A Very Bad Idea Coming Soon to a City Near You

[McCamy Taylor]

What if Congress voted tomorrow to cut your Social Security check in half? How would you feel? What would you do?

Retired firefighters and policemen in Central Falls, Rhode Island know how they would feel, because it has happened to them already. They have agreed to sharp cuts in their retirement pensions. They have no choice. If they don’t agree to accept half, the city says it will file for bankruptcy under a new plan that will allow it to decide which of its creditors get shafted and which get paid. Bondholders will not see a loss on their investment, but retirees could see their pension contracts voided. And the city retirees do not have Social Security to fall back upon. Here is the NYT article:

http://www.nytimes.com/2011/12/20/business/pension-deal-in-rhode-island-could-set-a-trend.html?_r=1&ref=politics

How can a city tell its retirees “Sorry, we are broke” while telling investors “Great news! We are flush with cash!”? You tell me. A contract is a contract. But in the U.S., contracts to pay investment brokers apparently count for more than contracts to support the folks who put out our fires and capture our criminals. That is because the banks are too big to fail while American workers are disposable.

If this trick works in Central Falls, it will be copied by cities all across the country. What a boon for local governments! It will be like getting free money! Cities that do not opt to place their pensioners out on ice floes will find themselves unable to sell municipal bonds. We will hear mayors claiming “If you want us to put out your fires now, you better let us stop paying the folks that used to put them out.”

And once local government workers are without a pension, it will be quite easy for the federal government to say “It isn’t fair that retired firefighters and police carry the burden for our bad economy. All retired workers must do their part.” At which point, your Social Security check will be cut in half---and the feds will tell you “Just be happy we don’t take all of it.”

[badtoworse]

1. Wouldn't a bankruptcy judge have to approve such a plan?

I don't believe a bankrupt city could do this unilaterally.

[RC]

3. Will a judge more likely have a city financed retirement account or city bonds

I'm betting on bonds.

[Igel]

10. The judge is bound, one would hope, to enforce the laws.

If the pensions had caveats of various kinds and the levels were to be set by law while the contracts couldn't be broken ex parte, the judge would have no choice.

A judge who cites (his) morality over the law he's sworn to uphold has neither, but is capricious. We may like some caprice, but only when it's something we like.

The judge would also look at the needs of workers and the needs of the city, viz. the population, to pass bonds in the future.

If the municipality fully defaults, I wonder if the feds would pick up the pension obligations.

[bhikkhu]

15. Not to mention, has his own retirement plan to think about

If the money just isn't there, I imagine there would have to be some pain spread around, but I think all parties - including bondholders and other debt-holders - should balance things out with as much as possible left to the retirees.

I can't imagine anything worse than having spent a lifetime of work, looking forward to a little ease in one's waning days, and then getting the shaft instead. I know some retirees who could easily go back to work, and some that collect comfortably from a couple different sources, but there are many who worked themselves down to the bone and just don't have anything left to give.

[jtuck004]

29. Wtf would a bondholder care about retirees? You don't want to pay you don't get debt to

continue running your city, and it dies. Most especially in the next 2 decades of a virtually no growth (or worse) economy. And with virtually every state bankrupt or nearly so (lots of creative bookeeping going on at high levels, btw), and no political will to spend, there will likely be no backstop. Will be a bunch of yelling, however. We shall see.

But share the pain? pffffft. The robber-barons of wall street have shown us the way, and the way is greed. Their friends in the government (some of them former employees) are creating the rules by which they thrive.

Not my position, (IMHO there is too much rent-seeking behavior, not enough investment and productivity building), but what fund with a few billion to invest in the return they can get from tollways, parking meters, people's pockets as taxpayers, (you can only get so much from student loan interest, mortgage fees and interest, consumer loans, car rental contracts, etc) is going to suddenly become a charity?

Not gonna happen.

btw - "I can't imagine anything worse than having spent a lifetime of work, looking forward to a little ease in one's waning days, and then getting the shaft instead."

I can, but that doesn't take away from the changes these folks will see.

[Nuclear Unicorn]

4. The pensioners would still be risking everything

Therein lies the rub. It's the half-loaf vs. whole loaf argument. To challenge the bankruptcy in court is to risk no loaf.

And for the city it's a diabolically easy call to make. Pensioners are formerly productive future expenses. Meanwhile bonds are future revenue. Stick it to the penshioners you save money. Stick it to the bond-holders you lose future revenue. It's a sad, sick calculus. Those pensions should have been fully funded from the beginning. Alas, too many pensions, both public and private, are dependant upon bizarre "future earnings" calculations.

My state's employee pension projects 8% return on investment!!! That's an insider-trading level of return on markets they have no control over. This is also in the face of less than 8% return for decades now. The 8% itself is unrealistic and for every year ROI is under 8% a subsequent year has to make-up the difference. They are doing nothing but spinning false promises for people who will be planning the sizes of their home purchases, etc on fanciful numbers. Thank God I'm not a state employee. The practice ought to be outlawed.

[saras]

6. So the rest of us have to stick it to the bond holders to the degree where they no longer can profit

[Nuclear Unicorn]

9. If they cannot profit they will not put money in bonds

Bonds are how governments fund projects -- http://www.wesdschools.org/News.aspx?type=viewArticle&article=1365

On the federal level bonds are how the government can spend more money than it raises in tax receipts. If bonds were no longer sold you would see deficit spending evaporate overnight; something the GOP would love. And sorry, even if you defunded the DoD 100% -- a thin that pushes past absurd and politically suicidal -- you would only account for $665 billion. That's AFTER the Iraq withdrawal and includes gutting all vet benefits, etc. Even then it's only 1/3 of the annual $1.7 trillion dollar deficit.

Deficit. Not overall budget; but only 1/3 of the deficit.

We need bonds unless we want to slash education, Medicare, social services, EPA/FDA/OSHA regulation enforcement, etc by 55% overnight.

And bonds aren't even profitable. All they do is offer a hedge against inflation. Bonds *are* the inflation rate. That 2% rate of return is the 2% inflation rate for the consumers. Most investors try to make Profit = (investment + return) - inflation. All the bond buyer did was break even. Tax them and suddenly bonds become auto-loss instruments. If the market dries up the rate of return climbs until people start buying them. That makes everything more expensive down the line for the consumer and dries up the credit markets.

Municipal bonds are even trickier. The feds will always be there but municipal governments can actually disappear if the city's population/economy (read: tax base) fades away. A city can say, "We have 100,000 people each taxed at a marginal rate of 5%. We grow plus 2% population every 10 years ergo we surmise tax receipts of X in Y years." But if the local economy goes toes-up those calculations become moot. If the pensions were funded on promises-only the retirees can howl day and night but the money won't be there. You can't squeeze blood from a stone, regardless of how much you tax the stone.

If you had to choose between schools and sewers here and now vs. retirees you can instantly see the issue. No schools or sewers means destroy your city. What do you use to pay your retired employees then, even if only half of what you promised?

The solution isn't to punish bond-holders, and the schools, roads and seweres they fund. The solution is to compel anyone offering a pension to have cash-on-demand in the bank to cover those pensions. Basing pensions on assumed 8% ROIs is a practice no SEC-governed entity would be allowed to lawfully claim. That way the bond-holders are 1 set of transactions and the pensioners are separate and segregated -- insulated, if you will -- from the economic tides.

[RickFromMN]

16. I would think bondholders are pushing ahead of others in line in the bankruptcy,

Isn't this thanks to something the Rhode Island Legislature did?
http://blogs.reuters.com/muniland/2011/08/03/bondholders-have-pushed-ahead-of-others-in-line/

I thought bonds were supposed to carry the risk of default.
Isn't the interest rate, on the bonds, related to this risk of default?

I thought creditors were paid before bond holders.
I thought pension obligations would be considered creditor obligations.

Raise the taxes on those benefiting the most from our system,
the rich and their large, very powerful, corporations.

Any corporation or person wishing to leave the country can do so.
Insure those corporations don't benefit from any U. S. subsidies or tax breaks.

Give a tax break to corporations, in the United States, for employees,
who work in the United States. Don't give tax breaks for foreign employees.

[badtoworse]

20. I was under the impression that bondholders are first in line in a bankruptcy proceeding

I'm not an expert though.

[joeglow3]

32. Typically, bondholders are first in line

[Nuclear Unicorn]

27. Good questions.

I thought bonds were supposed to carry the risk of default.
Isn't the interest rate, on the bonds, related to this risk of default?

I thought creditors were paid before bond holders.
I thought pension obligations would be considered creditor obligations.

Chapter 9 Municipal Bankruptcy pays-out bond-holders first but bonds are the instruments through which creditors lend money to the municipality. Generally, the point of CH9 is to allow the municipality to modify the repayment schedule of its bonds.

[RickFromMN]

36. I did not realize bondholders were first in line.

I thought governments and corporations told people to work at lower wages now
and they would receive pensions and other benefits later.

Clearly these promises cannot be trusted as is.

Workers must demand future promises be funded and the funds placed
in irrevocable instruments to insure workers get these promised benefits.

Perhaps if cities feared they could not hire workers in the future when they
go back on their promises to workers regarding future benefits, they would
hold promises to workers in the same regard they hold bondholders.

[treestar]

25. Yes, and people to whom wages and benefits are owed are the first priority

Though there is a special section for municipalities, Chapter 12.

[Odin2005]

2. Cutting pensions is immoral beyong belief.

It is a kind of theft from workers who were promised those pensions for years, only to lose them after they retire.

[stillwaiting]

12. Why do you hate America? What are you some kind of commie?

** asked in playful tone of voice **

[Odin2005]

13. I was one in high school!

Now I'm just a garden variety socialist pinko!

[we can do it]

5. How do i rec this?

[aquart]

8. I think you click DU rec.

Which is another instance of fixing what wasn't broken.

And now I will POST MY REPLY! with all the excitement the exclamation point implies.

[aquart]

7. Employment contracts don't seem to be considered worthy of being honored.

Me, I would make it a hanging offense to mess with a pension. You know, like stealing a horse.

[wiggs]

11. Pensions are deferred pay. The RWrs have messaged pensions to mean some sort of golden parachute

that far exceed what "normal Americans" get. The left has frame this correctly and be on top of events like in Central Falls in order to stop the trend.

Instead of ripping us off by privatizing social security, education, and medicare they have just started ripping us off directly by raiding pensions.

[Zalatix]

14. How will the Plutocracy protect itself if it keeps doing this to its police gangs? n/t

.

[a2liberal]

17. K&R (n/t)

[pacalo]

18. Let's hope the officers who have harassed & abused OWS read this or hear about it.

[whathehell]

19. Another instance of "class warfare" from the top down. Disgusting in the extreme. n/t

[onethatcares]

21. the main problem we(as citizens)have

there are too many people that don't have pensions of any type that instead of demanding them, they feel very good about taking them away from those that have.

It's one of the largest bang my head against concrete moments I have.

Our country is nuckng futz.

[mmonk]

22. Sad trends continue along with this austerity madness.

[NNN0LHI]

23. I have been getting cuts to my pension in one way or another since 2004

This year it was about a grand. True story.

Don

[fasttense]

24. When my father was alive, he worked for a corporation that promised him and my mom medical care

for life. He worked 20 years for that firm and had an agreement in writing. 5 years after he passed away, the corporation told my Mom she was no longer eligible for their medical care plan because 5 years was considered a lifetime.

The only thing she could have done was bring a suit against the corporation but she had very little money and energy left to do that.

Corporations aren't people in America, they are Gods.

[DeathToTheOil]

26. K'd & R'd nt

[lumberjack_jeff]

28. Take 'em to court.

Bankruptcy happens, but retirees shouldn't be left holding the whole bag. Bond investors should get the haircut too, and the city should demonstrate that they're taxing as much as they can to honor their prior commitments.

[NNN0LHI]

30. Us UAW retirees did just that when the retirees were not allowed a vote in the cuts

We took them to federal court in Michigan.

We lost our case.



Don

[lumberjack_jeff]

34. Seriously? The court ruled that retirees will just take whatever the current managers want to pay?

[NNN0LHI]

35. No, the court ruled we had to take what the current employees voted for in their contract

While us retirees were not allowed a vote in the matter.

That is what anyone employed/retired somewhere there is a two tier wage system in place can expect.

Same thing for municipal workers. Highly doubtful the new employees, when there are enough of them, who now only get a 401K retirement plan are going to vote for full funding of the retirees collecting a real pension.

I suspect when it comes right down to the nitty gritty something like this is probably going on with these retired firemen. Makes sense doesn't it?

Don

[Earth_First]

31. It's all part of the sick, twisted disgusting plan...

Until they get it all, they will not be satisfied.

[Marrah_G]

33. This is the same city that fired ALL it's teachers to break the union