Bankruptcy, the Best Way to Deal with Public Unions

Distressed cities are finally doing what they should have been doing long ago, declaring bankruptcy to force concessions from public unions. Numbers are still a trickle, but at soon as a major city such as Oakland or LA selects that option, we will likely see a torrent of municipal bankruptcies.

At a packed, two-day conference on municipal woes sponsored by Michael Stanton, the publisher of The Bond Buyer Distressed Cities Discuss Bold Tactics in a New Fiscal Era.

The conference was devoted to a discussion of the strengths and weaknesses of the more powerful tools being used in many cities these days, including receiverships, emergency declarations and even bankruptcy.

Attempts to plug budget holes with one-time transactions are giving way to other approaches, “This is truly a new era for dealing with troubled municipalities,” said Stanton.

New woes were unfolding elsewhere even as a capacity crowd of government officials, investors, lawyers and credit analysts were gathering here to discuss the trend.

In Jefferson County, Ala. — which filed the biggest Chapter 9 municipal bankruptcy in American history this fall after its sewer-construction financing fell apart and a court threw out one of its taxes — county commissioners were voting to default on a general obligation bond payment.

In Detroit, city and state officials were sparring over how much emergency aid the city might be able to get, and how much state oversight and control would accompany it.

Stockton, Calif., was in negotiations in a last-ditch effort to avoid becoming the biggest American city yet to declare bankruptcy. And just two hours west of Philadelphia, Harrisburg, the state capital, recently announced that it would default on a payment coming due to general obligation bondholders.

Robert G. Flanders Jr., the state-appointed receiver for Central Falls, R.I., said his city’s declaration of bankruptcy had proved invaluable in helping it cut costs. Before the city declared bankruptcy, he said, he had found it impossible to wring meaningful concessions out of the city’s unions and retirees — who were being asked to give up roughly half of the pensions they had earned as the city ran out of cash.

“The municipality is on bended knee asking the retirees and unions to come to the table and give up their contract rights,” he recalled. “All of that leverage shifts once you have the gumption to pull the Chapter 9 trigger. And guess what? That produces agreements quicker and more effectively than otherwise.”

Naomi Richman, a managing director at Moody’s Investors Service, wondered aloud whether it might become more acceptable for cities to declare bankruptcy.

“Back in the ’80s, the stigma against corporate bankruptcy fell away, and it became viewed as a strategy a corporation might pursue for various reasons,” Ms. Richman said. “Recently, with the residential housing collapse, individual bankruptcy has less of stigma in society — it’s a strategy that a person might be advised to follow if they have a debt that they can’t afford. Could the same thing happen for municipal bankruptcy?”

Rhode Island City Offers Gloomy Lesson

The Huffington Post reports As Detroit Bankruptcy Looms, Rhode Island City Offers Gloomy Lesson

PHILADELPHIA — Bankers, consultants and elected officials gathered at a conference here on Wednesday to discuss a hot political question for the formerly sleepy municipal bond industry: how to sell the need to protect the rights of bondholders — the often large, distant financial institutions who extend the credit that keeps towns humming — when cities enter financial crisis. The issue has most recently been thrown into relief as a Monday deadline for the city of Detroit to accept a consent order to fix the city’s budget looms.

“While the economists have declared the recession to have been over for almost three years now, the problems of state and local governments continue to mount,” said Bob Kurtter, the managing director for U.S. state and regional ratings at Moody’s Investors Service. “Default continues to be rare,” he said, but “our ratio of downgrades to upgrades has been negative for the past 12 quarters.”

As more cities and states struggle to fill the $1.26 trillion gap between what they have actually set aside for pensions and retirement benefits and what they have promised, municipal accountants will grapple with questions that will increasingly resemble those faced by Detroit or former Rhode Island Supreme Court Justice Robert Flanders when he was appointed last year as receiver for Central Falls, a struggling former factory town in the Ocean State.

From the comments of Flanders and others at the municipal bonds conference, it seems like the industry is in agreement about one thing going forward: someone is going to have to suffer, and it shouldn’t be bondholders.

Bondholders and Unions Should Both Share the Pain

This idea that bondholders should not take losses is ludicrous. Anyone stupid enough to buy Detroit bonds should pay a hefty price. Moreover, since untenable promises made to public unions are generally a leading cause of bankruptcy, public unions should suffer as well.

Gov. Rick Snyder Move on Detroit

The Christian Science Monitor reports Detroit nears deal to avert bankruptcy, but is it a state takeover?

March 27, 2012

With Detroit now formally in a state of “severe financial emergency,” city and state officials are grappling with the terms of an agreement to resolve the crisis, which both sides say they expect to be signed by week’s end.

So far, Michigan state officials are avoiding talk of a takeover – a toxic term in a majority black city whose elected officials are opposing the appointment of an emergency manager. Detroit officials are calling for more financial support from the state.

While Michigan Gov. Rick Snyder (R) says he wants to avoid assigning an emergency manager to control the city’s finances, the agreement being worked out between the city council and the state treasurer’s office is expected to force the most extensive financial restructuring ever experienced by Detroit, or any other US city its size.

Governor Snyder now has 10 days to deliver a “consent agreement,” according to a new law that allows the state to take financial control of any municipality facing bankruptcy. Since the law passed in March 2011, Michigan has placed four cities and two school districts under emergency management.

The law allows the state to break collective bargaining agreements, privatize city assets, fire local officials, and force a restructuring to keep basic city services flowing.

“It’s a big experiment,” says Vincent Hutchings, a political scientist at the University of Michigan in Ann Arbor. “Detroit is a high-profile city with a lot of issues.”

City officials oppose referring to the final deal as a “consent agreement,” which can lead to an emergency manager. The city wants to retain power to approve budgets but will hire a chief financial officer who will report to the mayor, said Deputy Mayor Lewis on Tuesday. The city also wants the state to lend Detroit money – a move that Snyder has refused in the past.

Meanwhile, many Detroit residents are protesting the possibility of the state playing a larger role in management of their city. An open meeting of the state commission was nearly shut down Monday by protesters who shouted, sang, and angrily denounced the state officials for what they see as trying to intervene with the democratic process. One activist filed a request with the Michigan Supreme Court for an emergency injunction to stop Snyder’s team from moving forward.

Adding to the drama is the weekend hospitalization of Detroit Mayor Dave Bing, who remains bedridden.

$1.26 Trillion Pension Gap

The only way to fill a pension gap of that size is to reduce benefits. Tax hikes are out of the question. And the fastest, easiest, and best way to get pension concessions from public unions is to reduce benefits and tell the unions what they get.

There is no need to negotiate. Central Falls did not negotiate, they said take 50% or you may end up getting even less.

Ultimately, the only way to deal with public unions is to strip them of all power including collective bargaining rights, then claw back ridiculous benefits in bankruptcy court.

About the author: Mike “Mish” Shedlock is a registered investment advisor representative for Sitka Pacific Capital Management. His top-rated global economics blog Mish’s Global Economic Trend Analysis offers insightful commentary every day of the week. He is also a contributing “professor” on Minyanville, a community site focused on economic and financial education. Every Thursday he does a podcast on HoweStreet and on an ad hoc basis he contributes to many other websites, including UnionWatch.