Saturday, July 27, 2013

Why Scott Walker is the Sleeper in 2016, A Bipartisan Assault on the Bill of Rights

Detroit's Bankruptcy is the First Domino
It is likely that few people understand the political and national significance of Detroit, Michigan's declaration of Chapter 9 bankruptcy this past week.  It is very easy and convenient to dismiss Detroit as a unique case - a once-proud national city that has lost over half its population over the past decade and is a poster child for what can wrong in a city - middle-class flight to the suburbs, the loss of a once-large industrial base, corrupt politicians and mismanagement of city services.

But that is far too convenient a story.  Detroit is not the first municipal bankruptcy and will not be the last.  The reasons and the numbers associated with them are staggering.

In 1994, Orange County, California went through a municipal bankruptcy process after making very poor borrowing and investment choices.  At the time, this was the largest municipal bankruptcy in American history, with $1.7 billion in debt to be resolved.  Orange County proved to be an outlier and no other major municipal bankruptcy followed for the next 14 years (there were some smaller ones in small towns, but nothing anywhere close to Orange County.)

Over the past few years, three significant but not large California towns have filed for bankruptcy.  Vallejo filed in 2008 followed by Stockton and San Bernadino in 2012.  These three filings all had one thing in company - the cities were awash in funded pension obligations that they could not meet.  Many in political circles and the media attributed this to be a uniquely Californian problem, a by-product of California's uniquely generous public pension scheme, large number of public employees and overall poor financial management.

Detroit's filing, a whooping $20 billion bankruptcy that crushes the size of all previous municipal bankruptcies, follows the same pattern as California.  Detroit has a mere $3.5 billion in bond obligations - the rest of the debt are massive unfunded pension liabilities.  Starting to see a pattern here?

Forbes documented a list of cities in similar situations to Detroit that may ultimately be the next victims of Chapter 9 bankruptcy filings.  Forbes estimates that there are over $1.4 TRILLION in unfunded municipal retiree benefits across the country, with New York City leading the way with $330 billion in liabilities alone.  Chicago has $63 billion in unfunded retiree liabilities.  And so on.  Virtually every northeastern and midwest city has a problem of unfunded retiree liabilities.

All of these funding needs obviously do not come due at once as public sector retirees draw on pension and health care benefits over long periods of time.  So one might mistake this as a very slow moving crisis which will have limited political impact over the next few years.

But Detroit's bankruptcy accelerates things.  Immediately following Detroit's filing, the major credit rating agencies began rapidly downgrading the credit rating of cities with unfunded liabilities.  This means that borrowing costs for major cities will shoot up - after all, post-Detroit and knowing what I just said, would you want to own bond obligations from New York or Chicago?  Municipal bankruptcies will accelerate and the effects will not be good.

A look back at the three cities in California who led the way shows that city services are still horrible, their economies are stagnant and populations are leaving en mass for better opportunities.

Detroit pensioner-receivers appear likely to only receive 15 to 20 cents on the dollar post-bankruptcy on their pension obligations.  Municipal pensions are NOT backstopped by a pension guarantee board like corporate pensions, so those folks are on their own in bankruptcy court.  A 15 to 20% payout would be devastating to retirees.  Imagine you are a retired municipal refuse worker who receives a $40,000 per year pension that you live off of, are 70 years old and have been retired for 10 years.  Suddenly having your income cut to $6,000 per year and your health care benefits cancelled would be destroyed.  Whether you believe that he or she should have received such a generous benefit is irrelevant at that point - the worker would struggle to go back to work and would have no mechanism to pay rent or utilities or buy groceries.

I believe that this will be a meaningful, perhaps defining issue in 2016, and no one has been out in front of the issue like Governor Scott Walker in Wisconsin.  He fought the unions to reduce state-funded pension and health care liabilities.  This fight led to a recall election that Walker narrowly won, as well as tons of insults hurled at Walker, including that he was trying to take away hard-earned benefits from teachers and fire fighters.

But Walker has a great narrative now - a guy who fought powerful unions, almost ending his political career to save the state from financial ruin.  "Is it really better for the state to promise benefits to workers that it cannot provide?" Walker can say, "is it really better for public employees to promise them benefits and then cut them off after they are retired, while devastating government?"

It's a pretty powerful argument.  Walker is one to watch in 2016.

For Shame
The House of Representatives this week voted to continue to allow the government gathering of metadata, such as your personal cell phone records.  This assault on civil liberties is shameful and bipartisan.

An unusual coalition of Neocon Republicans and Obama loyalists garnered 217 votes (134 Republicans and 83 Democrats), overcoming the votes of libertarians and liberals who support civil liberties (94 Republicans and 111 Democrats) to vote to continue to allow the practice.

None of those 217 deserve our support in 2014.

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