Earlier this month I highlighted the problems that public employees are facing in cities and some states with their outrageous pension plans and wages. They are literally bankrupting cities and, unlike the federal government at least in the short term, they can’t print money.
The bottom line is that San Bernardino and Stockton, both in California, are petitioning the bankruptcy court to allow them to reduce pension payments to the state pension fund, reduce payments to retirees and reduce the principal owed to bondholders. The first shoe just hit the ground.
The bankruptcy of the largest U.S. city to file a chapter 9 bankruptcy petition has yielded a decision with serious implications for municipal creditors. Specifically, the United States Bankruptcy Court for the Eastern District of California overruled the objections asserted by retired employees of the City of Stockton, California and authorized the City to suspend the retiree’s health benefits during the City’s Chapter 9 case. […] Bankruptcy Judge Klein acknowledged the potential hardship to the retirees, but citing Section 904 of the Bankruptcy Code stated that the court has no power to interfere with the property or revenues of the debtor during Chapter 9.
Stockton joined a growing trend by filing for Chapter 9 protection on June 28, 2012. During course of its bankruptcy case, the City implemented a new budget, which featured significant spending cuts, including a unilateral reduction of existing retiree health benefits.
I would suspect that the City of Stockton will be hosting a barbeque in the near future featuring new recipes for “Sacred Cow.” Proceeds will not likely go to retirees.
Public employees have long had an incestuous relationship with elected officials – virtually all Democrats. Unions “negotiate” with elected Democrats who give them diamond studded contracts and then Democrats receive huge campaign contributions from union members payroll deduction “dues.” It’s a scam to take money from taxpayers and launder it through public employee checks to unions and then featherbedding it back to the Democratic Party. It should be the subject of a RICO investigation, but I won’t hold my breath.
This ruling by Judge Klein is the start of a rock rolling downhill aimed at public employee unions and hopefully will restore some sanity to both union contracts and to city – and state – financing.
Union members are on notice that their fat pension deals aren’t off limits and the cities are going to discover that a new world is dawning where their ability to get nearly “free money” in the municipal bond market is going away.
Those two developments should bode well for taxpayers, for fiscal responsibility at the local level and, if conservatives are smart enough to leverage this mess, for conservatives to make a strong case to voters at the local level and to begin building a strong bench to reign in spending.
Aaron Kleven at the Association of Corporate Counsel, linked above, makes the case in a more lawyerly fashion…
This decision gives Chapter 9 debtors a great deal of flexibility to modify the rights of contractual counterparties, making Chapter 9 potentially even more unfavorable to creditors than the more well-traveled chapters of the bankruptcy code. Though municipal debt has traditionally been stable, the creditor-hostile nature of Chapter 9 should give potential creditors pause. If municipal bankruptcies continue to become more commonplace, creditors of various stripes — including institutional lenders, contractors, individual bond-holders, and workers negotiating compensation and pensions — would be wise to reevaluate their investment strategies so as to account for the greater risk of payment default or non-consensual credit modification.
In other words, the free lunch ain’t free.
Elected officials are going to have to reign in unions – and we’re seeing this start to happen all over – and the cost of borrowing to governments will be more expensive which could give voters pause when their elected officials try to pawn off another bond issue to patch their spending plans.
We could really be seeing the beginning of a new, and much more conservative, world at the local level. If that happens, you can bet it will “trickle up” as a new breed of fiscally conservative politicians come on the scene.