By John Ransom
8/11/2012
If you follow the rule in life to follow the money, the money trail increasingly is leading to a union pension, a union wage or a union contract. And it’s putting America’s cities out of business.
As more municipalities begin to eye bankruptcy proceedings as a way out of their financial mess, many believe that one great advantage of bankruptcy proceedings is that it will allow the nullification of fat union wages, pensions and other benefits that taxpayers in the private sector don’t get.
But if the example of Stockton, California serves as a guide, city officials would rather screw taxpayers and bondholders than take the union-led public employees off the state-sponsored tit.
And of course they would.
Public employee unions make public campaign contributions to politicians precisely for the exigency when taxpayers’ interest conflict with the interests of public employees.
Follow the money.
“The debate centers on Stockton, California, the largest city in the nation to declare bankruptcy,” reports Bloomberg. “In its initial proposal to creditors, the city would fully fund its pension system while walking away from $124 million in debt from pension-obligation bonds [Editor’s emphasis] it floated in 2007.”
So they are defaulting on the money they borrowed last time to get out the pension mess that they didn’t fix when they had the chance the first time.
Now they are contemplating a kind of municipal bankruptcy with none of the messy benefits of long-term financial relief.
Continues Bloomberg:
Stockton couldn’t meet its financial obligations to pay for enhanced pension benefits five years ago, so it borrowed the money [Editor’s emphasis]. Rather than cut unsustainable benefit levels while it has the chance to do so now, officials there would rather default on the $103 million it owes Assured (AGO) Guaranty.
Stockton and other Californian cities have slashed public services, thus putting the demands of public employees above the concerns of taxpayers and residents who rely on public services. Now we see that even bondholders don’t stand a chance when their interests collide with those of public-sector unions.
It’s easier to take on an offshore firm than confront CalPers [California Public Employees’ Retirement System], which had threatened to wage a protracted court battle against another Californian city, Vallejo, if it decided to reduce pension promises after its 2008 bankruptcy. Stockton officials no doubt are aware of that threat.
Why not screw the bondholders?
Isn’t this the precedent established by our president when he gifted $25 billion to the UAW pension plan- which killed the automakers to begin with- while giving the in GM bondholders the shaft in extra-legal bankruptcy proceedings?
The taxpayers will now pick up the tab.
Let me repeat: The taxpayers WILL pick up the tab.
“If municipalities begin to view bankruptcy as a ‘palatable solution’ for financial troubles that would be a ‘major negative paradigm shift for the municipal sector to the detriment of bondholders,’ Moody's [credit rating service warned] according to Reuters.
And for taxpayers too.
Because it has generally been assumed that the general obligations of municipalities would be honored with tax revenues, come hell or high-water.
It’s known as a moral obligation.
But don’t let a little thing like morality get in the way of the unions and public employees.
"It may signal a diminution in the traditional stigma attached to bankruptcy,” Moody’s concluded, “and a shift in how cities regard the sanctity of debt service obligations."
So if municipalities see bankruptcy as a viable option to get out of paying general obligation bonds, interest rates will go up for all municipalities to reflect the greater risk.
Interest rates will be “enhanced,” in other words, in order to finance the “enhanced pension benefits” of public employees.
Morgan Stanley is already advising clients to avoid state and local bond issues and be much more selective about municipal bonds in general.
"We are averse to state and local credit, and we advocate increased selectivity in GOs (general obligation bonds)," the [Morgan Stanley] researchers said according to Reuters.
"Structural challenges persist, even under optimistic growth scenarios," they said. "For states, tax growth is unlikely to overcome rising costs from long-term liability burdens and spending mandates while locals face constraints of state aid cuts and weaker tax bases from lower home values."
And to add to that, municipalities across the country will face higher interest rates for things like schools, roads and infrastructure.
So if you see your local public employee union reps, go up and thank them so much for the higher cost to finance government at time of record low interest rates.
Just tell them you have a moral obligation to thank them. But break no laws in doing so.
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To read another article by John Ransom, click here.
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