Wednesday, December 19, 2012

"When Cities Go Bankrupt"

Reason.com discusses the pension crises, debt, and how roadblocks to bankruptcy actually hurts cities. (See story here). A key point:
And make no mistake: Bankruptcy, municipal bankruptcy in particular, is powerful medicine. Bond holders hate it because it requires them to take a hit on what were thought to be ultra-safe investments. Public finance experts hate it because it limits—though it does not totally eliminate—their ability to take on more debt in the future. (Boo hoo!) But here’s the good part: Nobody hates municipal bankruptcy more than government employee unions.

That’s because bankruptcy is the best bet most cities have for getting out of their crushing health and retirement obligations to public workers. While many reformers —including many liberal good-government types who see how the pension crisis is slowly paralyzing activist government—want to renegotiate these contracts, this is almost impossible to do. California (where the pension crisis is most acute) has a voluminous history of court decisions generally ratcheting up protections for public worker contracts and prohibiting governments from making any changes. Beyond the legal question, there is an ethical argument: Sanctity of contract, no matter how stupid or vile the parties may be, is not to be thrown aside lightly.

But the United States has established bankruptcy provisions for a reason: to give hopeless debtors a way out that minimizes damage. The 19th-century move away from a universe of debtors’ prisons to a legal framework that allowed debts to be discharged in court was an important step in the creation of modern finance. Chapter 9, which treats municipal bankruptcy, was added to the U.S. Legal Code during the Great Depression to give shelter to underwater cities for which tax hikes were not an option. Many towns around the country are in that boat today, and while the long stagnation that began in 2007 usually gets the blame, the recession merely revealed a pre-existing problem.


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