Posted on 10/06/2014 12:45:24 PM PDT by Kaslin
U.S. Bankruptcy Judge Christopher Klein is having his Andy Warhol moment. Were it not for ISIS and the Ebola virus, all we would be hearing about on these pages and on FoxNews is Judge Klein's ruling in Stockton, California. In a case likely to be heard before the Supreme Court of the United States, if Judge Klein's ruling is confirmed and employee pensions are not sacrosanct in City and State bankruptcies, many cities in California that are insolvent today because of long term bad decision making will bite the bullet and declare bankruptcy. When these cities exit bankruptcy, they will be able to focus on representing their citizens and providing effective city services at appropriate levels rather than the levels in place because of fiscal issues threatening these cities.
Municipal bankruptcies would result in cities becoming more efficient and perhaps representing their voters more ably and more responsibly. In the process, current municipal pension holders will be sadly harmed, but the result will be that future municipal employees will become watchdogs against profligate spending.
What happened in Stockton? The City of Stockton determined that bad times would never come and built a new City Hall as well as other 'necessary' city properties including a sports arena. Stockton also paid more than competitive wages and promised unusually rich pensions and other wonderful lifetime perquisites to its employees. The political process was 'just the political process' and future liabilities were not adequately considered although there were likely rosy financial projections provided by City employees and well paid outside consultants. And then the dreaded tomorrow came and the ice cream cone melted. The City of Stockton could not pay its obligations.
Like every other financial nightmare, be it a business, a professional athlete with no understanding that his/her career is shorter than those great first year earnings, or just an irresponsible or unlucky citizen, there are going to be financial victims in any bankruptcy. Such is Stockton. The bondholders want to be paid, the pensioners want to be paid, the current employees want to be paid etc. etc. etc. What the bankruptcy judge is saying is that everyone, not just the vendors and bondholders, will need to take a haircut.
Obviously, there is some pain going to be felt by the current and former employees. The same thing happens in the private sector. Unfortunate, but that is the way it is sometimes.
The long term impacts of employees and their pensions being hurt by a municipal bankruptcy is that their unions as well as senior city executives will now have a reason prospectively to suggest to their elected bosses that they demonstrate fiscal frugality. When one's own personal wealth is not going to be impacted by a stupid decision by a local politician, it is a 'who really cares' if an idiot mayor and the city council put the city into bankruptcy. That changes when it becomes a WIFM = What is in it for me?
Another benefit of employees being in the bankruptcy mix in a municipal bankruptcy is that in the long term, it means lenders will be more comfortable loaning money to municipalities in the future. At the moment, lending to municipalities is a fool's errand in California because of the inequities of potential bankruptcies.
The California Angels are negotiating with the City of Anaheim regarding their desire for the City to give up tens of millions of dollars worth of Anaheim land to keep the Angels in town, rather than moving to a new city. It is so easy for the City Council, who will be gone in ten years, to give up anything to keep the Angels in Anaheim. For elected officials, by the time the City needs the money from the land, they will all be long gone. If giving up the land might impact city pensions and salaries in the future, the discussion might actually consider a look at the long term impacts of such a decision if the unions weigh in with the WIFM question. The same would hold true for the city where the Angels want to move.
If municipal unions and their constituents are forced to pay attention to bad long term financial decisions by city councils, everyone wins. Plaudits to Judge Klein. It is a shame that the former and current employees of Stockton are going to pay the price, but the long term impacts could be terrific.
“Municipal bankruptcies would result in (California) cities becoming more efficient and perhaps representing their voters more ably and more responsibly.”
Probably not.
If it can happen to my hard working Dad it can happen to those lazy,good for nothing "public servants" you see sitting on their a$$es whenever you visit a government office.
I totally disagree with that premise. It is just going to start another cycle as lawsuits fly!
For some reason the bold passage strikes me as pure fantasy...
The only way this truly ends is when investors finally wise up and realize that they are always — always — going to be getting screwed the hardest in any municipal bankruptcy. No matter what the investment contract says, no matter what the collateral is, no matter how much of a security interest they are supposed to have, they will get screwed. Only when they stop investing in municipal bonds will this end.
The cops will go postal over this.
The lawsuit would have to be federal, because bankruptcy is federal law.
It also overrides state law.
Importantly, Judge Christopher Klein “wrote the book” about federal bankruptcy law. Literally.
He wrote ‘A Guide to the Federal Rules of Civil Procedure that Apply in Bankruptcy’, which is a textbook for federal judges about bankruptcy law. And then, because he understands the subject so well, he wrote an easy-to-understand book for laymen, called ‘Bankruptcy Rules Made Easy’.
This is important, because it is far easier to write a complex book for experts than it is to simplify all that complexity for “the intelligent man”, who is not an expert.
So the bottom line is that in his subject area, he knows more of federal bankruptcy law than do the justices on the Supreme Court.
Now imagine trying to overturn *that* ruling, without looking like a fool.
In California some government workers can retire with 90% of pay, after 30 years.
The “pay” can result from “spiking” whereby accrued sickpay and vacation are taken in a late year to establish a high base year.
So you retire at say 55 with full pay for your lifetime, your spouse’s lifetime, plus platinum health benefits.
If the agency or municipality has not “funded” the annuity with enough to pay the full benefits, they must put in more, each year from their general funds.
Hence they go bankrupt, because they cannot afford the promises previously made.
Ultimately benefits have to go down, or taxes have to go up.
Did he work for Polaroid?
Municipal politics in California is already grossly over-impacted by employee labor organizations. Bankruptcies aren’t going to directly impact most residents, so their participation level isn’t going to be increased, and until it is, there’s no incentive for elected officials to reign in excessive compensation.
Bell, California’s a good example of what happens when the citizens refuse to get involved. The only reason they got busted is that they ticked off the police union and it went to the local paper.
“Looking like a fool” is rarely an impediment to the majority of local practitioners.
CalPers collects prospectively, based on a complex formula intended to see that there’s enough to cover future pension payments when the employee retires. That formula includes assumptions regarding future investment returns, time in service, anticipated salary increases, etc. When the assumptions prove to be incorrect, they collect “make up” payments to cover anticipated future liabilities. Not making those payments will have a greater impact on future retirees than current pensioners.
Egregious fiscal irresponsibility a ‘home run’ - sign of the times.
Pensions should be kept and not reduced because each side bargained in good faith. Promises should be kept.
Negotiating impossible pensions is not good faith, imo.
It’s “kick the can down the road” greed.
Well, then the voters can vote the guys out of office and when the contracts are up for negotiation again then try and get the unions to do what you want.
It is up the voters to demand things from the government and to put pressure on management to negotiate a better deal.
The employee live up to the contract, so should management. It applies to both private and public sectors.
I have never seen the cycle broken. It always gets kicked down the road.
It will get kicked down the road this time, too.
At some point, the bread and circuses will run out.
The Bread and Circuses rule.
http://www.goodreads.com/quotes/11649-the-america-of-my-time-line-is-a-laboratory-example
http://en.wikipedia.org/wiki/Bread_and_circuses
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