Municipal Bankruptcy Threatens Workers, Communities and the Economy

When I was growing up, my dad was a union laborer, helping build tunnels and bridges throughout the Bay. He could be old-school and had a lot of rules I didn't like (no slurping my straw at a restaurant, no backtalk, no whining when he brushed my hair too hard) so I got more than my share of spankings.

But there were a few of my dad's rules that I took to heart and one of the most important ones was that your word is all you got. He told me that you live by your commitments or you get no respect. We all learn that lesson at some point, right?

But now it sounds like those who have spent decades preaching personal responsibility have changed their minds about what that means. Conservative superstar Newt Gingrich recently proposed that states be allowed to declare bankruptcy for one specific purpose: to break commitments made to workers and retirees. 

Interesting that the same people who once labeled their policy agenda a “Contract with America” are now trying to break their contracts with real Americans. The same people who want to make personal bankruptcy impossible now want state and local governments to use it strategically to screw workers. Of course, the main reason people are forced into personal bankruptcy is medical debt, and this same crowd also wants to repeal Obama's health care law, so this story has no shortage of irony. 

But back to the idea of keeping your word. Let's say you are a mechanic working for the City of Vallejo. Every few years, your union sits down with the City and hammers out a deal. Raises in good times, concessions in bad. Negotiators shake hands and each honors the agreement. At least that's how its supposed to work.

Then one day, the City comes to your union and says “We have a $10 million dollar deficit.” You and your co-workers take them at their word. You sit with the firefighters and police officers and you come up with $10 million dollars worth of concessions and restructuring.

Problem solved, right?

It would be, if both sides felt compelled to stand by the deal they agreed to. But not if one side is looking to break the commitments it made at the table. Rather than accept the union concessions and figure out how to get the city back on track, the City decides to reject the deal and heads straight to bankruptcy court. And in an unprecedented move, the bankruptcy judge rules that the City CAN void its union contracts. 

The City continues to honor its contracts with every creditor except its workers, who nevertheless keep cleaning the streets, providing emergency aid, fighting fires, and chasing down criminals. 

It is this model of unilaterally breaking contracts with public sector workers that has inspired the rash of right-wing attacks on workers throughout the country. In an op-ed co-authored by former Florida Governor Jeb Bush, Gingrich explains the benefit of a state bankruptcy:

…as with municipal bankruptcy, a new bankruptcy law would allow states in default or in danger of default to reorganize their finances free from their union contractual obligations. In such a reorganization, a state could propose to terminate some, all or none of its government employee union contracts and establish new compensation rates, work rules, etc.

This abuse of the bankruptcy process that we saw in Vallejo and that some are pushing for states is about more than just breaking promises to workers and retirees. A bankruptcy is devastating for the entire community and for the larger economy. Its effects can be felt on bond ratings for decades.

That's why 26 states don't even allow municipal bankruptcies and 13 more limit a city or county's access to bankruptcy protection to prevent abuses. California is one of just eleven states that sets no conditions and has no oversight over municipal bankruptcy. 

Which brings us back to the mechanic working for the City of Vallejo. He has seen his income go down $1000 dollars per month, greatly decreasing the retirement he has been depending on. And now the City's plan to emerge from bankruptcy would pay “unsecured creditors,” that is employees and retirees, as low as five cents on the dollar for money owed.

That's because somehow, breaking your promises to employees doesn't have the same stigma as breaking promises to the banks. In fact, keeping your word to your workers is so devalued that cities and counties across the state have raised bankruptcy as a legitimate option. 

Bankruptcies have always been hardest on workers. When United Airlines went bankrupt, flight attendants lost three-quarters of their retirement benefits while executives got bonuses. orporate bankruptcies stripped long-time workers of wages and benefits, Congress took action to offer some minimal protection to workers when their employers go bankrupt. But city and county workers have none of those protections.

Rather than push for states to engage in reckless bankruptcies, let's go back to the old days when an employer's word was his bond. Commitments made at the bargaining table should be honored or renegotiated, not voided in bankruptcy court.