Municipal Bankruptcy Could Set a National Precedent for Wall Street, Bondholders and Pension Funds

In Columns by Hal PetersonLeave a Comment

My last column “New York’s Exploding Pension Crises” caught the attention of a family friend living near the City of San Bernardino, in California. He suggested I read a column published in The Economist titled “A Bankrupt City Takes on a Public Pension Behemoth,” i.e. the California Public Employees Retirement System (Calpers).

Let’s examine the broader implications of their action. To the best of my knowledge, they are the first municipality to file an emergency budget with a bankruptcy court that (if approved) would allow them to delay $13 million in required contributions to the six-largest pension fund in the world — a trend setting plan that has Wall Street and debt holders alarmed that the pension fund might gain priority status in the repayment queue.

Grinding of teeth well past. Mayor Pat Morris indicates while the pension fund is their biggest creditor, his city cannot cut services any further without jeopardizing basic safety. He also mentioned their “particular troubles go back decades, caused by overbearing union agreements, political dysfunction, and financial commitments made during good times that could not be met in bad.” In the filing submitted, the city is willing to resume payment “at some future date to be negotiated with the creditor.”

Relevance! George J. Marlin, the author of Narcissist Nation and current Nassau County Interim Finance Authority (NIFA) board member writes “the city of Buffalo, once the largest flour mill city in the western world and America’s fourth largest manufacturing city, is on the edge of bankruptcy.” As of 2008, “it lost 48% of its population since 1960, lost its heavy industry and manufacturing base, and has 35,000 abandoned single-family homes.”  The once thriving cities of Rochester, Syracuse, Utica, Binghamton and Schenectady share similar problems.

Marlin, cites one crushing cause: Big spending governor’s dating back to Nelson Rockefeller “circumvented taxpayer oversight and neutered local governments by employing fiscal gimmicks that concealed deficit spending…….while imposing (to date) more mandates than any other state, that  consuming (on average) 60 percent of their budgets.” To comply with these mandates, local governments are forced to raise billions in taxes.

In a presentation made in the Rockville Centre Public Library, with state and local officials present, I mentioned a need to address the “operational irresponsibility currently evident in Albany that, if not corrected, might lead to a new phase of instability beyond anyone’s imagination.” Governor Cuomo seems concerned. He was disappointed that a federal court judge ruled against a NIFA imposed wage-freeze that would save Nassau County $110 million.

“I need Nassau’s problem contained” he said. “If control boards don’t work here, other stressed municipalities will bring a tin cup to Albany or face bankruptcy.” Things must be getting serious. I haven’t heard the words “tin cup” used for years. And you think you have problems, Mayor Morris.



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