While the advocates for cutting or even eliminating public employee pensions salivated like Pavlov’s dog over the news in 2008 that the City of Vallejo, California had filed for bankruptcy in order to escape the city’s obligation to fund its employee pension promises, some predicted that the federal bankruptcy court would not allow Vallejo to simply erase its financial obligations.
As those who were around when the County of Orange filed for bankruptcy in 1994 because of investment losses by County Treasurer Tax Collector Bob Citron– a filing some still believe was not necessary – know from that experience, the federal bankruptcy court requires that the government filing bankruptcy develop a plan to pay its creditors, not to just walk away from them. The Orange County bankruptcy recovery plan eventually approved by the federal bankruptcy court did not stiff the county’s creditors, but rather saw the county take on bonded indebtedness and use those bond proceeds to make all creditors whole.
Those who chafe about public pensions and the future costs of fulfilling pension promises rejoiced at the Vallejo bankruptcy filing and have mistakenly been anxiously awaiting the day that other government entities also seek to escape their pension obligations by means of a bankruptcy filing. Well, guess what? It did not work as a way for Vallejo to escape its pension obligations and it won’t work for other units of government either.
Bloomberg news reported on December 13 that Vallejo spent $ 9.6 million on its bankruptcy filing and 2 year process, and the city’s pension obligation remains. Just like in the Orange County Bankruptcy the court required a recovery plan. And, behold – the city has just developed a 5 year budget plan that fully funds its promised retirement benefits. According to the article the plan also delays bond payments, trims benefits of current city employees and allocates $ 5 million to unsecured creditors.
The bankruptcy filing did bring city employee unions and bondholders to the negotiation table to develop a strategy of cuts and payment delays that would enable the city to meet its obligations, including the promised pension benefits. The Bloomberg article notes that the lesson that should be apparent to all is that the bargaining table, not the bankruptcy court, is the place to resolve most all perceived pension funding problems. To the extent that this is now realized by public sector unions, creditors and elected officials, the Vallejo bankruptcy filing served a purpose, albeit a different one than many supporters of the lawsuit seemed to anticipate.
So, for those Pavlovians salivating at the thought of more Vallejo-style bankruptcy filings as a means to escape promised public employee pension benefits, the bad news is that it won’t work. The good news is that the Vallejo case should give local elected officials the backbone to negotiate cost reduction strategies and cut out some of the local pork (some of which is frequently identified in various posts in this blog) and other excesses and focus on efficiency rather than expediency.
I suspect organized labor is having a similar awakening from the Vallejo case. Perhaps this is the reason that the Orange County Board of Supervisors recently aired a proposed 5 year cost reduction strategy that includes reductions in employee pay and benefits and the General Manager of the county’s major employee union, the Orange County Employees Association, is calling for the county and his union to work together.