Judy Nadler, senior fellow in government ethics at the Markkula Center for Applied Ethics, looks at ethical dilemmas, scandals, and best practices in government.
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Thursday, Aug. 23, 2012
Wall Street has taken notice of municipal bankruptcies, and now it appears that the courts may become involved as well.
The question is whether or not pension commitments can be annulled when bond insurers come asking for their payments. In a column published by the Sacramento Bee, Stockton is used as an example of a city that borrowed $125 million from the bond market five years ago to cover increases in pension benefits. The city pays $29 million a year to the California Public Employees’ Retirement System to cover its annual pension obligation.
Stockton has filed for bankruptcy, but to date has not put CalPERS, the nation’s largest public pension fund, on its bankruptcy list of creditors. Columnist Jon Ortiz writes, “Bond insurers say the city should cut CalPERS payments along with those to other creditors.”
Moody’s credit rating agency estimates 10 percent of California’s cities “have declared financial crisis.” Even Warren Buffet has left the municipal bond insurance business, signaling that the once-reliable municipal bonds are now risky business. Ultimately we will witness a battle between the bankruptcy law experts and those who are defending public pension obligations.
The future of education, public safety, libraries, and many more basics are at stake. At the end of the day, I don't think either side will be able to declare victory.
Tuesday, Jul. 17, 2012
In the wake of cities declaring bankruptcy, Baltimore’s “audit bill” seems like a no-brainer.
A watered-down version of the bill would require 14 city agencies to be audited at least once every four years. According to the Baltimore Sun, the original bill called for audits of all 55 city agencies every two years. If all goes well, the council will approve putting the proposal on the November ballot.
Councilman Brandon Scott, who is just 28 years old, noted that some agencies have not been audited in his lifetime. “We are a budget built on sand,” according to fellow councilmember Mary Pat Clarke.
The move toward more accountability came from a series of bills introduced by Councilman Bill Henry, who is seeking to streamline the council, reduce the power of the mayor, and impose term limits. While laudable, those reforms do not make the top of the list, nor should they become a roadblock for better fiscal oversight.
Financial audits cannot not be an option for any organization, let alone those who rely on tax dollars. Transparency in government must extend past open meetings, conflict-of-interest disclosures, and access to public records. Best practices dictate complete and regular audits of cities and their internal agencies.
Thursday, Jul. 12, 2012
There is a stigma about declaring personal bankruptcy, but it does not compare with the reputation that comes to a city that goes bankrupt. Ask the mayor of San Bernardino, the latest California city to file for Chapter 9 bankruptcy protection. As of this week, the city of 211,000 found it had just $150,000 in the bank. According to the Los Angeles Times, “The city barely scraped together enough money to cover its June payroll.”
Uncertain economic times are impacting local government to a degree that we have not seen in the past. Vallejo, a Bay Area city, declared bankruptcy in May 2008; Stockton did the same last month. Cities large and small are vulnerable. Earlier this month Mammoth Lakes, a resort town of 7,392 filed bankruptcy papers, in part because they could not pay a $43 million court judgment.
While costs of providing city services and employee benefits have skyrocketed, the slow economy and decline in real estate values have contributed to the $45 million shortfall in San Bernardino.
An “exit route” would not be possible without recent state legislation that changed bankruptcy law. The move was prompted by the 1994 bankruptcy of Orange County, the largest county in the United States to go bankrupt.
The results of declaring bankruptcy include drastic reductions in police and fire protection, layoffs, and severe cuts in basic services such as parks, libraries, and road repairs. While it is easy to blame the financial problems on the pension programs (many are unfunded or underfunded), there is no benefit at this point to place the blame on any one factor. In some cases, the loss of redevelopment funds and the inability to pay off bonds are determining factors. And because any tax increases must be passed by the voters (one provision of Proposition 13), cites are unable to keep revenues in line with expenditures.
Is this the tip of the bankruptcy iceberg? Michael Coleman, a fiscal advisor for the League of California Cities admits there may be more cities facing this option in the future, but predicts some will able to weather the storm. As for the others, Coleman says. “Some cities may not go into bankruptcy, but they may dissolve. They may cease to exist.”
- Should cities have the right to declare bankruptcy?
- The law dictates how creditors are to be treated. What ethical obligation do cities have to their employees in times of fiscal collapse?
Tuesday, Feb. 22, 2011
The prospect of cities declaring bankruptcy has governors and legislators looking for solutions to rescue insolvent municipalities
. In Central Falls, Rhode Island, the answer was to demote the mayor to an advisor, and put a state-appointed receiver in charge of the city. The state now has authority for unlimited oversight.
Last July Mayor Charles D. Moreau was forced to turn in his city car, cell phone, and keys to city hall. His salary went from $71,736 to $26,000, although he has yet to be called for advice. His problems did not begin with the bankruptcy, however. Moreau is currently under investigation on state and federal corruption charges, but has refused calls for his resignation, insisting he is planning his 2013 re-election campagn.
A retired state judge is serving as receiver, trying to get the city financially on track. Cedar Falls was the first city in the state to declare insolvency, leaving both a deficit and unfunded retiree benefits. The action caused the city’s debt to plummet to junk bond status, and raised alarm in the town of 19,000.
Cedar Falls is one of thousands of small towns that might be a good candidate for consolidation. While pooling resources and sharing revenues is not always an easy transition, it seems to make sense in a city of only 1.29 square miles.