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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.
Bankruptcy with liquidation.
Vallejo, reorganized instead of dissolving.
“The public’s perception of government pensions also seem to be changing. Millions of people employed in the private sector have seen their 401(k) plans ravaged, frozen or cashed out. They might be less inclined to empathize with their government counterparts.”
http://www2.hernandotoday.com/content/2010/dec/24/251316/nationwide-pension-troubles-may-affect-local-lands/news/
“This five-year plan looks out and says, basically, we will be treading water for five years,” Vallejo city manager Phil Batchelor told the council.
“Treading water” – doesn’t sound like the problem has been solved – does it.
Because unsecured creditors are likely to be paid so little, Levinson said, there is likely a looming battle between unsecured and secured creditors on the horizon.
“The unsecureds may go after the secured creditors,” he said. “That is the way it always works in Chapter 11 and that is the way it is going to work in Chapter 9.”
He also said he expects a “cram-down plan,” which happens when one group of creditors does not agree with a final proposal and the court forces the plan.
The plan could be altered in the future if changes are needed to accommodate the court or negotiations.
http://www.bondbuyer.com/issues/119_479/vallejo_blueprint_exit_bankruptcy-1020577-1.html
junior – good follow up posts. Sure seems to confirm that those looking for an easy fix to back out of pension promises via a municipal bankruptcy filing are looking for somehting that does not exist! A mess.
Keep your eye on Costa Mesa and stay tuned…
Exactly. Riggy was promising bankruptcy on the campaign trail. Supervisor and Costa Mesa resident John Moorlach has spoken of bankruptcy as the best way of dealing with Costa Mesa’s public employees. And the shitstorm they put Wendy Leece through was for accepting some substantial givebacks from police, fire, and other associations, a move that staved off any need to declare bankruptcy.
But now Riggy’s in charge.
My point is that bankruptcy is NOT out of the equation for Vallejo – it remains to be seen if BK in some form will be the ultimate outcome.
IBEW, the lowest paid bargaining unit in the City of Vallejo, ended up having to make up for the money squandered on (believe it or not) giving Police a pay raise in the middle of their financial meltdown. The city dropped their contribution to IBEW retiree’s health benefit to $300 a month, leaving retirees who are not yet medicare eligible with a health insurance bill of $400-$1500 a month. The Council sat around congratulating themselves on raping the most vulnerable retirees and never admitted their complicity in this mess; that for decades the pinheads spent money like drunks in a pool hall all the while failing to fund retiree health benefits. Vallejo had the opportunity to save significant amounts of money by going after the 90% public safety retirements during bankruptcy but failed to do so go figure…