No Foundations Riding to Rescue this Bankrupt Suburban Municipality

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August 20, 2015; Courier-Journal (Louisville, KY)

The latest city to follow in Detroit’s footsteps of bankruptcy is Hillview, Kentucky. That small suburb outside of Louisville, with a population of only 8,000, lost an $11.4 million suit with a trucking company over a land sale. Due to added interest as the city fought the court decision only to lose its appeal in the Kentucky Supreme Court, Hillview now owes $15 million. With its Chapter 9 filing, Hillview may have liabilities of around $100 million, against assets potentially only as much as $10 million.

There is some debate as to whether Hillview really needed to declare bankruptcy, spurning settlement offers from the trucking company, which apparently had been willing to accept about 40 cents on the dollar. There may be a reason that Hillview found bankruptcy preferable to paying out, even at a lower rate than the court ordered, to the trucking company.

In August, Moody’s, which rates some 15,000 government entities, issued a report titled “Municipal Bankruptcy Still Rare, but No Longer Taboo.” Likening Hillview’s scenario to the one in Detroit in some ways, Moody’s Senior VP Al Medioli noted, “There appears to be a dynamic at play that elevates retirees as a group above other creditors, and that further places pensions on a higher plane above all other liabilities, regardless of bond security or legal revenue pledge.”

Kentucky’s state and local governments face pension challenges like those in other parts of the country. As of early 2015, the state was contending with an unfunded pension liability of over $9 billion, considered the nation’s least well-funded state pension system. Information on Hillview’s pension obligations that might have been affected by the bankruptcy filing wasn’t immediately available, even to groups that monitor pensions in the state.

For a small city like Hillview, there are no foundations likely to appear on the horizon with a plan to lead the city out of bankruptcy while protecting most pension assets, like the foundation sector did for Detroit through the linkage of the Detroit Institute of Arts. However, don’t imagine that municipal government (and state government) pension debts aren’t on the minds of some foundations. For example, the John and Laura Arnold Foundation has made pension reform one of its core program initiatives under the guise of promoting sustainable government finance practices. The foundation conducts various reviews of state and local pension funds, recently examining Colorado’s, with recommendations for helping the state deal with its deficit.

There will be no shortage of ideas, short of a Detroit “Grand Bargain,” that could be developed to entice foundations to bail out state and local government pension obligations. In Pennsylvania, for example, Governor Tom Wolf proposed issuing “pension bonds” to put about $3 billion into city and state teachers’ pensions, with the expectation that stock market appreciation of 3 to 4 percent would keep the bondholders happy, despite Pittsburgh’s experience with pension bonds that Mayor Bill Peduto said had nearly driven the city into bankruptcy. Wolf’s proposal preceded the stock market’s 10 percent “correction” last week, making the governor a somewhat unreliable investment advisor. Nonetheless, it is easy to imagine pressure on foundation investment personnel to invest some portion of their tax-exempt assets as socially responsible or mission-related investments behind pension bonds that government authorities say would yield 400 or 500 basis points.

Another pension reform idea has emerged in California. The ballot initiative being pushed by former San Jose Mayor Chuck Reed, a Democrat, and former San Diego city council member Carl DeMaio, a Republican, would give voters the ability to vote on proposed compensation and retirement benefits for pensioners and require governments to get voter approval for major changes in pension plans or “to pay more than one half of an employee’s pension benefits,” as described in an article in Reason supportive of the plan. Given how much popular antagonism has been whipped up toward public employee pensions, it isn’t hard to imagine voters acting on pensions in ways that aren’t necessarily protective of retirees’ past contributions. Would foundations weigh in to support this exercise in “pension democracy” when the results are almost guaranteed to go against the pensioners?

The underlying sentiment was expressed quite candidly in an op-ed on pension issues in Arizona. “This is a democracy and as hard as it might seem to cops, teachers, and firemen, many of us don’t want to bail out your pensions,” wrote Prescott, Arizona political activist Bill Williams. “We can live with your pension as it was the day you joined, but we can’t be accountable for how it has been mismanaged since…Retirees should have to bite the bullet.”

Although not an Arnold foundation initiative, Citizens to Protect PA Jobs is a 501(c)(4) that has been lobbying Governor Wolf for pension reform. John and Laura Arnold have donated between $100,000 and $500,000 to the organization, described by AFSCME union leader David Fillman as focused on replacing traditional pensions with 401(k)-type plans.

Pension obligations helped push Stockton, California, as well as Detroit into bankruptcy. It isn’t known at this moment how much of Hillview’s obligations to former and current city employees may be at risk in its Chapter 9 filing. There won’t be major foundations sounding the alarm to come to Hillview’s rescue as they did for Detroit, but no one should assume that pressures to get involved in pension reform, for good or for ill, or to invest in potential pension-saving schemes won’t be felt in more foundations rather than fewer as municipalities find bankruptcy to be less scary than it once was.—Rick Cohen