Can bankruptcy save California’s cities from staggering pension obligations?
As California cities and counties struggle to fulfill the generous pay and pension commitments that they made to public employees during flush economic times, some politicians have taken comfort in a usually forbidding word: bankruptcy. Top officials in Los Angeles and San Diego have raised the B-word in recent weeks, and almost everyone is paying attention to developments in Vallejo (population 117,000), on the edge of the San Francisco Bay Area. The blue-collar port city filed for bankruptcy in May 2008, after it couldn’t pay its bills. Now, observers are watching to see whether Vallejo—the biggest California city to file for bankruptcy so far—offers a road map out of the mire.
Blame Vallejo’s politics, dominated by public-sector unions, for the city’s sorry fiscal situation. “Police and firefighter salaries, pensions and overtime accounted for 74 percent of Vallejo’s $80 million general budget, significantly higher than the state average of 60 percent,” reported a 2009 Cato Institute study. The study highlighted a shocking level of enrichment: pay and benefit packages of more than $300,000 a year for police captains and average firefighter compensation packages of $171,000 a year. Pensions are luxurious: regular public employees can retire at age 55 with 81 percent of their final year’s pay guaranteed, come hell or a stock-market crash. Police and fire officials in Vallejo, as in much of California, can retire at age 50 with 90 percent of their final year’s pay guaranteed, including cost-of-living adjustments for the rest of their lives and the lives of their spouses. And that’s before taking advantage of the common pension-spiking schemes that propel payouts even higher.
When a city spends so much taxpayer money on retirees, it doesn’t have much left over for services that might actually benefit the public. That’s why Vallejo has been slashing police services and has even warned residents to use the 911 system judiciously. “Since 2005, the number of police officers has dropped from 158 to 104,” a San Francisco Chronicle editorial about Vallejo pointed out recently. “In 2008, Vallejo had a higher violent crime rate than any other comparable city in California.” And it isn’t just public safety that has suffered. A 2008 Chronicle article reported on a budget plan that “cuts funding for the senior center, youth groups and arts organizations, to the dismay of residents.” Citizens complain about an increasingly decrepit downtown.
All this thrift could go only so far, however. Hence Vallejo’s bankruptcy, which could theoretically remove the city’s crushing obligations to retired employees. Unfortunately, it isn’t clear yet whether the pension promises will actually wind up rescinded. Yes, a judge has ruled that “city labor contracts can be overturned in bankruptcy,” reports Ed Mendell on his well-respected CalPensions blog, but a “ ‘workout plan’ approved by the City Council in December, described as an opening position in labor negotiations, cuts nearly all general fund spending, except for employee pensions.” Though the city eventually voted to reduce firefighter pensions for new hires and to require a larger pension contribution by firefighters, it did not touch existing pensions or pensions for police officers. Vallejo’s avoidance of the pension issue makes it less likely that other cities could declare bankruptcy and then easily dispose of their burdensome pension promises.
That’s unfortunate, because plenty of California cities are in similar straits. For years, local elected officials in Vallejo and throughout the state (and the nation, for that matter) have rapidly fattened pension benefits for public employees, worrying more about the next election cycle than about the ability of their municipalities to make good on all the lush promises. Once these contracts are approved, they become binding and must be fulfilled on the backs of current and future taxpayers.
True, the Orange County Board of Supervisors, which granted massive pension increases twice in the past decade, is making an unusual legal attempt to reduce its pension obligations: it’s pursuing a lawsuit claiming that the retroactive portion of one increase was an unconstitutional gift of public funds. That’s a worthy effort but a long shot. Most California jurisdictions think that bankruptcy is a more feasible alternative if salary and pension costs push them toward insolvency.
The Chronicle editorial, taking Vallejo to task for entering bankruptcy, prescribes two alternatives: more “help” from Sacramento (a nonstarter, given the state’s nearly $21 billion budget deficit) and higher local taxes. That’s certainly what California’s muscular public-sector unions would like to see. They backed legislation that would make it nearly impossible for localities to abrogate their labor contracts in a bankruptcy. Now they’re advocating tax-raising plans and railing against the two-thirds vote requirement to pass budgets and tax increases in the California State Legislature.
Cities across the nation should pay close attention to Vallejo’s workout plan. If bankruptcy isn’t a fix for past profligate spending on public employees, then more debt and higher taxes may be inevitable—a sobering thought in an already-struggling economy.
Steven Greenhut is the director of the Pacific Research Institute’s Journalism Center in Sacramento and the author of Plunder! How Public Employee Unions Are Raiding Treasuries, Controlling Our Lives And Bankrupting The Nation.