The Bankruptcy Option
[Guest post by DRJ]
In my view, there are two ways for local, state and federal governments to resolve their fiscal problems and deal with their underfunded pensions and entitlements. One way is to limit benefits and get serious about budgeting. The other is to file for federal bankruptcy relief or state receivership.
The City of Central Falls, Rhode Island, has chosen the receivership option:
“As I posted two days ago, the City of Central Falls (whose slogan is “A City With a Bright Future”) filed for receivership, the state equivalent of bankruptcy. Rhode Island law does not allow a municipality to file for federal bankruptcy protection, but provides the state receivership alternative.
A temporary receiver was appointed by Rhode Island Superior Court Justice Michael Silverstein, an experienced business lawyer and well-regarded judge.
The Petition (embedded below) for appointment of a receiver details the financial problems, and highlights two items, pensions and union contracts.
First, Central Falls’ “actuarial accrued liability” for pensions exceeds $35 million, but there are only $4 million in assets. The annual contribution required by the actuaries for 2009 was $2.7 million, of which the City actually contributed $0. No funds are available for 2010 contributions.
Second, of the $18 million budget, $6.5 million is for employees with collective bargaining agreements. According to The Providence Journal, “City Solicitor John T. Gannon said the city is in the middle of all its municipal employee union contracts. Mayor Charles D. Moreau has been trying to negotiate concessions, he said, but without success.”
The implications of the Central Falls receivership are enormous. Under receivership, the receiver has the power to modify all contracts, including union contracts.”
Central Falls may become a legal battleground because unions, in particular, fear the domino effect if governments choose to abrogate their contracts via bankruptcy or receivership. If that happens, maybe these courts will have stiffer legal spines than those in the GM and Chrysler cases.
— DRJ
Well they could always take up gold mining. That’s what Chavez seems to be doing these days. You never know.
bill-tb (541ea9) — 5/21/2010 @ 6:26 pmOne small city got into this situation and tried to file bankruptcy but it was blocked by the unions. The response was for the city to disincorporate. It reverted to the county to provide police and fire. Since there was no longer a city, the contracts were void.
Mike K (82f374) — 5/21/2010 @ 6:43 pmDoesn’t bother me. The cities had no right to promise the citizens money to the unions in perpetuity.
Charlos (4336cc) — 5/21/2010 @ 7:23 pmCentral Falls may be the harbinger of a lot more municipal defaults in the coming months/years–a “Greece” for American cities, if you will.
The amount of liability held by cities just for pensions is way beyond what can be paid in the long run. Pile on current entitlements, obligations, infrastructure, etc., and it’s clear that it’s just a matter of time before the piper needs to get paid.
The protests in Europe by unions and “students” (many of whom are just unemployed loafers living on the government teat for the six years of their “college” experience) are a great example of how drunk fratboys act when they are told that the party’s over.
Like I’ve said before, I’m almost hoping the whole system comes crashing down, because I know these clowns will be going down with me and the full force of reality will finally hit them square in the mouth. They certainly won’t be the ones to save it or even keep up the illusion of propping it up, that’s for sure, but you can bet your bottom dollar they’ll be hectoring the ones who have that ability all the way up until the end.
Another Chris (94b855) — 5/21/2010 @ 7:59 pmVallejo CA filed for BK protection over a year ago, and the union contracts seem to be the central sticking point in resolving the issue.
Perhaps they too will have to dis-incorporate?
Which raises the question of what happens if a County dissolves (or can they?)?
AD - RtR/OS! (9200e9) — 5/21/2010 @ 8:06 pmWhat a surprise! This was the town that was in the news because a huge percentage of its high school students were failing the state exam and the teachers refused to work something like an additional 25 minutes a day or week without compensation. The school fired all the teachers and Obama supported it. I wonder what he thinks of the receivership.
daleyrocks (1d0d98) — 5/21/2010 @ 9:24 pm“…I wonder what he thinks of the receivership.”
Comment by daleyrocks — 5/21/2010 @ 9:24 pm
He probably had to look it up to see what it was…
oh, wait, that would be like reading AZ’s law to see what it said before commenting upon it…
never mind.
He’s agin’ it.
AD - RtR/OS! (9200e9) — 5/21/2010 @ 9:32 pmIt seems wrong for a municipality to inflict a state of perpetual indebtedness on the citizenry.
Why not simply contract for the services required at the prevailing market rate, and allow the companies involved (and their unions)to make provisions for retirement, insurance, and the like?
Competition would keep these costs in line, and, as the financial situation changes, so would the city be able to manage the ebb and flow of tax dollars.
Anon 1:50 (ab0a05) — 5/22/2010 @ 4:28 amRe : Anon
This is a fine idea going forward, but it doesn’t solve the problem with cities already committed to these costs and services via contracts and pension plans. Where I live (SE Michigan) some cities have been able to outsource limited services such as sanitation and public works, but the likelihood of outsourcing/privatizing very expensive public safety (police, fire) and educational services is approximately zero.
Rich B. (eb120d) — 5/22/2010 @ 4:49 amMission Viejo, where I live, has been a city for about 20 years. In 1964, there was nothing here but cattle grazing. When I arrived in 1972, it was still a small town and you could still see cattle grazing in the hills. Now it has a population of about 120,000 and we have the usual careerist problems with the city council.
In 2000, there was a particularly nasty election with last minute fliers that accused one candidate of things that were not true. I got involved with a local group that called itself, The Committee for Integrity in Government. There were about 20 of us with a total group of maybe 50 who would show up to picket or go to rallies. It was sort of a precursor to the tea party locally.
I found myself on the planning commission because Gail Reavis, the new council member who had defeated a local lobbyist, could not get any of her appointments approved by the council majority. They just voted every one down. She was stymied. I was asked if I would served and I agreed. As it happened, I had operated on one of the council majority members and was pretty well know in town so I was approved.
Two years later, the CIG ousted the entire council majority with new candidates. Big celebration. Then the new members, who we had all supported in return for promises of reform, made friends with the usual local lobbyists and became indistinguishable from the old group.
The issue was city financial restraint. At one point, city council members were building city buildings and naming them after themselves. The city hall and city library were misrepresented to the public as far less expensive than they were.
Now, the city, which has 150 employees and over half of them have salaries over $100,000, teeters on insolvency. The city reserves, which ten years ago were over $25 million, are gone.
Anyway, we tried. Maybe the tea parties can pick up the baton. Many of the people I see at the rallies are the same people. My house is for sale.
I don’t know what is going to happen to California. My kids and grandkids are here but I don’t know if I want to watch the coming disaster. We’ll see.
Mike K (82f374) — 5/22/2010 @ 7:07 amMike K.
From your experience, any ideas on how to prevent reformers turning into “professional politicians”? I guess the public never letting themselves think “now we’ve got it done, and can get on with the rest of our lives” is probably the key. Nothing in this world keeps functioning smoothly without effort and maintenance. I guess even a group like CIG is made of individuals who can be seduced by the feel of influence and power. There is a citizen’s group In Philly that has worked for honest and educated elections, but from what I’ve seen, even they have become more partisan as time has gone on. (I could be wrong, but that’s my perception).
MD in Philly (cb8efe) — 5/22/2010 @ 8:28 amMission Viejo, where I live, has been a city for about 20 years.
Yikes! If it is bad there, imagine how really bad it is in those cities that are much larger and full to the brim with people who routinely embrace liberal policies, ideas and the Democrat Party in general. Where politicians can be brazen and shameless in their trickery and, as long as they stick to the playbook of feel-good, pro-compassion, pro-union, kum-bah-wah tactics, get away with it.
Throw in a lot of economic weakness, lousy schools, low literacy rates, noticeable levels of crime/vandalism and — voila! — you end up with a high percentage of urban America. A more pathetic, even nightmarish, dysfunctional version of communities like Mission Viejo.
Of course, some cities on occasion have pulled back from the brink and voted into office a Rudolph Giuliani or Richard Riordan. But I wonder if at a certain point that won’t be enough or, worse, no longer will occur. If so, America’s future is guaranteed to be a cross between a society like Mexico and a society like Greece.
Mark (411533) — 5/22/2010 @ 9:46 amIL’s in a similar hole, and I was fervently hoping that last year the state would have had to declare bankruptcy, and let the chips fall where they may. Too much corruption, too much public apathy, too much prostrate MSM over the past few decades, and now our current hack Governor won’t even risk a little union wrath over a new convention business reform bill (which is as a corrupt gov’t entity as the day is long).
Want to know how bad it is here? Less than a month ago we had a huge demonstration at our state capital by public school teachers demanding a tax increase in order to preserve their gold – plated pensions and 30 – hour work weeks (not including their entire summers off). Why on earth would they demand this, in the middle of a terrible recession and a bankrupt state? Because it’s for the children!
Dmac (3d61d9) — 5/22/2010 @ 10:34 am