Tuesday, April 3, 2012

Bankruptcy gives cities bargaining power

In the past we have blogged about our underfunded municipal pensions.

Today, we talk about a potential solution, bankruptcy. Remember that the alternatives to agreement determine the terms of agreement. Bankruptcy gives cities a much better alternative, and allows them to gain a more favorable split of the proverbial pie. Bankruptcies in Stockton, Detroit, Jefferson County, and Rhode Island resulted in smaller payments to city employees and pensioners.

Robert G. Flanders Jr., the state-appointed receiver for Central Falls, R.I., said his city’s declaration of bankruptcy had proved invaluable in helping it cut costs. Before the city declared bankruptcy, he said, he had found it impossible to wring meaningful concessions out of the city’s unions and retirees — who were being asked to give up roughly half of the pensions they had earned as the city ran out of cash.

“The municipality is on bended knee asking the retirees and unions to come to the table and give up their contract rights,” he recalled. “All of that leverage shifts once you have the gumption to pull the Chapter 9 trigger. And guess what? That produces agreements quicker and more effectively than otherwise.”

The article speculates that as soon as a major city, like Oakland or Los Angeles, declares bankruptcy, that the flood gates will open.


  1. Puerto Rico is in similar straits but is forbidden from declaring bankruptcy. What do you see them doing to rectify their problems?
    Nick Youngerman

  2. Can't wait for the State of Illinois to do this! I would love to move back home, but the state is held captive by the pensions of union workers, and the citizens pay for it in extremely high taxes. Hard to leave a state like TN with 0% state income tax to go to a state with 4.99%.

    1. not an attny, but it is my understanding that states do not have the ability to declare bankruptcy, only cities do

  3. So we need to create the right disincentive so that City leaders don't see stealing from little old ladies as their best alternative.
    ie maybe make it a criminal offense to reduce (aka steal) pensions?

  4. Joan, in most State Constitutions it's illegal to cut pension benefits. The only way to afford these pension is to raise taxes. Either do that or break the unions to stop pension entrants. In the case of teachers unions the states without a union have significant worse student outcomes than those who do have a union.