The Detroit Bankruptcy Will Be Interesting To Follow; Meredith Whitney Says It Is A Game-Changer

Back in March, 2013 (just a few months ago), Governing.com had an interesting article suggesting that the "successful" bankruptcy of Central Falls, Rhode Island, may have changed everything about cities declaring bankruptcy. Here is an excerpt:

Many fiscal observers point to Vallejo as Exhibit A of why municipal bankruptcies are a bad idea. The city’s credit rating plummeted, all but killing its borrowing ability. Cuts to services and public safety led to increased crime and prostitution. Even now, the city faces a looming collective bargaining battle with labor unions, and its 2013 budget draws several million dollars from rainy day reserves.

But the landscape may be changing. Since Vallejo, other cities have used bankruptcy filings to help restructure burdensome debts, overhaul pension obligations and renegotiate labor contracts. A handful of California cities are now using bankruptcy to take on that state’s goliath pension system; the outcomes of those cases could spread far beyond California, changing the way other municipalities view bankruptcy. Filing for Chapter 9 will almost certainly remain a decision of last resort, but the stigma may not be what it once was. There’s a growing sense among some leaders that municipal bankruptcy -- unthinkable just a few years ago -- may be a valuable tool in a city’s financial toolbox.

A big part of the shift has to do with pensions. Employee pensions and other retiree benefits aren’t the only cause of municipal distress, but they’re a major factor. Cities’ obligations to retired employees are gobbling up a larger and larger share of local budgets. In San Jose, Calif., for example, the city’s pension payments jumped from $73 million in 2001 to $245 million in 2012, roughly 27 percent of that city’s general fund budget. But tinkering with those obligations can be next to impossible. Fiscally distressed cities have sought relief by raising taxes and cutting services, but they often hit a brick wall when it comes to contract adjustments. And even in cases where they can negotiate a new labor agreement, existing pension agreements have legally been untouchable.

That was until Central Falls, R.I., declared bankruptcy. [Central Falls was first mentioned at the MDW blog on December 18, 2010.] The finance-strapped town of 20,000 people, located on the northern outskirts of Providence, had been trying to renegotiate its pension contracts for months with no success. When it filed for bankruptcy protection in August 2011, the slate was essentially wiped clean. The city immediately moved to change its labor and retiree agreements. The new deal hammered out by Central Falls and the unions was essentially what the city had wanted all along, says Ted Orson, the attorney for the city’s receiver. The final agreement slashed pensions by 55 percent (although funding from the state’s general assembly reduced that cut to 25 percent for the first five years).

The difference, Olson says, is that Central Falls was the first city to use bankruptcy to make good on its promise to cut pension benefits. “Up until Central Falls, there was never what we call an ‘or else,’” Orson says. “There wasn’t any leverage to make concessions. However, after Central Falls, when [the labor unions] saw what happened, they understood it’s better to negotiate a better agreement than to be in a position where something can be forced on you and you might not like what it is.”

Go to the linked article for more on this. 

Of course, Yahoo!Finance has a much more superficial article regarding the interview with Meredith Whitney, but you can probable read all about it in her new book.

There are a handful of pundits/talking heads that seem to be a bit more reliable than Art Carney these days.