Bankruptcy may be only way out for cities, states – Pacific Research Institute

Bankruptcy may be only way out for cities, states


The problem in the public sector is that government never is allowed to fail. There never is a day of reckoning no matter how poorly government provides its so-called services

I recently documented how the state’s pro-union attorney general, Kamala Harris, crafted an unfair and dishonest title and summary for a pair of pension reform ballot initiatives submitted to her office, effectively killing the measures.

Then, last week, the government employee unions tried – and almost succeeded – with an even nastier stunt designed to undermine democracy.

In San Diego, unions are fearful of a new pension reform measure supporters call Comprehensive Pension Reform, or CPR, which has qualified for the June ballot. Instead of simply gearing up to fight this political battle, the unions petitioned one of those ridiculous commissions that most Californians have never even heard of, the Public Employment Relations Board, which is unfriendly turf for taxpayers. The union contended that placing the initiative on the ballot amounted to an unfair labor practice, and PERB called for a court injunction to stop the election until it could complete its sham proceedings.

In essence, the unions and this unelected board insist that the people of San Diego have no right to vote on pension reform. This is just the latest reminder of the totalitarian tactics of a public-sector union movement that doesn’t care about anything other than protecting its benefits.

“Never in the history of this state … has there ever been a requirement to meet and confer over a citizens’ initiative placed on the ballot by voter signatures,” San Diego City Attorney Jan Goldsmith said in a toughly worded letter to PERB. Pension reform advocate Carl DeMaio, a San Diego councilman and mayoral candidate, criticized PERB’s assault on Californians’ constitutional rights.

Fortunately, a judge agreed with the city, but expect the unions to head back to court if their campaign against CPR fails.

The unions that dominate Sacramento are not about to permit any serious reform, given that real reform – especially in light of frightening new estimates about the scope of unfunded pension liabilities – means that the days of millionaires’ pensions (meaning you would need millions in the bank to receive the lifetime payouts commonly received by recent California government retirees) eventually have to end. Unions don’t mind undermining the public’s right to vote. They don’t care if our taxes go through the roof, and businesses flee the state. They don’t care if services are slashed. They want their money.

Even Gov. Jerry Brown’s modest pension reform proposals are going nowhere in a Democratic-controlled Legislature that continues to promote expanded benefits for public employees, including a recently introduced Public Employees Bill of Rights. That leaves few other choices than a continuing gallop toward the fiscal brink.

While other liberal states, such as Rhode Island, are addressing their pension problems, and some Midwestern states – Wisconsin, Ohio and Indiana – are fighting battles over union power, California does basically nothing. I appreciate the governor’s pension proposals, but he continues to view hefty tax increases as the only real solution to the state’s budget problems. The deficit has shrunk a bit, and Standard & Poor’s pushed up the state’s credit rating a tad, but the fundamentals here have not improved very much.

Where does that leave us?

Economist Allan Meltzer once quipped that “capitalism without failure is like religion without sin. It doesn’t work.” Americans have been witnessing this axiom on a broad scale, as government efforts to prop up industries, bail out the financial sector and protect politically favored private businesses from failure have only prolonged the financial crisis. Without failure, there is no day of reckoning and no effort by the failed party to make the fundamental changes needed to avert future crisis.

The problem in the public sector is that government never is allowed to fail. There never is a day of reckoning no matter how poorly a government agency may provide its so-called services. Often, the worst agencies are rewarded for their failure with more public dollars. California governments have continually ramped up pension promises, and governments can’t go out of business, so they just keep piling up the debt.

When there’s no money left, officials play games with the numbers or – as Gov. Brown continues to do – make it their main objective to raise taxes.

Since reforms are blocked because of union control, some have proposed wider use of the bankruptcy option so municipalities can reorganize their debt. The main critics of the bankruptcy option are the unions. They know that bankruptcy would enable governments to abrogate unaffordable labor contracts. The public-employee unions championed a bill, signed into law by Brown in October, that makes municipal bankruptcy more cumbersome by forcing localities to seek approval for such actions by additional committees.

Some even see the bankruptcy option as something that should be allowed for states. In January 2011, GOP stalwarts Jeb Bush and Newt Gingrich ignited this debate with a Los Angeles Times op-ed titled, “Better Off Bankrupt.” They argued that an organized bankruptcy process might help states overcome staggering budget deficits. But other conservatives, concerned about the impact of bankruptcy on bond markets, have been campaigning against this idea. They note that the highly publicized bankruptcy of the city of Vallejo ultimately did little to reform its supersized pensions for public employees.

I’m not advocating for bankruptcy per se, but what happens when all other reform options are taken off the table? What happens when the politics of a state won’t allow the reforms necessary to save that state? In other words, what happens when failure is not an option? If the likes of Harris and PERB and the unions continue to get their way, we in California very well may get to see the answer.

Nothing contained in this blog is to be construed as necessarily reflecting the views of the Pacific Research Institute or as an attempt to thwart or aid the passage of any legislation.

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