WASHINGTON — Municipal bankruptcy expert James Spiotto is proposing the idea of creating state public pension authorities to resolve pension issues, citing the urgent need to end the "insanity" of chronic pension underfunding.
Spiotto, a managing director at Chapman Strategic Advisors LLC, made his case in a new paper examining Chapter 9 bankruptcy compared to other potential resolutions for cash-strapped municipalities.
Detroit's filing last year ramped up discussions of the potential for, and ramifications of, bankruptcy filings by other cities and counties facing mounting pension and other post-employment benefit liabilities in other states and territories. But Spiotto stressed that a "tsunami" of filings is not happening or on the way.
"It is rare," he said during a presentation of his ideas Tuesday during a webinar sponsored by The Bond Buyer. He noted that bankruptcy carries a stigma and added, "It is not a vehicle of choice."
States must allow cities to file for bankruptcy, and fewer than half either explicitly or conditionally allow municipalities to do so. A handful of others allow it for a very limited set of issuers. States themselves are not permitted to file, nor are territories like Puerto Rico.
"The state is the government," said Robert Klausner, principal at Klausner, Kaufman, Jensen & Levinson P.A. "Cities are just corporations."
Klausner said studies have shown that municipal bankruptcy is not a good option of first resort for a city under stress.
"It's such a drastic, nuclear option," he said. "Bankruptcy is not a viable means of avoiding pension debt."
In a paper prepared for the webinar, entitled The Unfunded Pension Obligation Crisis: Is Chapter 9 Bankruptcy the Ultimate Remedy? Are There Better Resolution Mechanisms," Spiotto raised the idea of creating state-level, quasi-judicial pension authorities authorized either by the states themselves or by federal law. The authorities would have the authority to analyze pension problems and recommend remedies, including a restructuring plan funding pensions at an acceptable level without compromising the ability of the municipality to reinvest in itself.
Without making investments in infrastructure and essential services, a stressed municipality would ultimately be unable to grow its tax base and climb out of trouble, he said.
"In recommending a restructuring, the pension authority can determine what is affordable and sustainable and recommend changes to the local governmental body and workers or it can be empowered to require such restructuring, if necessary, through a pre-packaged plan in Chapter 9 filing," Spiotto said in the paper.
Other webinar participants, however, reacted to the idea cautiously.
"It would have to be very well thought out," said Ronald Green, the controller of Houston, Texas. Green said he felt such an authority would have to be made up of a panel of true municipal finance experts, rather than a group of gubernatorial appointees who might be more influenced by politics.
Klausner said an authority would seek to streamline the judicial process and might pose constitutional questions in the process.
Currently, Spiotto pointed out, municipalities have three options for dealing with huge pension liabilities. They can reach an agreement with all stakeholders, including holders of their bonds, to reduce payments for the common good. They can impose cuts to payments, or they can claim the pension plans have been mismanaged and are no longer the responsibility of the municipality but rather of the pension fund itself.
The first option is ideal but rarely the feasible, while the second can face legal tests and incur major blowback, according to Spiotto's paper. But if something isn't done, "meltdowns" will occur, Spiotto wrote.
"The pension underfunding crisis has reached a level of crisis so that now is the time for action, change, adult supervision and necessary determinations of what is affordable and what is not," his paper concludes.
