Monday, June 27, 2011

Speech to the Contra Costa Taxpayers Association

Last Friday, I was asked to speak to the Contra Costa Taxpayers Association on Vallejo's bankruptcy experience. I've been working with a new group called California United for Fiscal Reform on statewide pension reform, and one of the members asked me to present to her organization. I hadn't taken the time to look back yet, so I used this as an exercise to start telling the story as I saw it -- and the story behind the story. (Please note that this was a speech prepared and presented by me and is not the official position or opinion of the City of Vallejo or the Vallejo City Council body.)

I can't add PDF attachments using this blog program, so I'll have to post the whole speech here. It's long, so I apologize in advance. I didn't use it word-for-word, and had to make changes due to time constraints. But it's pretty close. I'm sure this document will evolve and I will make changes and additions. (Because of the time constraints, I didn't get to mention everyting -- like the 1993 Citizen's Budget Advisory Committee warning on the structural deficit, or the 2003 letter from community members outlining every pitfall with the new public safety contrcts that ultimately proved right, yet was completely ignored by the then-City Council. You can watch a video of the presentation, or just fast forwad to the Q&As afterwards with me and former City Manger Joe Tanner, at the Vallejo Independent Bulletin website.

I think it is critical to honestly look at what got us to the point of bankruptcy -- and what happened in bankruptcy -- so we never repeat our mistakes. I do think our current five-year plan is as solid as it can be in these uncertain economic times. But beware our unfunded pension/health care liabilities. The new proposed changes by the GASB (Government Accounting Standards Board) will force cities to show our unfunded liabilities as debt, not just a footnote. This is the tsunami behind the tsunami. The GASB hasn't released their draft changes yet, but there will definitely be more to come...

Speech before the Contra Costa Taxpayers Association by

Stephanie Gomes, City Council Member, City of Vallejo

June 24, 2011

One main question I was asked in coming to speak today: is Chapter 9 (Municipal Bankruptcy) a “way out” from the financial crisis facing our cities and counties?

The short answer is: No.

Unfortunately, just like weight loss, no matter how much we desperately want one, there is no magic pill that will solve our financial problems. It’s a simple math problem: revenues in, expenditures out.

Many cities, counties, states and indeed our country have been living beyond our means for quite a few years, gorging on the money filling our coffers during the bubble, and committing those coffers to living off that same amount of excess in perpetuity. There’s one problem with that – the good times never last forever. But our leaders failed to account for that.

And the good times are gone. At least for the foreseeable future.

So that leaves cities and counties asking that million dollar question – how do we hit the “reset” button and make our budgets sustainable again? Many of us are getting deeper into the red, with sales taxes and property taxes on the continual down slide, unions are digging their heels in to more concessions, and the voters are loathe to agree to pay more taxes for increasingly fewer services.

So we’re back to that collective problem that cities and counties across the U.S. are experiencing: “revenues in, expenditures out”. The revenue side is a bit trickier given this Great Recession that we’re slogging through. Some agencies will try to ask the voters for more taxes. When the economy picks up again, we will all be focusing on economic development. That’s an “easier” side of the equation given the right conditions and good planning.

The tougher answer, and the one that got Vallejo into so much trouble, is reigning in the expenditures. Given that local government is labor intensive, our general fund budgets are consumed by salaries and benefits of the employees who provide vital city services. And in Vallejo our public safety employees were some of the highest paid in the Bay Area. So when we need to address budget deficits, we have to look to employee costs. Anything else is just kicking the can down the road.

Vallejo should serve as a cautionary tale not so much about bankruptcy, but of the real and painful repercussions of financial mismanagement, poor planning, and giving control of the purse strings to our public employee unions. Vallejo was indeed unique in almost every aspect. I doubt that many municipalities will face our perfect storm. But many will face several parts of it:

  • Years of wage and benefit deferrals coming due
  • Closure of MI Naval Base – huge loss of jobs/economic impact
  • Employee union influenced City Council
  • Crash of the housing market
  • Crash in sales, property, transfer taxes
  • Budgets based on rosy economic forecasts
  • Revenue sources not identified for new expenditures
  • Huge unfunded liabilities

I will state a disclaimer here before I go further and say that I do not believe the whole problem in Vallejo is our public employee unions. Management in Vallejo failed on many levels over a period of many years to get the city to the brink of bankruptcy. They failed to invest in good, smart economic development when the iron was hot. They agreed to the public safety union’s requests, didn’t cost them out, and left the results to future leaders.

But the public employee unions, especially our public safety unions, helped engineer this unsustainable system, with the compliance of weak leaders, and ultimately they could have saved Vallejo from filing bankruptcy. They could have made real, hard concessions on pay and benefits. They could have saved Vallejo millions in legal fees arguing whether the city was hiding money and indeed was bankrupt. But Vallejo was the epicenter of failing cities, and we were first. The public employee unions didn’t have a “Vallejo example” to urge them to cooperate and negotiate reductions that were distasteful but preferred over the bankruptcy experience.

The law of unintended consequences. Cities like San Jose and Stockton and Oakland are using Vallejo’s bankruptcy experience as a bargaining chip and extracting huge givebacks from their employees that were unthinkable three years ago.

So in the drunken halcyon days of the bubble, the public safety unions in Vallejo grew extremely powerful by putting their union dues into local elections and to buy favor with the city councils. (and if you don’t believe this happens, when I first ran for office in my endorsement interviews, the coalition of unions asked me point blank: “If we endorse you, will you stay bought? My answer was, “You couldn’t buy me in the first place, so how could I “stay” bought?”)

Before I was elected, the City finally hired a city manager who was tough and willing to demand changes from our public safety unions. Ultimately, he was sued by the IAFF 1186 President, along with two other council members, for defamation of character (that was a practice used or threatened against community members and council members before). This case was thrown out in court as a SLAPP suit (a Strategic Lawsuit Against Public Participation (SLAPP) is a lawsuit that is intended to censor, intimidate and silence critics by burdening them with the cost of a legal defense until they abandon their criticism or opposition (Wikipedia definition).) The legal fees for that SLAPP suit, for both sides, was approximately $140,000, and the IAFF 1186 President was ordered to pay it all. Amazingly, they turned around and tried to incorporate that $140,000 into their next round of contract negotiations, right after I was first elected. I said that I'd climb to the top of the tallest building and tell the entire city if they tried to fold these legal fees into any new fire contract. Ultimately, the members of IAFF 1186 were on the hook for the legal fees -- why they voted to cover this SLAPP suit is beyond me.

Soon thereafter, we hired one of the best city managers we've had, Joe Tanner (who is in this audience), who also had the courage to take on our powerful public safety unions and help us solve our crushing financial problems. He was beaten up in the local newspaper repeatedly, targeted by nasty union propaganda, and ultimately became a victim of the dark side of politics.

So back to when I was first elected in 2005. The City had a $3 million operating deficit. The previous City Councils had tried to balance the budget by “negotiating” increasingly lucrative contracts with the employees in exchange for raise deferrals and contract extensions. Raise deferrals given in prior years to balance deficit budgets were due in 2005 – something like eight percent raises. (We won’t even go into unfunded liabilities). Our employee contracts extended to 2012, we had minimum staffing on our fire trucks and a debated minimum-manning clause in the police contract. And we had binding arbitration in our City Charter. That all added up to the fact that any changes the City needed to make to cut back expenditures and balance the budget would need to be approved by the unions. If not, then by an arbitrator. The City Council’s hands were effectively tied. I knew then that we were headed for bankruptcy.

So, the unions negotiated with the city for a year, until the then city manager gave up and declared the negotiations a failure. I am proud to say that for the first time in years, the City Council (except two newly elected union-endorsed council members) refused the unions’ offers and decided to cut the fire truck staffing to achieve the cost savings we needed to stay solvent. The city stayed solvent -- barely. The unions arbitrated the decision. But we cut the truck staffing, eliminated all funding for community based organizations, stopped funding vehicle replacements and road repair and maintenance, and exhausted the rest of our meager reserves.

Enter 2008. The perfect storm. The City lost the fire truck arbitration (the arbitrator did not have to consider the financial implications of the decision), which immediately increased our deficit by several million dollars. Development revenues dropped off, housing started to decline. Employees near retirement or able to transfer saw the writing on the wall and jumped ship – taking a $4 million leave payout with them. The City tried to negotiate last minute concessions to stave off a bankruptcy filing. I was opposed to this agreement – it was business as usual. But the Council majority resolved all union grievances in return for some temporary labor concessions that lasted a couple of months and an agreement to “come to the table” again. That was a net loss.

So our General Fund was depleted. Our reserves were depleted. Labor concessions were expiring. We were flat broke. Our closed session meetings were brutal. Those Council members who didn’t want to recognize that bankruptcy was a foregone conclusion, spent hours picking through the numbers, desperately trying in vain to make things pencil out. Trade this for that, move this here, put that there. It didn’t work because of that very simple math problem: revenues in, expenditures out.

So on May 6, 2008, the City Council authorized a filing for bankruptcy. An agonizing, painful watershed moment. The council chambers were packed with union members, community members, media…and lawyers. It was a unanimous Council decision, which shocked the unions I think. Their council members had never voted against them before. But there’s a little part of the law that says that if an official uses restricted funds to balance the budget or allows employees to work with the foreknowledge that there was no money to pay for that work, the governing body would not have normal governmental immunity for official acts and they would not be protected from personal liability. I believe the prospect of landing in jail or losing one’s home was quite persuasive.

So what happened then? It became a nasty legal battle. The unions fought our declaration of insolvency – they said we were hiding money. They said we had tons of money in our water fund, our redevelopment fund, our transportation fund. Just use that. (That’s illegal, by the way).

Eventually, the City prevailed and the judge indeed said we were insolvent. It was a very hollow victory.

So the City created a “Pendency Plan” – essentially our operating plan during the bankruptcy proceedings. We were able to do things we couldn’t do without the protection of bankruptcy. We froze wages and benefits and implemented furloughs. In 2009 we cut our interest payments to the banks to equal what we were cutting our employees – for three months our payments to the banks were suspended to conserve cash. This pendency plan allowed us to continue to operate, to provide services to the public and keep the lights on at City Hall.

We negotiated with our creditors, including our employee unions and retirees. And right here lies the exact moment of Vallejo’s failure in bankruptcy.

In February 2009, the City Council majority (excluding myself and another council member) agreed to a new police contract. You’d think that if unsustainable salaries, benefits and pensions the largest part of your structural deficit, you’d target that if you absolutely, positively had to file for bankruptcy. Right? I mean, why go through the pain of bankruptcy if you’re just going to limp out with a continued structural deficit and the same contracts and with which you went into it?

For reasons I intellectually know, but still in my heart cannot fathom, this police contract didn’t cut wages. It didn’t cut pensions. It didn’t ask for employee contribution to medical. It guaranteed RAISES for the next two years. And it agreed to pay the Vallejo Police Officers Association legal fees if the City was forced to bring that contract back into bankruptcy. And if that wasn’t reason enough to reject it, our finance director said on that very night during that discussion that we were facing another $12 million deficit next year. But the Council majority approved it. This was a huge failure of political will.

That was the most painful moment of my entire Council career. I KNEW approving that contract was wrong. I KNEW we couldn’t afford it. But worst of all, I KNEW we had just failed bankruptcy. Because every employee union that came after that said, “Me too.” It failed to address our structural deficit at THE best time to do so. And it set up one employee group against another. It gave more to police and less to fire and even less to IBEW. It just wasn’t fair.

But eventually I had to set it down and move on. So we created a five-year plan that – at this point in time – is sustainable. We should be out of bankruptcy in July or August. But I have my worries. We haven’t addressed our structural deficit, our employee costs keep climbing while we have fewer and fewer of them to do the work. Our property taxes are down 24 percent since 2008. Our sales taxes are down 22 percent. And they’re still dropping. We’ve tried to be as conservative as we can with our economic forecasts. We’re planning for the worst, hoping for the best. At this point in our economic history, a stagnant budget is a good thing. Not up, but not down. Again, I won’t even go into our unfunded liability – that’s a whole separate discussion that threatens the very core of local governments.

One bright spot of our bankruptcy experience, though, was a shift in public opinion regarding our employee unions’ pay and benefits. Vallejo had binding arbitration in our City Charter – an arbitrator was the deciding official in employee wage/benefit disputes. The City tried to remove it from our charger a couple of times since the 1970s, and it failed. But this time we fought a difficult, bitter battle, with the unions spending ten times what the community spent. We raised $7,000 and hand made our signs in my backyard! But we won. Now, in 2012, when three of our four employee contracts expire, the elected officials of this city will decide on what pay and benefits the City can afford. That is a huge change.

Ok, so what’s the “good, bad and ugly” of bankruptcy?

The good:

  • In the first two years of bankruptcy, the city was able to save $35 million just implementing the pendency plan. Granted, to date our legal fees are $11 million. But do the math – we saved $24 million.
  • Abuse, undue influence, poor accounting practices – they were all revealed. Painful, but absolutely necessary for any chance of recovery.
  • Political leaders are forced to show their cards – there is no hiding, no avoiding. Vote for the people, or vote for your campaign contributors.
  • An opportunity to reorganize and restructure.
  • A municipality can void unsustainable labor contracts, with the judge’s permission.

The bad:

  • $11 million in the pockets of very happy lawyers. Despite the $35 million in savings, I’d have rather spent that $11 million on attracting new businesses, fixing our streets, or hiring more police officers to patrol our neighborhoods.

The Ugly:

  • Bankruptcy hurts. It hurts your city’s image, it hurts the relationship between the community and our city employees, it destroys employee morale.
  • Public employee union battles. Have you ever heard of the “Bloody their noses” doctrine? It's alive and well.

The City has done good things since 2009 to begin to rebuild our financial structure. We have adopted new “Rules to Live by” that may be common sense, but many municipalities haven’t been following them:

  1. Live within your means
  2. Look to your future
  3. Stop deferring expenses
  4. Fund retirement obligations
  5. Dedicate your surplus
  6. Set up a rainy-day fund

If we can follow these rules, Vallejo will indeed be on the road to recovery. Actually, when we were first going into bankruptcy, we saw that other cities were snickering at Vallejo, absolutely unaware that they would be facing similar challenges in just three years. Now, when Vallejo has done our hard work, we’ve got a semi-stable budget while cities all around us are in freefall.

If we have learned anything from Vallejo’s Chapter 9 experience is that filing for Chapter 9 should be an absolute, positive last resort. It is not an end to a means. It’s painful. It tears a community up. But I will say this: if given the same circumstances, I’d vote to file for bankruptcy again. We didn’t have a choice. And contrary to the media reports, Vallejo’s bankruptcy did not cause our decrease in police or fire services, our library cuts or our road maintenance deficits. Our financial mismanagement caused that long before that vote to file for bankruptcy. Those services were steadily decreasing as our deficits continued to increase. And the structure of that deficit was not addressed. It was just covered over with a band-aid year after year. And I understand why, to a certain extent – once you give something, it’s hard to take it back. And trying to take it back from powerful public safety unions is incredibly difficult, legally exhausting, financially crushing, and pretty much political career-ending. It takes courage of conviction, a very stubborn personality, and a very thick skin to try to right that ship.

I’ll close with this difficult conclusion. But I think this is a seminal issue all over this country, and I believe that it’s so bad that many of the traditional Democratic base of union supporters are starting to reach this very same conclusion -- unfortunately, long before our elected leaders are willing to admit it. But Vallejo’s experience ripped the cover off of the dirty little secret of how public employee unions can buy power and control over the very people who vote on their wages and benefits. Private sector employee unions cannot control who their bosses are. But public employee unions take their collective power and money to essentially control the hiring – and firing – of their bosses. This is a systemic problem that must be fixed or the system will ultimately fail.

And waiting for our elected leaders to make these changes will take a long, long time. Just look at the legislature’s response to Vallejo’s bankruptcy – to write a bill that requires municipalities to get permission of a union-majority committee to declare bankruptcy and remove employee contracts from bankruptcy proceedings if a declaration is made. What did Assembly member Noreen Evans and then Senator Pat Wiggins do when Vallejo was on the verge of declaring bankruptcy? They sent a letter chastising the city for considering bankruptcy and being so unfriendly to our employee unions. Did they talk to us to reach their conclusions? No, never.

So I am convinced that we taxpayers of California must demand these changes. We must join together, city-to-city, county-to-county, and raise our voices loud and strong demanding legislative solutions to these issues. There are no saviors – there is only us.