Wednesday, March 18, 2009
The next leg of the financial crisis: municipal finance
One of the interesting characteristics of the financial crisis is the degree to which, during the bubble years, everything that could possibly be leveraged was leveraged to the hilt, real estate and financial assets being the obvious case in point. Government spending and the establishment of future obligations are another, and this occurred at every level from the Feds on down to the school district level. The assumption of ever rising property values led to assumptions of ever rising property tax revenues and increasing transaction fees when real estate changed hands. By projecting these increases out forever, governments could ladle pork in many forms to their constituents, including future obligations that are completely out of line with the economic environment we now face.
The chickens are only just coming home to roost. Tax increases will certainly be one result, but not the only one. Municipal bankruptcy, fairly rare, looks to become a lot more common. Mish posted a couple of months back on the likely trend of increasing municipal bankruptcies over the course of the year. Among the issues explored in his post is the bankruptcy of Vallejo, California, which promised its employees extremely generous benefits it can no longer afford to pay.
There is a development in the Vallejo bankruptcy story that could have wide ranging repercussions for municipalities, municipal workers, and taxpayers.
In the first ruling of its kind, a bankruptcy judge held the city of Vallejo, Calif. has the authority to void its existing union contracts in its effort to reorganize, holding public workers do not enjoy the same protections Congress gave union workers at private companies.No doubt an appeal will be forthcoming, and it will be closely watched. I suspect this is the first of many skirmishes we can expect to see between taxpayers and public employees, and the battles will likely become quite intense. Regardless of the decision, it is hard to see how these obligations will be honored long term without haircuts. If they get too onerous, local tax burdens can and will be abandoned by tax payers, regardless of what a judge says.
The decision will be particularly important to cities with large unfunded pension liabilities, according to James Spiotto, of Chapman & Cutler in Chicago and a specialist in municipal bankruptcy who helped advise the Senate Judiciary Committee on Chapter 9 reforms.
He said the unfunded pension liabilities for states and cities was $800 billion a few years ago and may be at $1 trillion today. "The question is whether it is an inability to pay or an unwillingness to pay. If municipalities can't provide basic services and still pay labor costs or pensions then that is a real issue," Spiotto said.
5 Comments:
By 
Escort81, at
Wed Mar 18, 02:33:00 PM:
No doubt an appeal will be forthcoming
Wouldn't Vallejo fall within the Federal 9th District Court of Appeals? What are the chances of that particular panel of judges will busting up the unions (that is, not overturn a trial court decision, and any lower court appellate decisions that are adverse to the unions)?
I think that 'Villian makes a valid point, though I would expect that there will be some degree of correlation between those three dozen or so counties where roughly half of the total number of the nation's foreclosures have taken place over the last several years, and the extent to which municipalities experience a shortfall in tax receipts sufficiently large to tank them.
Or maybe because we hold a healthy amount of PA tax free munis, I don't want to believe that there is much default risk among those issuers back east!
By Jamie Irons, at
Wed Mar 18, 03:08:00 PM:
T.H.
I am writing you from Vallejo, California, where I work as a physician and chief of a large department in a major hospital. (Note spelling of Vallejo, which Escort81 got right! --The city was named after General Mariano Guadalupe Vallejo, of California Bear Flag Revolt fame, whose land grant originally encompassed all of the city and much more.)
The bankruptcy of Vallejo has had severe repercussions already in our ability to care for mentally ill persons, because of the reduced police presence in the city.
Jamie Irons
By 
, at
Wed Mar 18, 03:42:00 PM:
'Villain:
This is going to be a huge battleground, and both political parties have to tread carefully here. I think there could be an opening for Republicans to rally taxpayers, if my assumption is right. That assumption is that there are more people out there who aren't in a public employees union or in any union at all than there are in unions of every kind (public employees or not). If this is the case, then the Republicans can lead the charge of responsibly tapering the public pensions so that we don't destroy the funds of those of us who aren't in unions and/or who don't have pensions but who are relying on our own assets for retirement. If the Democrats stick with the unions across the board and only view taxation of everyone as a means to make the public employees "whole", they'll face a big revolt. It's a very sensitive issue, but if my assumption is wrong, then we could have a massive, legislated redistribution of wealth that will benefit those who worked as public employees over everyone else, with major repercussions, such as a diminished, disincentivized, almost disenfranchised private sector.
This pension burden, when coupled with Medicare projections 20 years out, is staggering. Legislative life, in the end, is all about demographics. And our politicians over the course of the past 40 years failed to address the results of the Baby Boom, particularly the front end of it (say for people born from '46 through '55). Now, we have a crisis.
Wondering where to retire to (which red state, that is) so that I can preserve what remains of the corpus of my assets, I am
The Centrist
By Purple Avenger, at
Wed Mar 18, 05:51:00 PM:
If they get too onerous, local tax burdens can and will be abandoned by tax payers, regardless of what a judge says.
I abandoned an apartment building in south Troy NY precisely because of this. The city claimed it was worth $80K, and wouldn't budge on the taxes. In reality, it was impossible to get anyone to buy it at all due to an impossible tax/revenue proposition and location in the middle of "crack town".
Meh, someone else's problem now.
By Retriever, at
Wed Mar 18, 07:35:00 PM:
I am raising my children to honor their obligations., not weasel out of them when times get tough. Webster's definition:
1: the action of obligating oneself to a course of action (as by a promise or vow)
2 a: something (as a formal contract, a promise, or the demands of conscience or custom) that obligates one to a course of action b: a debt security (as a mortgage or corporate bond) c: a commitment (as by a government) to pay a particular sum of money ; also : an amount owed under such an obligation "unable to meet its obligations, the company went into bankruptcy"
3 a: a condition or feeling of being obligated b: a debt of gratitude
4: something one is bound to do : duty , responsibility
I am not a financial or pensions expert, and will doubtless be ignored or howled down by others more expert in the arcane rationalizations for an institution not doing as it promised,. But the union members I know paid a large percentage themselves into their pension funds and most of them live as well as work in the community they serve. So they are both mooching union members and oppressed taxpayers.
A municipality or other government employer is perfectly free to stop offering pensions to new hires (where I live, they did that several years ago) but I would hope that they would set a good example and honor legal commitments made years before.
It is sheer envy, or a smokescreen over the intention to break an agreement , to vilify "greedy parasitical unions" as a terrible burden on "virtuous taxpayers". Where I live, the municipal union workers are mostly more honest than the hedgie and other financial services taxpayers who would like the town to welch on its obligations.
