Sometime this week, the city of Stockton, California will file for bankruptcy. I’m sure the people of Stockton — all 300,000 of them — are a bit bewildered by their current grim reality.
Not too long ago, Stockton was on the move. It built a new marina and hotel and promenade to attract tourists. It built vast tracts of housing in an effort to lure bargain-hunting workers from the Bay Area. It offered generous pay and benefits to its workers, including allowing them to retire at age 55.
Then the crash came. The vast tracts of housing sit largely vacant, and Stockton has the second-highest foreclosure rate in the country. The hoped-for boom in tourism and convention traffic never materialized. Stockton boasts the second-highest rate of violent crime in California and a 17.5 percent unemployment rate. The city has been cutting payroll for years, including a 25 percent cut in the police force and a 30 percent cut in the fire department payroll. Public employee pay and benefits have been reduced. Yet still the city faces a $26 million budget deficit and $417 million in liability for retirees’ health care. When mediation talks with public employee unions and creditors failed, bankruptcy became the only option.
If I lived in Stockton I’d have one question: how did city government fail so colossally? Stockton looks like one of those cities where bones were thrown to everyone: big dream city projects for the pro-development crowd, big pay and health care benefits and pensions for the public employee unions, big promises of progress and better days ahead for voters, and pats on the back and big salaries for city leaders. Now that it has turned to ashes, city residents are left in a crime-ridden, devastated city that has to do untenable things like totally eliminating healthcare benefits for city retirees.
I guess, therefore, I’d have a second question: where is the accountability for the city leaders who allowed the city to stroll, dream-like, into this predicament?
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Posted in America, Politics, tagged America, bankruptcy, California, California budget deficit, Congress, Illinois, Politics, Public Employee Unions, Retirees, senior citizens, Seniors, State Budgets, State employees, Tea Party on January 21, 2011 |
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As even a casual follower of the news knows, many states are struggling with huge budget problems. Ohio is one of them. Usually the problems are the result of declining tax revenues, increased government spending and support obligations, and the fact that bills are starting to come due on grossly underfunded state employee pension and retirement plans.
States are taking different approaches to their predicament. Illinois recently enacted huge increases to its individual and corporate income taxes. California has declared a state of fiscal emergency. Some states have focused exclusively on cutting spending. And, it now appears, other states have quietly gone to Congress to explore the possibility of either a federal bailout or changes in the law to allow states to declare bankruptcy. In these Tea Party days, there doesn’t seem to be much appetite for bailouts — especially for states that seem to have behaved irresponsibly with their budgeting decisions and can’t be trusted to behave responsibly in the future. So, the “bankruptcy option” evidently is being seriously explored as a way to allow states to avoid their pension obligations.
I’m opposed to a federal bailout of the states. I’m also opposed to any change in the law to facilitate states wiping out their debts through a bankruptcy-type process. I think the bankruptcy option would be bad policy for two reasons. First, I think such an approach is not fair to people who have agreements with the states that would be affected by a bankruptcy process. State employees who have worked for years on the understanding that they will receive a pension should not be deprived of their pension payments. For those workers, the pension was part of the deal, they have relied on the pension in their retirement planning, and it would be unfair for states to now renege on the deal. Second, bankruptcy would affect not only state workers with pensions, but also all people who have contracts with the state, all people who purchases state bonds and debt instruments, and all others who do business with the states. It would be a drastic step that would, I think, forever affect the state’s credit rating and investor confidence in government securities generally. States that have been responsible in their budgeting and spending would be tarred, too, and would have to endure higher interest rates on their own borrowing as a result. Obviously, neither of those results would be welcome.
The solution for states that are in a budget bind should lie in the state, itself, making the tough choices and difficult changes necessary to get their fiscal houses in order. Cut spending. Eliminate programs that aren’t essential. Sell state property and assets. Negotiate changes to future pension obligations and eliminate pensions for newly hired employees. Change laws that require automatic escalations in pension payments. Explore users fees as additional revenue sources. But don’t come to Uncle Sam for a bailout, and don’t take a bankruptcy option that could leave retirees high and dry and cripple state credit ratings for decades to come.
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On Thursday, Blockbuster Inc. filed for bankruptcy. The retail video rental chain, which employs about 25,000 people, is close to $1 billion in debt and is getting hammered by Netflix and other companies that offer different approaches to delivery of movies and entertainment options to consumers.
I haven’t been to a Blockbuster store in years, but I pass one on my commute to work every day, and there has been a noticeable decline in traffic at that store. Consumers obviously prefer the mail order/on-line alternatives to driving to the nearest Blockbuster store, rummaging through the shelves in hopes of finding a worthwhile video to watch that night, and then paying late fees when they forget to return the movie in timely fashion.
The lesson of the Blockbuster bankruptcy is that the tastes and practices of American consumers are ever-changing and often influenced by new technology — which is why so many people are skeptical when the federal government tries to pick winners and losers, subsidizes particular industries or lines of business, or otherwise attempts to influence consumer choices or the direction of the American economy. Blockbuster was once a mighty company, with busy stores in every shopping mall. People who looked at the company in its heyday probably thought that, of course, Blockbuster would be profitable indefinitely. When something better came along, however, Americans left the Blockbuster model behind without a second thought.
At least no one is suggesting that we should bail Blockbuster out.
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Sigh. As I’ve noted recently, the bad news just keeps coming. Yesterday the troubling story was about personal bankruptcies reaching a five-year high. Today it is reports of another “surprise” increase in new filings for unemployment benefits, which reached the highest weekly total in nine months. When every day seems to bring a fresh sign of ongoing economic turmoil, it is difficult to be optimistic.
What does this onslaught of bad news mean? It means that, more than two years into this recession, we aren’t seeing significant improvement in our economy. What we have tried has not worked, and it clearly is time to try another approach.
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Here’s an interesting editorial on the possibility that California might go into bankruptcy in an attempt to get its fiscal house in order — an option that some other governmental entities have exercised. It is sad state of affairs when elected leaders bring governmental bodies to this point, but the bankruptcy laws are there for good reasons. Better to use the bankruptcy laws to fix the problems that are driving California under than to use budget gimmicks and borrowing that will only make the problems worse in the long term.
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