Within the next couple months, San Bernardino will exit Chapter 9 municipal bankruptcy in a condition very similar to how it entered: a poor city burdened with excessive pension debt.
Because San Bernardino, like Vallejo and Stockton before it, opted not to pursue pension cuts in bankruptcy, costs are certain to rise and there’s a high risk of a “Chapter 18” repeat trip through federal court.
In a new report, we argue that municipal bankruptcy is more effective when state governments take control of the process.
“Reform is urgent in California because of the many pockets of severe fiscal weakness that may be found throughout the state.”
In states which have taken over cities before letting them go bankrupt, insolvent cities have faced up to their pension problems in a way that Stockton, Vallejo and San Bernardino did not.
California, by contrast, does almost nothing for cities on the brink of insolvency.
This should change. Instead of passing the buck to local officials on the toughest, chips-are-down bankruptcy decisions, state government should appoint receivers to manage cities’ bankruptcies for them.
Reform is urgent in California because of the many pockets of severe fiscal weakness that may be found throughout the state. Sixteen California cities with a population above 50,000 have a poverty rate above 25 percent. (The statewide poverty rate is 16.3 percent.) According to the Bureau of Labor Statistics, 10 out of the 15 metro areas with the highest unemployment are located in California.
The most recent data from the Census Bureau show that California local governments’ debt load has steadily risen over the last four decades and now stands at 100 percent of annual revenues, a near-historic peak.
California cities’ pension costs, which have been rising since the dotcom bubble burst in 2001, are about to surge still higher, thanks to last month’s vote by CalPERS’ board of directors to lower the system’s investment rate of return from 7.5 to 7 percent. The less a city’s pension system reaps in stock market gains, the more it must contribute from its budget.
Across the nation, many cities are challenged by excessive poverty and debt levels and pension costs. What is distinctive to California is Sacramento’s notably hands-off approach towards municipal insolvency.
Shortly before Central Falls, Rhode Island and Detroit, Michigan filed for bankruptcy in 2011 and 2013, respectively, their state governments appointed receivers with full control over fiscal and administrative affairs. Unlike in the three California bankruptcies, all of which were managed by local officials, neither Central Falls nor Detroit left pensions untouched. A 2015 Moody’s report estimated that Central Falls cut its pension claims by 39 percent and Detroit by 18 percent, compared with 0 percent for Stockton, Vallejo and San Bernardino.
Since Vallejo exited bankruptcy in the fall of 2011, its pension bill has risen by more than half. In the current fiscal year, Stockton was contributing about 50 percent of salary for its public safety workers’ pensions, up from 30 percent when it first filed for bankruptcy.
These outcomes may have been avoided had California followed the Rhode Island and Michigan models.
Adopting what we call an “intervention bankruptcy” approach will require ideological concessions for both the left and the right. Left-leaning state officials will have to acknowledge that an insolvent city implies a failure of state policy. They, or their appointee, will have to face up to the choice between funding basic services and funding pensions, instead of leaving these decisions in local hands.
Conservatives should not assume that powerful government unions will run roughshod over a state-appointed receiver just as they have over local officials and the Legislature in Sacramento.
Central Falls’ receiver was put in place by a state government controlled by a Democratic legislature and liberal governor, Lincoln Chaffee. Rhode Island boasts a larger share of unionized government workers than California (62 percent versus 55 percent). Though he was appointed by a Republican governor, Kevyn Orr, the emergency manager of Detroit, was a Democrat.
By definition, an unelected state appointee enjoys a certain distance from local political pressures and would stand a stronger chance of designing a truly effective bankruptcy plan than the same local officials who were responsible for the city’s going broke in the first place.
Municipal bankruptcy is always the result of a lack of leadership. But only strong leadership can make the bankruptcy process work, and it’s more likely to come from the state than the local level.
This piece originally appeared in the Orange County Register, based on a new report
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Stephen Eide is a senior fellow at the Manhattan Institute. Daniel DiSalvo is a senior fellow at the Manhattan Institute and associate professor of political science at the City College Of New York (CUNY).
This piece originally appeared in Orange County Register