NOVANEWS
What happens to a municipal worker’s pension when a city goes bankrupt? Unlike banks, they won’t get bailed out
ADAM J. LEVITIN
Dan McNamara, president of the Detroit Fire Fighters Association, speaks to firefighters (Credit: AP/Paul Sancya)
We are now on the cutting edge of a wave of municipal bankruptcies fueled by pension obligations that cities cannot afford. Cities made workers promises in good times based on optimistic assumptions that did not always hold true.
Yet it is far from clear that bankruptcy provides any solution to municipal pension problems. No city has ever reduced its pension obligations in bankruptcy without pensioner consent. While municipal bankruptcy has been around since the 1930s, pension-driven bankruptcies are a new phenomenon. Few of the local government units that have filed for bankruptcy since the 1930s have even been true municipalities. Most have been sewer, water and hospital districts plus oddballs like county fairs and NYC Off-Track Betting or the Las Vegas Monorail.
The cities that have filed for bankruptcy are generally tiny towns that find themselves in economic distress for mundane or ridiculous reasons, not because of pensions: The town treasurer absconded with a million dollars; the city’s tax on strip clubs was an unconstitutional violation of freedom of express; the state shut down the illegal speed trap the town was operating on the interstate. Nor were the largest and most famous municipal bankruptcy cases resolved to date about pensions: Orange County, Calif., and Jefferson County, Ala., both ended up in bankruptcy because of bad investments in financial derivatives. Pensions were one of many factors in New York City’s financial crisis in 1975, but the bankruptcy law at the time made filing impractical because it would have necessitated the city first soliciting the consent of thousands of unknown holders of its bearer bonds.
The new wave of municipal bankruptcies — Detroit, Stockton and San Bernardino being the leading cases — are all set to test the question of whether pensions can be cut in bankruptcy, particularly in the face of state laws protecting those pension obligations. If municipal pensions can be cut in bankruptcy, we should expect to see more cities eyeing bankruptcy as a possibility, and other cities using the threat of bankruptcy as negotiating leverage to wring concessions from pensioners and employees.
Chicago, for example, after undergoing an unheard of three-notch downgrade on its municipal debt, is struggling to find a way to handle its municipal debt without taking the politically unpopular step of raising taxes. Thus far the city has engaged in a questionable campaign to sell off all sorts of public assets, such as its parking meter revenues for the next 75 years. There’s only so long, however, a city can “burn the furniture” to stave off its financial problems.
Yet it is far from clear that bankruptcy provides any solution to municipal pension problems. No city has ever reduced its pension obligations in bankruptcy without pensioner consent. While municipal bankruptcy has been around since the 1930s, pension-driven bankruptcies are a new phenomenon. Few of the local government units that have filed for bankruptcy since the 1930s have even been true municipalities. Most have been sewer, water and hospital districts plus oddballs like county fairs and NYC Off-Track Betting or the Las Vegas Monorail.
The cities that have filed for bankruptcy are generally tiny towns that find themselves in economic distress for mundane or ridiculous reasons, not because of pensions: The town treasurer absconded with a million dollars; the city’s tax on strip clubs was an unconstitutional violation of freedom of express; the state shut down the illegal speed trap the town was operating on the interstate. Nor were the largest and most famous municipal bankruptcy cases resolved to date about pensions: Orange County, Calif., and Jefferson County, Ala., both ended up in bankruptcy because of bad investments in financial derivatives. Pensions were one of many factors in New York City’s financial crisis in 1975, but the bankruptcy law at the time made filing impractical because it would have necessitated the city first soliciting the consent of thousands of unknown holders of its bearer bonds.
The new wave of municipal bankruptcies — Detroit, Stockton and San Bernardino being the leading cases — are all set to test the question of whether pensions can be cut in bankruptcy, particularly in the face of state laws protecting those pension obligations. If municipal pensions can be cut in bankruptcy, we should expect to see more cities eyeing bankruptcy as a possibility, and other cities using the threat of bankruptcy as negotiating leverage to wring concessions from pensioners and employees.
Chicago, for example, after undergoing an unheard of three-notch downgrade on its municipal debt, is struggling to find a way to handle its municipal debt without taking the politically unpopular step of raising taxes. Thus far the city has engaged in a questionable campaign to sell off all sorts of public assets, such as its parking meter revenues for the next 75 years. There’s only so long, however, a city can “burn the furniture” to stave off its financial problems.
