In 1985, longtime music producer Quincy Jones gathered the top recording artists of the day to record the song “We Are the World” to raise money for victims of Ethiopia’s famine. How did he get these temperamental artists to collaborate? He taped a sign on the recording studio entrance: “Check Your Ego at the Door.”
That’s the true lesson in last week’s Detroit bankruptcy decision, in which a federal judge ruled that, despite state constitutional protections, the city could cut pensions as part of its restructuring. Thus, everyone’s interests are at stake: CalPERS, their employees and retirees, bondholders and trade creditors, taxpayers, the cities themselves.
“We have done a terrible job of getting to a point of consensus,” San Francisco bankruptcy attorney and longtime mediator Karol Denniston told me. “To get something fair and equitable, they all have to be involved in the process.”
The real question is whether they want to. Claiming virtue, CalPERS called the ruling shortsighted. But if higher courts affirm the Detroit decision, CalPERS’ public statement may not be worth the paper it’s printed on.
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Like claiming innocence, blame-gaming is equally counterproductive. It’s paper-thin ignorance to fault Democrats and liberals for Detroit’s collapse, given a complex combination of factors, from local to national to international, that contributed to its decades-long erosion.
California is no different, from then-Gov. Pete Wilson borrowing $1.6 billion in pension reserves to balance his recession-ravaged 1992 budget, to CalPERS snow-jobbing lawmakers to gain 1999 passage of a pension proposal – SB 400. It passed overwhelmingly. It was a dog, “one of the worst public policy decisions in the history of California,” one state official told the Little Hoover Commission in 2011. “The math was wrong, big time,” ex-Gov. Gray Davis would later say, and he signed SB 400 into law.
Actually, the math was ignored. CalPERS staffers calculated serious downsides to the legislation, but its board omitted that from their sales pitch to lawmakers. And these are the same guys who say promises made to retirees need to be kept.
CalPERS understandably responded to Wilson and the Democratic-controlled Legislature’s fund-raiding with Proposition 162, insulating CalPERS and other retirement boards from legislative oversight while allowing the board to hire its own actuaries to calculate how to keep the fund sound. With foxes guarding the henhouse, it’s far easier to sell your proposals to lawmakers. And we voters approved that.
The circus continues. San Bernardino declared bankruptcy in August 2012, yet last week the city had to raise police salaries by another million dollars annually because of a provision in its city charter.
“The politics of charter change in this community are raw,” Jim Morris, chief of staff to San Bernardino Mayor Pat Morris, and the mayor’s son, told me. Past attempts to amend the charter have failed. “Public safety groups have largely been the ones who’ve contributed to maintaining the status quo because they benefit from it,” Morris said.
Who is to blame there? The pro-union safety groups, the lawmakers they control, or the citizens who voted those lawmakers into office?
It doesn’t matter anymore. Salary increases, pension liabilities, capital market creditors ... the real question is where the money comes from to pay for it all. There is no money.
“This is where adult supervision is required,” Denniston said. “You can’t say reflexively, ‘This is going to be done on your back.’ We need to step back from our attitudes toward unions, government, capital markets. The simplest way to drill down to it is, everybody is necessary.”
To what degree? Who gets priority?
For Marquette University law professor Paul Secunda, who specializes in labor and benefits issues, it’s a no-brainer.
“Employees are the most vulnerable of creditors,” he told me. “Unlike bondholders and trade creditors, municipal employees have no ability to diversify their risk. They just have their one job. They lose that when bankruptcy occurs and, now, their benefits are at risk. Bondholders have numerous ways to diversify their risk – through different bond holdings and even bond mutual funds with thousands of bond holdings.”
Conversely, Secunda understands that if municipalities can’t be active on the bond market going forward because their credit ratings have tanked, “you’ll not only be unable to get general obligation bonds to pay your budget, you won’t be able to get the more specific bonds for things like schools, roads and other city services.”
“If we get people to understand they’ll get a better return if they sit down and work with each other, you’ll move into a different dynamic,” Denniston said.
In other words, grow up, accept that everyone screwed up, and then maybe we can get this fixed.
Instead, we’re like a house afire with everyone standing outside blaming each other for who lit the match. But once the house burns down, then what? Move in with the grandkids, I guess, and let them worry about it.