by James Spiotto
The financial health of some municipalities across the nation that are in financial distress is being threatened by unfunded public employee pension obligations that are not affordable and sustainable. When the cost of meeting public pension obligations crowds out the government’s ability to deliver essential public services such as police, fire and water, priorities need to be established and creative solutions are required. Whether the government’s previous commitment to generous pension benefits was ill-advised is not the issue. The time for that debate is passed. Rather, the situation cries out for a fair and equitable resolution of the demands upon the finite revenues of the government.
Whether the government’s previous commitment to generous pension benefits was ill-advised is not the issue. The time for that debate is passed.
Some financially distressed cities have turned to Chapter 9 of the Bankruptcy Code for relief. The courts in the Detroit and Stockton bankruptcies recently have held in connection with the confirmation of the Plans that pensions can be adjusted in bankruptcy. Ideally, a less draconian procedure than a resort to Chapter 9 should be available. In the article I have written, How Municipalities in Financial Distress Should Deal with Unfunded Pension Obligations and Appropriate Funding of Essential Services, 50 Willamette L. Rev. 515 (pending publication), I have examined the issue and suggest a proposal for dealing outside of Chapter 9 with unfunded pension obligations that are not capable of being paid. The U.S. Supreme Court legal precedent and governmental mandates support adjustment outside of Chapter 9 of these pension expenses that cannot be paid without jeopardizing the economic future of government and its citizens. Labor and pension contracts under state constitutions and statutory provisions should not be interpreted as a mutual suicide pact. A recovery plan that fully invests in essential services and infrastructure at an acceptable level with required reasonable adjustments to pension benefits to what is sustainable and affordable is the only path forward for all concerned.
The principal purpose of state and local government is the provision of essential services and infrastructure necessary to maintain the health, safety and welfare of its citizens. The problem of mounting unfunded municipal pension obligations has been viewed erroneously as precluding the provision of these essential governmental services and infrastructure. In fact, there is no legal or practical justification for elevating the funding of pension obligations to the exclusion of essential governmental services and infrastructure. Any failure to satisfy the principal purpose of government to protect the health, safety and welfare of citizens will lead to the deterioration of the municipality and will ultimately negatively impact the municipality’s ability to pay for workers and retirees in the future.
The goal of a municipality must be to fund pension obligations to the fullest extent possible without causing the financial demise of the municipality through failure to fund the principal purpose of government.
Actually, the best way to ensure that funds will be available long-term for the payment of municipal pension obligations is to fully fund governmental services and infrastructure. A vibrant and well run municipality will attract citizens, stimulate the local economy, provide new jobs and result in the expansion of business, all of which will increase revenues available to pay legacy costs such as pensions.
This is no time for the academic debate as to whether previously agreed to pension benefits were imprudent or too generous. In practice, a municipality can only pay what it can afford to pay. The goal of a municipality must be to fund pension obligations to the fullest extent possible without causing the financial demise of the municipality through failure to fund the principal purpose of government. Recent bankruptcies, such as Detroit, Stockton and San Bernardino, have raised the question of whether unfunded pension obligations should crowd out funding for essential governmental services.
The judicial wisdom expressed in these cases has resulted in a practical response to the query. Pension obligations, like other contracts, can be adjusted in bankruptcy to what is sustainable and affordable. This makes both legal and practice sense. Failure to meet the requirements for governmental services and infrastructure in the name of satisfying pension obligations will result in the death spiral of the municipality, which will necessarily mean fewer funds available for workers and retirees. Absolutists who continue to reject any adjustment to pension obligations so that essential services and infrastructure cannot be funded are undertaking a fool’s errand. The resulting economic erosion of cities from such an approach will long term mean less for public workers and retirees.
Pension obligations, like other contracts, can be adjusted in bankruptcy to what is sustainable and affordable.
This article provides a practical and legal justification for the payment of governmental services and infrastructure first and the satisfaction of pension obligations second without the resort to municipal bankruptcy. This priority is the only approach that is consistent with the reason for the existence of government. Further, it is the only way that taxpayers will support the growth, survival and success of the municipality.
Importantly, such support is necessary for the satisfaction of pension obligations. The article explains that, ideally, a less draconian procedure than a resort to Chapter 9 should be available to units of local government. In the article, I suggest a proposal for dealing with unfunded pension obligations outside of a Chapter 9: a recovery plan with reasonable adjustments to pension benefits to what is sustainable and affordable to the fullest extent possible. If the recovery plan is successful, increased payments should be made to retirees in satisfaction of pension obligations in the future. In this way, pension obligations will be funded at a level that is fair to both the young and oldest workers while avoiding the financial ruin of the municipality.
James Spiotto is Managing Director of Chapman Strategic Advisors, LLC and Co-Publisher of MuniNet Guide.