Tuesday, July 31, 2018

The alternatives to agreement determine the terms of agreement

Rhode Island is using this principle to reduce its pension obligations:
Rhode Island officials then took the rare step of passing legislation that put bondholders ahead of other creditors and pensioners in the event of a municipal bankruptcy. Since cities and pensioners were bargaining in the shadow of bankruptcy law (if the parties did not reach agreement, a bankruptcy court would decide who gets what) the alternatives for pensioners deteriorated.

In Central Falls, Rhode Island, this shifted the bargaining advantage to the city and away from the workers, who had to get in line behind the bondholders:
After the 2011 bankruptcy, an event that received national attention amid predictions of widespread municipal failures, retirees agreed to 55% cuts because they feared facing even deeper cuts later. ... The concessions helped Central Falls emerge from bankruptcy in 2012 and create a “rainy day fund” that now holds $2 million.

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