Why Philadelphia Should Just Go Bankrupt Already
Last week, as Philadelphia’s Mayor Nutter held an unprecedented closed-door session with a number of investors looking to raise money to help fix the city’s troubled finances, popular economist and blogger Michael Shedlock predicted that Philadelphia is effectively bankrupt.
It does not take a genius to figure out what is going on here. Philadelphia is bankrupt. Without even seeing the details, it is safe to assume untenable union wages and pension benefits are at the heart of it all. A 47.6% funded pension is rather telling in and of itself.
As a lifelong resident of the area, a native of Germantown, a product of the Philadelphia public schools, a supporter of Mayor Nutter, and a huge fan of the city, I hope Shedlock is right. Mayor Nutter should move the city into bankruptcy. He would be doing its residents, the region and the entire country a favor.
Of course, the media reaction would be brutal. It’s not every day that a city goes bust, particularly the fifth-largest city in the country. The Mayor, who proudly leads the U.S. Conference of Mayors, would be subject to harsh criticism from his opponents. Those on the right would cheer the Mayor’s courageous fiscal stand, while those on the left would lament the potential effects on workers and retirees. Our region would be the topic of jokes on late-night TV. It will not be pretty.
Philadelphia’s story is the same story that’s been told about American government for the past 30 years.
It’s a story of how our elected leaders over the past three decades have mismanaged public funds.
It’s a story of how the unions won negotiation after negotiation—and never had the self-discipline to confess that what they were taking from the public now would hurt the city in the long run.
It’s a story of how the public ignored the problems and hoped that they would all go magically away.
Nutter shares in the responsibility. So does Street, Rendell, Goode and other mayors and union bosses before them. We all share in the responsibility. Everyone is to blame for this mess. It’s a local problem. It’s a national problem.
But there’s now a unique opportunity to fix these problems. If only our Mayor is brave enough.
In California, the city of Stockton reluctantly declared bankruptcy and because of a groundbreaking ruling by a federal bankruptcy judge, the city’s pension and other entitlement liabilities are now subject to re-negotiation. What would happen if the city of Philadelphia did the same? What would happen if other cities in the country that find themselves in a similar financial predicament would do the same? Or states?
Here’s what would happen: Pensions, health benefits, sick days, vacation time, salary increases, retirement payouts and other entitlements that were all negotiated in good faith by the unions and agreed to by former city managers would now be up for re-negotiation.
Is this fair? No, it’s not fair. Many of these people work hard, and a deal really should be a deal. But there’s also reality, and that reality is that sometimes deals change. In the past 19 years of running my own small business I’ve learned that a deal is never a deal until the cash is in the bank.
A bankruptcy filing would change (not eliminate) entitlement deals and bring significant benefits to the city. It would send a message to our future politicians that they cannot borrow and spend the public’s money without affecting their own legacy. It would also remind the leaders of our labor unions that grabbing too much for their members today could very well hurt those same members (and their children) in the future. The experience would force both sides to understand that in a good deal, everyone wins. And even the best deals don’t last as long as planned.
A bankruptcy would force us all to look at how we fund our schools. Instead of punishing good teachers and children to make ends meet, a renegotiation of entitlements may help our leaders weed out the unproductive and unworthy collectors of payroll and retirement benefits who would no longer be protected by their unions. It may even encourage soliciting funds and partnerships from our city’s business community. Both political and union offices would be forced by the courts to come up with new ideas and create a better balance between public and charter school and online education options.
The bankruptcy of the country’s fifth-largest city would set a precedent for other local governments. If done right, it would restore faith in the municipal financing market so that mayors don’t have to have closed-door meetings with investors to plead for funds or be forced into fire sales.
With the recent events in Stockton and our city’s precarious state of finances, why not go bust? It’s a chance for Philadelphians to make amends for the past, clean up our act, and courageously show the world how an American city can re-invent itself for the next century.