Let’s see, there’s the Iranians, the sequester, the Federal Budget that defies reduction, but none of those are going to have impact that is going to roll across the nation with the coming massacre in state and municipal financing.
The big blue states and cities are teetering on the cliff and it’s doubtful that a good outcome is in sight.
States and cities have much bigger problems running deficits than does the federal government because they can’t print money. They have to raise taxes, cut spending – as in real dollar cuts – or borrow money.
In 2008 Vallejo, CA filed a chapter 9 bankruptcy because their tax base fell apart reducing revenues and their cost of employee wages and pensions were killing them. From Governing comes this assessment:
Many fiscal observers point to Vallejo as Exhibit A of why municipal bankruptcies are a bad idea. The city’s credit rating plummeted, all but killing its borrowing ability. Cuts to services and public safety led to increased crime and prostitution. Even now, the city faces a looming collective bargaining battle with labor unions, and its 2013 budget draws several million dollars from rainy day reserves.
Now that may not be a good result, but welcome to the real world.
For the past four decades, public employee unions and elected Democrats have engaged in theater that has given Democrats access to taxpayers pocket books in an unprecedented way. Democrats who head big blue states and cities “negotiated” with PE unions giving them large pay increases and unchecked pensions. The unions then got an automatic payroll deduction for dues, collected before the members ever saw their checks and before the money even got warm in their accounts, the unions wrote checks to help elect more Democrats. Rinse and repeat.
That little should-be-a-RICO-violation is coming to an end and it’s not going to be pretty.
That was until Central Falls, R.I., declared bankruptcy. The finance-strapped town of 20,000 people, located on the northern outskirts of Providence, had been trying to renegotiate its pension contracts for months with no success. When it filed for bankruptcy protection in August 2011, the slate was essentially wiped clean. The city immediately moved to change its labor and retiree agreements. The new deal hammered out by Central Falls and the unions was essentially what the city had wanted all along, says Ted Orson, the attorney for the city’s receiver. The final agreement slashed pensions by 55 percent…
There are two large cities in California fighting the same battle, San Bernardino and Stockton, and then there’s Detroit which will be taken over in about 30 days by a state manager with essentially the same powers as a bankruptcy judge. Union contracts, including retirees’ benefits are being rewritten unilaterally. In the case of Stockton, they are petitioning the court to allow them to haircut bond holders principal. If that happens, it will be the first time in history that bond holders of municipal bonds have actually lost principal.
The bottom line here is that the stigma of a city filing bankruptcy is gone, the recalcitrant unions are going to get slammed and potentially, bond holders may well discover that muni bonds aren’t the safe haven they’ve been for a hundred years.
The world is going to change dramatically. Blue state governors and blue city mayors are being forced to stand up to unions. The public has had it with tax increases – at least at the local level – and are not siding with unions. Bond holders are going to be looking for substantially higher interest rates and real security to do deals in the future.
If you’re a “progressive” at the local level, you’ve just run out of other people’s money. The end of the world!
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