Pfeiffer agrees that bankruptcy should be a last-ditch effort. “You have to look at this as a continuum, with bankruptcy at the far end,” he says. “Along the way you have things like renegotiating your labor agreements and debts with bondholders, tightening up operations through layoffs and furloughs, and eliminating or reducing services. Many financially distressed municipalities have done this and avoided bankruptcy, working out their respective problems.” (See “Beating Back Bankruptcy,” below.)
They key word is “respective.” Both Pagano and Pfeiffer say every municipality’s problems are unique, requiring different remedies for different ailments. Nevertheless, they do cite a few similarities, chiefly their grand promises made to city workers. “Unlike the private sector, states, cities and towns continued to provide defined-benefit pension plans instead of more cost-effective defined-contribution strategies,” says Pfeiffer. “The recession highlighted the extent of these obligations, which were steep.”
Pagano takes a blunter tone. “In my state of Illinois, if you’re the head of a labor union for just one measly day, you’re entitled to a state pension for the rest of your life — even if you’ve never contributed a single cent to it,” he says. “In Stockton, city retirees get free health care for life, in an era when people are living a lot longer. These are the deals that were being made 30 years ago. There was no bright light on them and no one questioned them. It’s too bad that the taxpayers and city pensioners have to suffer for the stupid things done by people three decades ago.”
Preventing such suffering in the future requires the gumption to take action now, says Bob Deis, who retired Nov. 1. “A lot of cities are sitting on time bombs,” he maintains. “Their retiree medical insurance liabilities and pensions are adding up, as baby boomers retire by the droves and want their share.”
Is bankruptcy the best solution for troubled cities? It’s too soon in Detroit, Stockton, Vallejo and Jefferson County to conclude that the patient is healed. But when all other options are exhausted, the answer would seem to be yes.
Still, cities must carefully weigh the risks of bankruptcy. It can tarnish a municipality’s reputation, steering businesses in other directions. It also affects the ability to attract bond investors, potentially scaring them away for good. “I wish we could go back and ask Moody’s, Standard & Poor’s and the other rating agencies why they gave AAA credit to these places years ago, when they were making these risky promises and deals,” Pagano muses.
It’s too late to do that, of course. But it’s not too late to do something. “If municipal finance leaders don’t take charge of these problems now, they’re aiding and abetting the equivalent of a Ponzi scheme,” Deis charges. “Finance is either a part of the solution or part of the problem.”
Russ Banham is a contributing editor of CFO.