature Legislation

Other opponents said that the bill is premature, since there are no completed mediated negotiations yet.

“Why wouldn’t we wait until after we see the effects?” asked Assemblyman Cameron Smyth, R-Santa Clarita, chairman of the committee.

“I feel there are obvious things that need to be done,” Wieckowski said. “Things I agreed to, to get the bill signed by the Governor.”

Wieckowski said that, because the rest of the nation is watching to see what California does, he is taking a closer look at the concessions he made last year. And he added that members of the Bankruptcy Bar Association view the process as groundbreaking. “Hopefully I am only improving the situation,” Wieckowski added. “It’s unique to anything ever done.”

Editor’s Note: This is the second in a CalWatchDog.com Special Series of 12 in-depth articles on municipal bankruptcy.

MARCH 9, 2012

By STEVEN GREENHUT

Economist Allan Meltzer once quipped that “Capitalism without failure is like religion without sin. It doesn’t work.” Americans have been witnessing this axiom on a broad scale, as government efforts to prop up industries, bail out the financial sector and protect select private businesses from failure have only caused a prolonged financial crisis. Without failure, there is no day of reckoning and no effort by the failed party to make the fundamental changes needed to avert future crises.

Ultimately, there’s only so much bailout money to go around, and private businesses that make bad decisions, offer uncompetitive products or services or are run inefficiently ultimately go belly up or restructure their debt. Americans accept that bankruptcy is a necessary part of the market system. We want to see those poor-performing businesses change or shutter their doors. New competitors will spring up and, in the end, the public is generally better served when companies can fail rather than get bailed out.

The problem in the public sector is that government never is allowed to fail. There never is a day of reckoning no matter how poorly a government agency may provide its so-called services. Because there are no real customers in the government world, there’s never any hell to pay when the public is mistreated, when resources are wasted and when incompetents enrich themselves in the name of serving the public. Often, the worst agencies are rewarded for their failure by being granted additional public dollars. There never is actual failure.

Reform Plans

For decades, I’ve been hearing about reform plans for any number of government agencies. Think of the Los Angeles Unified School District, the poster child for mis-educating students and squandering public resources. Nothing ever changes there because the system cannot fail. It is propped up by government funding.

Our federal government does many things, almost all of them poorly and wastefully, yet our government prints as much money as it needs to pay for this. There is no failure, no day of reckoning. The federal government’s debt has soared above $15 trillion, but there is no chance of capitalist-like failure for the national government.

But it’s a different story at the state and municipal level. State governments and localities cannot print money. They must, at least theoretically, balance their books. Yet many state governments such asC alifornia struggle with endless budget deficits. Unfunded liabilities to pay for pension promises for state and local public employees hit an estimated $3 trillion nationwide. Then there are the debts for the health-care promises that municipalities have made to their employees. Much of this is not honestly accounted for, so the real numbers are worse than the official ones.

De Facto Bankruptcy

As Orange County, Calif., Supervisor and former Treasurer John Moorlach has pointed out, California is in de facto bankruptcy. States are not allowed technically to go bankrupt under current federal law, but some of them — California most notably — are basically insolvent. They spend more money than they take in. California’s officials play games with the budget every year to mask that debt, but it is there no matter how artfully legislators and governors shift around funds and paper over their ongoing debt spending.

Municipalities can go bankrupt and some of them — Harrisburg,Pa., Central Falls, R.I., Vallejo, Calif. — have actually gone bankrupt or tried to do so. In the San Francisco Bay Area,Vallejois a union-dominated city that ended up spending 80 percent of its budget on pay and benefit packages for city workers, primarily police and firefighters. In Vallejo, one police captain earned a compensation package of $300,000 and average firefighter compensation is in the $175,000 a year range. At a certain point, cities that spend that way end up insolvent and bankruptcy becomes one of the few options available.

It’s one of the only ways to impose failure on a public entity. Governments are the ultimate example of Meltzer’s maxim. They spend. They make foolhardy decisions. They make outrageous promises to the public employee unions that have so much political power in state capitols and city halls. When there’s no money left, officials play games with the numbers or — as California Gov. Jerry Brown continues to do — make their main objective raising taxes. Of course, raising taxes is only a temporary fix. Short of the threat of failure, the same politicians who created the current mess will continue to spend money in the same old ways. They only buy themselves time and tax hikes can actually reduce tax revenues, as the supply side economists have shown.

Union Critics

The main critics of the bankruptcy option are the unions. They know that bankruptcy would enable cities and possibly states to abrogate these unaffordable contracts. I saw it many times while covering local government. Unions would promise that the new pension formula — usually granted retroactively — would not cost city governments anything. But their economic projections were always overly rosy, and before long the unfunded liabilities would soar.

But the courts in California have ruled repeatedly that once an elected body grants a pension increase, there is no reducing the benefit for the 30-year life of the contract. The California Supreme Court ruled in November 2011 that not only are vested benefits such as pensions, which were granted contractually, off-limits from any tinkering, but non-contractual and non-vested benefits such as retiree health care also can carry the weight of a contract. By unanimous vote, the court found an implied contract and made it that much more difficult for localities in this state to address budgetary problems. There are fewer and fewer options.

The public-employee unions championed a bill, signed into law by Gov. Jerry Brown in October 2011, that makes municipal bankruptcy more cumbersome by forcing localities to get approval for such actions by additional committees. It’s not a ban on such bankruptcies, but it makes it harder for cities to use this option. But it’s not just the unions that are opposed to the concept of government bankruptcy.

Bond Markets

Some conservative intellectuals, concerned about the impact of bankruptcy on bond markets, have been campaigning against this idea. This debate started in January after former Florida Gov. Jeb Bush and former U.S. House Speaker Newt Gingrich made this argument in a Los Angeles Times op-ed titled, “Better Off Bankrupt”:

“The figures for next year’s budgets are staggering. California, which faces a $25.4-billion budget shortfall, will pay $100,000-plus pensions to more than 12,000 state and municipal retirees this year. A Stanford study puts the state’s unfunded pension obligations at more than half a trillion dollars.Illinoishas a $15-billion budget deficit, prompting its governor and lame-duck Legislature to hike its personal income tax rate by 66 percent.New York, where 73 percent of the government workforce is unionized, is staring at a $10-billion deficit.

“There has been an organized federal bankruptcy process for municipalities since the 1930s, and a handful of cities, towns and counties – most notably California’s Orange County in 1994 – have gone through municipal bankruptcy and gotten their fiscal houses back in working order. A bankruptcy option for the states would look very similar to Chapter 9 municipal bankruptcy, with some necessary modifications.”

The Manhattan Institute’s E.J. McMahon disagreed. He argued in the Wall Street Journal that, “Such an option would certainly rattle the bond market — which bankruptcy proponents see as a good thing. Yet this ignores the potential for collateral damage and disruption. While bond spreads might get wider for the most troubled states, the enactment of a state bankruptcy law is likely to raise the cost of borrowing for all municipal issuers.”

Granted, McMahon is dealing here with the prospect of state bankruptcy, rather than the municipal bankruptcies that are the subject of this series. As such, he is right to point out that most of the state spending problems come from educational spending and Medicaid transfer payments, not pension obligations, which are local obligations. But many of his points are meant to apply to municipal bankruptcy as well. He argues that “officials committed to cutting costs already have options for putting the squeeze on their unions.”

Unused Tools

Unfortunately, while officials indeed have those tools, they generally are unwilling to use them. Expecting state and local officials, who in California and other states with the biggest problems tend to be union-supporting Democrats, to take on the unions that elected them to office is unrealistic. It’s not going to happen easily and the threat of bankruptcy at the very least could force these unions and officials to embrace the needed tough medicine.

Critics of bankruptcy like to point to the results of the Vallejobankruptcy as an example of why municipal bankruptcy is no panacea. I wrote in March 2010 in City Journal, “Though the city eventually voted to reduce firefighter pensions for new hires and to require a larger pension contribution by firefighters, it did not touch existing pensions or pensions for police officers.Vallejo’s avoidance of the pension issue makes it less likely that other cities could declare bankruptcy and then easily dispose of their burdensome pension promises.” Since then, the city has emerged from bankruptcy and has cut benefits mostly moving forward. The city did cut back salaries and slash its retiree health-care debt, but it fell far short of ditching its enormous benefit obligations.

Bondholders’ Losses

Wrote Nicole Gelinas in City Journal:

“Bondholders should realize, then, that they are vulnerable to real losses as cities, towns, and states move to escape massive health-care obligations to their retirees. At best, they’ll suffer theVallejo bondholders’ fate — though a three-year deferral of payment is no small matter to an investor. At worst, they’ll take bigger losses as obligations pile up. It’s easy to imagine some future mayor convincing a bankruptcy judge that it’s only fair for bondholders, along with union members, to take big cuts in a restructuring. Indeed, heavily indebted governments’ willingness to repay crippling municipal debt will depend on what’s politically expedient. Today, politicians still see the advantages of borrowing more. Ten years from now, it may be more practical for a governor to tell the public: we’ve borrowed too much, we did so because clever Wall Street investors convinced our predecessors that it was a good idea, and we shouldn’t have to pay those investors back.”

So Vallejo was not a panacea, but it did help the city and, as Gelinas points out, might set the stage for much more far-reaching results from future municipal bankruptcies. That’s what has many bankruptcy critics concerned. Granted, bond holders might have reason to fear that result, but that should give taxpayers hope that bankruptcy could provide the pressure needed to force officials to get out from under these unsustainable costs for public employees. Cities are running out of money and something has to be done.

Sure, it would be better if elected officials used other options such as those detailed by McMahon before relying on bankruptcy. But that’s wishful thinking. Officials would rather play financial games and seek new tax revenues or leave the mess for future politicians. Yes, as other critics note, municipal or state bankruptcy is just a reflection of failure. But that’s exactly what governments need — some level of failure to force them to act responsibly. As Meltzer understood, failure — or the threat of it — is the only thing that works.

———————–

CalWatchDog.com’s Special Series on Municipal Bankruptcy:

Broke Municipalities Look to Bankruptcy Option

Bankruptcy Didn’t Make the Sky Fall In Orange County

Local Governments Face Bankruptcy Quandary

Bond Holders Seek Governmental Transparency