Professor Elam

Thursday August 9, 2012

The Rush to Chapter Nine

The Rush to file Chapter Nine Bankruptcy has begun. This  is surely David Axlerod’s worst nightmare. The failed policies of poorly run (by Democrats) cities will be on display for all to see. Let’s take a look at how today is an echo of the trend begun in the Northeast in the 1970s.

Younger readers may not recall former New York City Mayor John Lindsay. Lindsay won two successive three way races to continue as Mayor. He famously termed it ‘the second toughest job in America’ in reference to the Presidency of the USA being the toughest. At the time New York was beset by strikes called by various municipal unions. It began with subway workers and continued with sanitation workers as the garbage piled up. As Margaret Thatcher observed, the trouble with socialism is that one eventually runs out of other people’s money, which is exactly what happened. Subsequent Mayor Abe Beame inherited  a worsening situation in 1973. But the money did run out. At first then President Gerald Ford refused calls for a Federal Bailout. But the relented, money was sent to the  City, and despite missing some bond payments,  bankruptcy was avoided.  In response to the crisis, the existing Chapter Nine Statute for Municipalities was amended bringing the same protection for municipalities as other bankruptcy provisions.

Vallejo, CA took bankruptcy in 2008 and has been watched as a bell weather for other troubled municipalities. The trouble is that excessive spending and promises of truly golden retirement plans to usually unionized employees have proven impossible to finance. Now the rush to file has accelerated.

In what is surely a ‘gimme a break ironic record’ Harrisburg, PA (capitol of the state) had its bankruptcy filing dismissed by Judge Mary France.  A disastrous incinerator project pushed Harrisburg to the brink, all the while expecting a State bailout.

Montgomery County Alabama filed the largest municipal bankruptcy in history in November, 2011. It  is some $4 billion in debt due to  a disastrous sewer system expansion to meet Federal Clean Water Standards.

Until this past month, no city with over 200,000 population has taken bankruptcy. That barrier of fiscal embarrassment has now been lifted. Stockton, CA (population 300,000) filed June 28. Mammoth Lakes, CA filed July 3.  Now the southern city of San Bernardino, CA (210,000 population) has joined the March to Broke.

The vote in Wisconsin where Governor Robb Walker asked municipal unions to pay more for their benefits was crucial. The unions overplayed their hand, attempting an expensive recall election for the Governor.  President Barrack Obama was a now show during the recall election, and Walker won 55-45 percent.

This has given more Municipal officials confidence to take on otherwise non-negotiable union demands. In Chicago, former Obama advisor Rahm Emanuel now calls Washington, DC ‘dysfunctional.’  At the same time he ‘can’t wait for Washington to fix things in Chicago.’

Brett Stephens at the Wall Street Journal reports that some 48% of American households now receive some kind of support from Washington, DC. That is also about the percent of Americans that pay no Federal Income Tax. There is a linkage there. If Obama and Party can nudge that percent of entitlements to a majority voting block of 51%, they will have a permanent electoral lock on any office promising to continue the Entitlement Bandwagon.

So the question is, will the minority pulling this Entitlement Wagon go along with a Majority of American riding in the Wagon?  That was not the case in Wisconsin. And the failure of such schemes will likely be on display between now and the November elections as more cities join the Bankruptcy Party.

The common denominator here is that most of those in trouble have been Democrat run. The question remains whether the Romney Campaign can frame that as an issue. Governor Rick Perry’s message along the same lines, Texas Works, got lost along the way. Will Romney emerge as a Reagan pointing out Expansive Government is the problem Or as many Republicans fear, will he run as another Ford, Dole, Bush, McCain?  All were Democrat Lights in the eyes of the Tea Party. This suspicion  gave fuel to the succession of Cain, Perry, and Santorum during the Primary.

What’s the message Mitt, Reagan or Dole, the moment is yours to seize.