Lots of businesses know about the magic of bankruptcy court. There, heavy debt
can be lifted. Expensive leases can be undone. Burdensome contracts can
be erased.
Indeed, a bankruptcy judge can make your bad decisions disappear like magic. You can get a do-over.
Businesses know this, which may explain why some business people, including former
Mayor Richard J. Riordan, are urging the city of Los Angeles to file
for bankruptcy.
The
real appeal of a Chapter 9 filing for Los Angeles is that a bankruptcy
judge could make the tough decisions that the City Council and the
mayor won’t. A judge could declare it’s do-over time, and make the
city’s burdens more or less disappear like magic.
Take
pensions. They’re generous and rising frighteningly fast. According to
reports, the city will have to contribute $730 million next year to
cover pension costs, up nearly 12 percent from this year’s $653
million. And they don’t stop after that; projections put that figure at
over $1 billion in a few years.
Those
pensions need to be reined in for the city to get back on its financial
feet. But the true problem isn’t the pensions, per se. The true problem
is the lack of political will to do anything about them, the lack of
spine to defy the unions that put many of the city’s elected people in
office.
So
some business folks are thinking: Since L.A.’s union-dependent mayor
and City Council aren’t likely to get medieval on the unions’ pensions,
maybe a bankruptcy judge could do it for them, eh? That way, L.A. can
get its do-over and the elected types can blame it on the judge.
Problem solved.
But wait. Not so fast. Take a minute to consider a disturbing little case study.
The
town of Vallejo, north of San Francisco, declared bankruptcy two years
ago. Like Los Angeles and so many other California cities, it became a
municipal basket case largely because it gave its unionized workers pay
and pensions so astonishing the city eventually could not keep up.
A
report by the Cato Institute in the fall pointed out that regular
public employees in Vallejo can retire at 55 with 81 percent of their
final year’s pay guaranteed. It’s even better for police and fire
officials, who can retire at 50 with a pension that pays them 90
percent of their final year’s salary every year for life and for the
lives of their spouses. Obviously, as time marches on and more
employees retire, the cumulative load on the city’s taxpayers gets
heavier.
Making
matters worse was the generous pay. Firefighters average $171,000 a
year. Police captains earn $300,000 a year. That implies the captain
could retire at 50 and get $270,000 a year for his life and for the
life of his wife.
As
you might expect, unions fought Vallejo’s bankruptcy. Finally, the
bankruptcy judge in the case last year held that the city could void
its union contracts.
That’s when the disturbing thing happened. You see, the city’s elected officials still had to ask the
judge to void the pension contracts. In other words, they still had to
reach inside themselves and find the political will to defy the unions.
That they could not do.
Steven
Greenhut of the Pacific Research Institute in Sacramento, writing in
the Wall Street Journal in March, said the Vallejo’s workout plan in
December called for cuts in services and some employee benefits, but it
did not touch the pension contributions the city had to pay. Indeed,
the city increased its pension contributions.
Wrote
Greenhut: "Other cities will now find it harder to use the threat of
bankruptcy (or bankruptcy itself) to get unions to agree to rein in
pension costs."
Bankruptcy
can wipe away problems like magic. But the true problem is not the
burdensome contracts or runaway pension expenses. The true problem is
the lack of political will to confront the unions.
Bankruptcy
won’t give L.A.’s elected leaders the spine to confront them. And until
they get the spine, bankruptcy is no solution for Los Angeles.
Charles Crumpley is editor of the Business Journal. He can be reached at ccrumpley@labusinessjournal.