The BANKRUPTCY Solution

Mayor Lenny Curry has repeatedly said that unless the city of Jacksonville votes for a half-cent sales tax to resolve its $2.85 billion pension shortfall, Jacksonville “could be Detroit in five years.” If Mayor Curry’s tax referendum gets voted down on Aug. 30, we need to be prepared for the next step, and like in Detroit, that step may be bankruptcy.

The image of Detroit is a powerful one. It is a city where whole neighborhoods are abandoned, formerly majestic public buildings are used for photo shoots depicting the decay and collapse of society, and where crime and poverty are rampant. But that’s really not the image of Detroit the people of Jacksonville should focus on. What they should focus on is the city that got a fresh start on rebuilding its infrastructure by seeking protection under the Bankruptcy Act. Bankruptcy is a way for a group of people, whether it’s a city, or a nation, to put the mistakes of the past behind them, and to get on the path to a sound financial future.

It’s not just Detroit: California Cities, Puerto Rico and others
Jacksonville wouldn’t be the first or only municipality to seek protection under Chapter 9 of the Bankruptcy Code. California cities and counties have used it more than those of any other state. Orange County in Southern California filed bankruptcy in 1994, Desert Hot Springs in 2001, Los Osos in 2006, Moffet in 2007, Vallejo in 2008, and Stockton and San Bernardino in 2012. Detroit gets the most press because it was the largest city to ever file. In short, lots of cities have gone into bankruptcy and you’ve heard little about them in the media.

So would Jacksonville filing bankruptcy give the city a “black eye”? Possibly, but we are not alone. Overall, the U.S. faces a $3.4 trillion pension funding hole, more than 1,000 times the size of Jacksonville’s problem, so if Jacksonville does file for bankruptcy, you can be sure it won’t be the last city to do so. We all need to understand what we are facing: We are insolvent.

We are a city with a population of 842,000 facing a debt of $2.85 billion, or about $3,400 per person. If you figure that the size of the average household is 2.58 people, then the outstanding debt is $8,700 per household. Unlike the federal government, the city of Jacksonville can’t print money, so this is real money.

Raising taxes to generate $8,700 in revenue per household would be counterproductive. Most people in Jacksonville have no money set aside for retirement. They’re going to need to reach into their pocket every day, at least until the year 2043, and they’re going to have to work longer hours and take fewer and shorter vacations if the city is going to raise taxes to pay for the unfunded pension liability. Personally, I can afford it, but I work hard enough already. You do, too.

“A deal is a deal” – isn’t it?
One of my favorite expressions is, “A deal is a deal,” and some people may be tempted to say that the city needs to stand by its agreement with the three pension funds. However, a deal is only a deal if both sides play by the rules. In this case, Jacksonville and the Police & Fire Pension Funds didn’t play by the rules. They negotiated this pension deal behind closed doors, out of the Sunshine. This deal was illegal from the start.

The Sunshine Act is very clear. “No resolution, rule, or formal action shall be considered binding” unless it takes place at a meeting which the public can attend. Jacksonville’s pension deal was negotiated in secret, at mediations the public was barred from attending. After a long and torturous court case, the court decided last year that because the pension agreement was negotiated outside of the public’s view, it was void ab initio, meaning that it’s not only not a binding contract, but that it was NEVER a binding agreement. This pension plan is illegal, and it is bankrupting Jacksonville.

The 2014 Task Force on the pension crisis, headed by Jacksonville lawyer Bill Scheu, concluded that the city’s pension obligations could be “retroactively modified or eliminated pursuant to a proper filing by the city for protection under the bankruptcy laws.” However, when they wrote their report, the Court hadn’t yet declared the pension agreement to be void. As of today, Jacksonville has no legally binding pension obligation to the PFPF. If we take the Sunshine Act seriously, and we are going to abide by the law, there is no agreement. The city must begin the negotiation process from scratch.

What could a bankruptcy court do?
The primary thing that a bankruptcy judge could do is force the parties to negotiate a valid pension agreement. In that negotiation, the public would have a powerful role. While the law generally prohibits making retroactive changes to pre-existing pension benefits, in Jacksonville, there are no pre-existing pension benefits. The city, and the public, would therefore have a powerful negotiating position.

What is the worst-case scenario for PFPF? The public could demand that the fund be liquidated and the money that was paid in under the void agreement be returned to the taxpayers. Do you think that the fund has an incentive to negotiate? They should.

Obstacles to bankruptcy
There are always obstacles to filing a municipal bankruptcy, but no set of obstacles is insurmountable. The city would have to prove that it is insolvent. The very existence of a $2.85 billion unfunded liability in a city where the annual general revenue fund is only $1 billion would seem to be good evidence of insolvency. The fact that the unfunded liability can be paid off by 2043 does not dispose of the issue, either. Implied in the question of solvency is whether a debt, if you call the unfunded pension liability a debt, can be paid off in a reasonable period of time. Twenty-seven years is not a reasonable period of time to be saddled with such a debt burden.

The city would have to show that further budget cuts or tax increases would be counterproductive, and it would need approval from the Florida Legislature. When the 2014 task force rejected bankruptcy, two things hadn’t yet happened. The courts hadn’t declared that the pension plan was void, and the unfunded liability hadn’t ballooned to its current amount. We are dealing with a different set of circumstances now. Today, bankruptcy is an option that should be on the table.

We could set the trend
Perhaps if the people of Jacksonville put their collective foot down and refused to saddle their children with a lifetime of debt, the rest of the nation, with its $3.4 trillion pension debt, would sit up and take notice, and decide to make the necessary changes. Debt is never a good thing. Saddling our children with debt is an even worse thing.
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Sullivan is an attorney who has argued before the U.S. Supreme Court.

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