{"id":3353,"date":"2023-06-08T22:55:44","date_gmt":"2023-06-08T22:55:44","guid":{"rendered":"https:\/\/wifamily.news\/?p=3353"},"modified":"2023-06-08T23:05:28","modified_gmt":"2023-06-08T23:05:28","slug":"milwaukee-bankruptcy-the-consequences-could-be-severe-including-to-cops","status":"publish","type":"post","link":"https:\/\/wifamily.news\/?p=3353","title":{"rendered":"Milwaukee Bankruptcy: The Consequences Could Be Severe, Including to Cops"},"content":{"rendered":"

This post originally appeared at https:\/\/www.wisconsinrightnow.com\/milwaukee-bankruptcy\/<\/a><\/p>\n

\"milwaukee<\/p>\n

Should Milwaukee cops worry about their pensions? If there is a Milwaukee bankruptcy, probably.<\/strong><\/em><\/p>\n

What are the consequences of a Milwaukee bankruptcy? A narrative has grown on the right that bankruptcy might be a better solution to Milwaukee\u2019s pension and budget mess than allowing the city and county\u2019s elected representatives to decide whether to increase the local sales tax or endure massive<\/em> cuts in police and other services.<\/p>\n

On the left, there is lingering concern that sales taxes are regressive, hitting the poor harder.<\/p>\n

Here is the reality: Without a sales tax increase, Milwaukee faces two worse choices: Massive<\/strong> service cuts (we\u2019re talking 500 Milwaukee police officers on a 1,700-member force) or bankruptcy. Although the Legislature would need to pass new legislation to authorize the latter, Assembly Speaker Robin Vos said previously that bankruptcy might not be a bad thing.<\/p>\n

On June 8 came the news that Republican leaders in the state Assembly and Senate and Democratic Gov. Tony Evers have agreed on a new shared revenue deal that would allow the Milwaukee Common Council and County Board to approve the new sales tax increase on a two-thirds vote to solve their fiscal woes. That sales tax revenue would address the city\u2019s and county\u2019s unfunded pension liabilities, if approved, avoiding bankruptcy or catastrophic service cuts. The full Legislature still needs to approve the plan. And, obviously, the Common Council and County Board would have to sign off on a sales tax too.<\/p>\n

Previously, Vos was standing firm on a referendum requirement for the sales tax hike, but he traded it away for a school choice expansion and other conservative wins.<\/a> A referendum could have been a risky move in an anti-police city that might not care if the MPD is gutted by 25%. Then again, the same could be said about the liberal elected bodies, which are packed with Democratic politicians who hate cops.<\/p>\n

Meanwhile, the conservative MacIver Institute and some talk radio hosts have called the Assembly plan\/sales tax provision a \u201cMilwaukee bailout.\u201d A sales tax approved by elected representatives is not a \u201cbailout.\u201d<\/a><\/p>\n

But what are the consequences of municipal bankruptcy? We researched what happened in other cities, and we would encourage all stakeholders to consider the consequences long and hard before advocating for bankruptcy over the sales tax option.<\/p>\n

What we found:<\/em> In some communities that went bankrupt around the country, a Wisconsin Right Now analysis has found, city workers, including retired police and firefighters<\/em>, saw pension, benefit or cost-of-living cuts. Indeed, we\u2019ve started hearing from Milwaukee police officers who are deeply concerned about the potential effect on their hard-earned pensions.<\/p>\n

\u201cEveryone would walk off the job\u201d if pensions are cut, one officer told us. That frustrated officer warned that many cops would be \u201cdone\u201d with Republicans at the ballot box if that happens, noting that the police union is often a supporter of GOP candidates.<\/p>\n

The effects on pensions are just the start of the potential consequences<\/em> of municipal bankruptcy, though. Research shows a city\u2019s reputation suffers, its bond rating and economic investment can drop, bond holders are stiffed, and sometimes taxes rise and services are slashed anyway. Bankruptcy would be a PR nightmare with the Republican National Convention coming to town. These ramifications could send shock waves throughout the state.<\/p>\n

In Central Falls, Rhode Island, for example, retired firefighters saw their benefits cut by 55 percent, and property taxes rose, under bankruptcy, according to Mercatus.org.<\/p>\n

There are few actions that should carry greater stigma in the municipal credit markets than a bankruptcy filing,\u201d an analysis by Standards & Poor\u2019s Rating Services<\/a> warned. \u201cWe believe any potential weakening of an obligor\u2019s willingness to pay its obligations may reflect degraded credit quality.<\/p>\n

\u201cMoreover, once a bankruptcy occurs, we anticipate the credit implications will remain after the municipality technically emerges from bankruptcy. Restoration of market access could be many years into the future,\u201d Standards and Poor\u2019s found.<\/p>\n

\u201cMunicipal bankruptcies do not wipe away a distressed local government\u2019s problems,\u201d Pew Charitable Trusts wrote in a lengthy analysis of municipal bankruptcies. \u201cPolicymakers are still left with agonizing decisions: whether to raise taxes to pay for key services or to cut them, how to keep existing residents and businesses from fleeing, and how to improve economic conditions in the long run.\u201d<\/p>\n

We called Rob Henken, President of the Wisconsin Policy Forum, which has written extensively on Milwaukee\u2019s fiscal issues.<\/p>\n

He explained that the city and county would have \u201cthree big buckets\u201d to draw from under a bankruptcy. \u201cPension and retiree healthcare liabilities, capital debt, and all of the services they provide.\u201d If the city went bankrupt and was placed in receivership, how those concerns would be balanced is speculative, he said, but could possibly include retiree pensions, service cuts, or bondholders losing money.<\/p>\n

\u201cWhat bankruptcy could do, is it would somehow be a mechanism to allow the government to potentially not have to completely fulfill all of their obligations, to their retirees and to their bondholders,\u201d said Henken, who stressed he was not taking a side on the question. He pointed out that some services are mandated, like running a county jail.<\/p>\n

\u201cWhy do you declare bankruptcy? Essentially you can\u2019t pay your bills,\u201d said Henken. \u201cYou get a court to agree with you that your debts shouldn\u2019t be fully paid.\u201d In the case of a municipality or county, those debts are, in part, to pensioners. Another option could be slashing benefits to current or future workers, not retirees, Henken said.<\/p>\n

Fitch\u2019s recently downgraded<\/a> Milwaukee\u2019s bond rating because of its financial problems. A lower bond rating can have significant effects on taxpayers because it can lead to the city paying higher interest rates.<\/p>\n

\u201cThe recent succession of municipal bankruptcies shows that a city\u2019s residents and workers often suffer significantly during and following a Chapter 9 bankruptcy,\u201d Pew Charitable Trust wrote in a study.<\/p>\n

\u201cOnce a municipality\u2019s officials decide to file a Chapter 9 petition, we believe its prospects for future economic growth, and its credit standing, will likely be much weaker,\u201d Standards and Poor\u2019s analysis warns.<\/p>\n

\u201cIn exchange, the municipality may obtain temporary cash flow relief and, potentially, the court\u2019s backing for a stronger negotiating position with some of its creditors. However, our review suggests to us that these benefits are likely to dissipate within a few years. They are also typically offset by the potential residue a bankruptcy can leave on the municipality\u2019s reputation \u2026 We believe the fallout from bankruptcy often includes reduced prospects for economic investment of all types.\u201d<\/p>\n

Municipal bankruptcy is rare due to the consequences.<\/p>\n

\u201cChapter 9 <\/a> is used infrequently. Only 29 municipalities filed for bankruptcy between 2001 and 2017.\u00a0Detroit, with more than $18 billion in debt, filed for bankruptcy in 2013, making it the largest municipal bankruptcy case to date,\u201d\u00a0a study<\/a> published by Emory Law found.<\/span><\/p>\n

Milwaukee could find it tougher to attract business. As a net exporter of personal income to the suburbs and an economic engine for the state, Milwaukee\u2019s viability has ramifications throughout Wisconsin.<\/p>\n

Bankruptcy becomes a balancing act of competing interests and how to weigh them, the research shows: The interests of pensioners (as collective bargaining and other contracts can sometimes be voided);\u00a0of bondholders; of taxpayers; and the interests of other creditors.<\/p>\n

\u201cUnder current bankruptcy law, Chapter 9 debtors have significant freedom to modify their outstanding pension obligations through the bankruptcy process,\u201d a 2018 analysis by the Congressional Research Service says<\/a>.<\/p>\n

\u201cMilwaukee\u2019s leaders have been making bad decisions for many years. They have been warned the cost of those decisions would eventually catch up with them, and lo and behold, that has come to fruition,\u201d Republican state Sen. Chris Kapenga said, opposing the sales tax authorization.<\/p>\n

\u201cAs with every community, the local elected officials in Milwaukee have made their own decisions on local matters. They should bear the fruit of good decisions as well as bear the burden of bad decisions,\u201d he said.<\/p>\n

Indeed, the City of Milwaukee and Milwaukee County failed to contribute enough to their pension systems for years, according to Reason Foundation. \u201cThe city government failed to put enough dollars into the pension plan to improve funding,\u201d Reason wrote.<\/a> The county struggled because of the pension backdrop scandal but started meeting and even exceeding its pension obligations, starting in 2015, according to Reason.<\/p>\n

Henken says investment losses contributed to the pension liabilities. \u201cVarious forms of state aid have not increased nearly at the rate of the consumer price index over time,\u201d he said, while adding that expenditures need to be looked at. As recently as 2010, the Milwaukee pension fund was overfunded, he said, meaning the city was not required to \u201cput in any taxpayer dollars.\u201d<\/p>\n

Of course, city leaders could have prepared and re-calibrated, when the pension fund started to go south.<\/p>\n

At the same time, Milwaukee officials pursuing a $353 million expansion of the street car, demanding millions of dollars for a new museum or Brewers stadium, and creating new diversity, equity and inclusion positions don\u2019t seem like good fiscal stewardship in times of trouble.<\/p>\n

However, the question is what to do now.<\/p>\n

MacIver focused<\/a> on Detroit\u2019s 2013 bankruptcy to basically leave the impression that bankruptcy concerns are overblown, a narrative quickly picked up by some talk show hosts and legislators.<\/p>\n

MacIver pointed out that, in Detroit, police and fire pensions were not cut (other city workers\u2019 pensions were and cops\u2019 cost-of-living increase decreased). However, that\u2019s only part of the story.<\/p>\n

How were police pensions saved in Detroit? According to the Citizens Research Council of Michigan<\/a>, the city got a reprieve for nine years from paying its pension debt as part of the bankruptcy deal. Instead, the pensions \u201cwere met through contributions from private parties and the State of Michigan as part of an agreement commonly referred to as the \u2018Grand Bargain.’\u201d<\/a><\/p>\n

In other words, preserving police pensions required an actual state \u201cbailout\u201d in Michigan.<\/p>\n

\u201cThe \u2018Grand Bargain\u2019 was an unprecedented collaborative effort that yielded $820 million worth of donations to make payments into the city\u2019s pension plans on the city\u2019s behalf. The city\u2019s philanthropic community contributed $370 million, the State of Michigan contributed $350 million<\/strong>, and the DIA (Detroit Institute of Arts) committed an additional $100 million,\u201d according to the Citizens Research Council.<\/p>\n

Although this Grand Bargain allowed Detroit to emerge from bankruptcy with balanced budgets, its pension payments are scheduled to restart. The city is already tangled in a lawsuit with police over that. In Detroit, other city workers lost 4.5% of their pensions.<\/p>\n

According to Reuters<\/a>, Detroit got rid of $7 billion in debt through bankruptcy, which ended in 2014, but the city did so in part by cutting pensions for retired city workers. The workers sued, and they lost in federal court. \u201cThousands of retired Detroit city workers were subjected to 4.5 percent pension cuts, the end of cost-of-living increases, and reduced insurance coverage to help the city,\u201d Reuters reported.<\/p>\n

In 2012, the year before bankruptcy, Detroit, according to Reuters, \u201ccut pay and healthcare benefits for city workers, including police, by 10 percent.\u201d<\/p>\n

Other cities like Stockton and Vallejo, California, managed to avoid cutting police pensions when they went bankrupt (although there were other consequences, and Vallejo cut retirees\u2019 health benefits). \u201cIn the Chapter 9 case involving the City of Vallejo, California, the automatic stay allowed the City to reduce retiree health benefits. One of the City\u2019s arguments was that retirees had no vested rights in the health benefits since they were negotiated as part of a collective bargaining agreement, \u201d wrote HG Experts.<\/p>\n

According to a study by Mercatus.org,<\/a> \u201cChapter 9 gave the city (of Vallejo) the opportunity to reject its costly collective-bargaining agreements. To deal with rising costs, city officials cut health-care benefits, laid off public-safety workers, and reduced services and payments to bondholders. But left untouched was the source of Vallejo\u2019s budgetary morass: $128 million in unfunded pension obligations. Two years after the city emerged from a bankruptcy, its labor costs are eating up more of the general fund than they did before the filing.\u201d<\/p>\n

In 2011, when Central Falls, Rhode Island, went bankrupt, the conversation changed. Suddenly, retirees\u2019 pensions were on the table because bankruptcy laws allow a governmental entity to void collective bargaining agreements and contracts.<\/p>\n

In 2011, The New York Times wrote<\/a> of Central Falls, \u201cRetired police and firefighters from Central Falls, R.I., have agreed to sharp pension cuts, a step thought to be unprecedented in municipal bankruptcy and one that could prompt similar attempts by other distressed governments.\u201d<\/p>\n

\u201cThe cuts would be up to 55 percent of each retiree\u2019s benefits, which now vary widely, from about $4,000 to $46,000 a year, depending on final salary, years of service and other factors. A few retirees would give up more than $25,000 a year,\u201d The Times reported of Central Falls.<\/p>\n

Prichard, Alabama declared bankruptcy after it simply stopped sending pension checks to retired cops and other city workers. The New York Times noted<\/a> that Prichard \u201chad already taken the unusual step of reducing pension benefits by 8.5 percent for current retirees, after it declared bankruptcy in 1999.\u201d<\/p>\n

In Chester, Pennsylvania, police pensions were recalculated<\/a>, and, thus, reduced.<\/p>\n

Since Central Falls, some courts have ruled that retirees\u2019 pensions are now fair game in municipal bankruptcies. In 2014, \u201ca federal judge ruled that California cities may alter pensions in bankruptcy,\u201d according to Governing.<\/a> The New York Times reported that a\u00a0federal bankruptcy judge had ruled <\/a>that Detroit \u201ccould reduce public pensions to help shed its debts.\u201d<\/p>\n

It\u2019s not a done deal that police pensions would be cut in a Milwaukee bankruptcy. It could end up in court. Cohen, Weiss, and Simon wrote in an analysis<\/a> that \u201ceven if a state authorizes municipal bankruptcies, a bankruptcy court sitting in that state may not allow pension cuts if the state\u2019s constitution provides special protection to public-sector pensions.\u201d<\/p>\n

However, \u201cin the Detroit<\/i> case, the bankruptcy court ruled that public-sector pensions enjoy no more protection under Michigan law than ordinary contracts, even though the constitution of that state prohibits public employee pensions from being \u2018diminished or impaired,’\u201d the law firm explained. In contrast, in Arizona, the state Supreme Court in 2014 argued that public-sector pensions have \u201cgreater than ordinary contract protection,\u201d the article says.<\/p>\n

To be sure, public pensions, especially those of police, have strapped many local governments, and we are not arguing that public pensions do not need any reform going forward. In fact, the shared revenue deal does this by moving future Milwaukee workers into the well-run state pension system.<\/p>\n

However, we do believe that the pensions were a promise to retired city workers, especially police officers, who endured extremely dangerous jobs in very difficult conditions as part of the deal<\/em>. Going after them retroactively<\/strong> would further hobble an already decimated Milwaukee Police Department, making recruiting efforts much tougher. Public pensions often are a trade-off for lower salaries. Retroactively cutting the pensions of retired cops who, in some cases, bled for them and were even shot for them, strikes us as deeply unfair. Minimally, we believe that conservatives, who claim they \u201cback the badge,\u201d should consider whether they have the stomach for this possibility when they debate bankruptcy.<\/p>\n

If the city went bankrupt and police and fire pensions were exempted, taxpayers would likely bear the burden through service cuts and tax increases. It\u2019s a no-win situation any way you turn. Police and fire pensions make up a large portion of the whole.<\/p>\n

In contrast, the sales tax would spread the pain. It would mean that, say, the drug dealer who loafs around has to share the pain at the store with the hard-working public works employee or firefighter.<\/p>\n

Consider the bankruptcy experiences of these cities and counties:<\/p>\n