Bankruptcy protection for Hoboken?

12/21/2008:

The following reader mail sent in today brings up the question about bankruptcy protection:

The City of Hoboken is insolvent

(Sent to: Mayor David Roberts, Judy Tripodi, All members of the Hoboken City Council, Steve Kleinman (Hoboken Corporation Counsel), Hoboken411.com, Hoboken Revolt and Hoboken Reporter)

hoboken-bankruptcy-protection.jpgRe: Hoboken Fiscal Crisis – Bankruptcy protection

The purpose of any organization (for “profit” or “non-profit”) is to operate for the benefit of its stakeholders. In the case of public companies, those stakeholders are shareholders. In the case of local governments, those stakeholders are taxpayers. The fiscal crisis facing Hoboken was caused by years of mismanagement as the focus shifted away from taxpayers and onto employee enrichment. The spending imbalances associated with this shift finally resulted in the massive tax increase recently levied against taxpayers. Such a disruptive tax event calls for an equally severe response… Hoboken should immediately seek bankruptcy protection.

While painful and political suicide for our Mayor, bankruptcy is the only prudent course of action. Ms. Tripodi and the Hoboken City Council should contemplate such action without regard to political pressures as the dramatic spending increases choking Hoboken occurred during Mayor Roberts’ administration. The financial crisis facing Hoboken is not unique. The following private and public sector examples should serve as case studies for how to address crippling cost containment issues involving collective bargaining agreements.

SEE THE REST OF THE LETTER AFTER THE BREAK…

(A Bankrupt Hoboken?, continued…)

According to rough math using the FY2009 budget (posted on the city website) salaries/wages and benefits represent ~53% of total appropriations. Police and fire alone account for 69% of all salaries & wages:

hoboken-police-and-fire-salaries.jpg

The vast majority of these expenses are subject to collective bargaining agreements, which eliminate the flexibility needed to reduce costs. Union officials have no incentive to reopen these contracts as the recent tax increase was a major victory and funded current obligations in full. As taxpayers, our leverage to modify these contracts is forced nullification via bankruptcy court. A few recent examples…

  • vallejo.jpgVallejo, CA (May 2008) – This suburb of San Francisco faced many of the same problems as Hoboken and filed Chapter 9 bankruptcy on May 23, 2008.

    According to CNBC, “the filing will allow Vallejo to re-negotiate contracts with employees, vendors and bondholders and protect it from lawsuits, but the move will damage its credit rating and lead to costly legal expenses.”

    A Google search results in plenty of information on this situation (City of Vallejo website, CNBC, etc.).

  • big-3-automakers-bailout.jpgGM, Chrysler, Ford (December 2008) – As we all know, the Big 3 automakers recently contemplated bankruptcy and sought (and received) help from the federal government. These companies have many of the same problems as Hoboken; excessive labor costs and heavy debt loads.

    One of the primary provisions of the “bailout” was the restructuring of labor agreements, which the United Auto Workers (one of the most powerful unions in the country) accepted. Union leadership knew that the alternative, bankruptcy, was far worse as it would result in the nullification of labor agreements and massive layoffs of its membership.

The benefits of bankruptcy are clear from a taxpayer perspective. However, Hoboken leadership should work with counsel to understand all the downsides/risks prior to taking such action. Not being a bankruptcy attorney, I am not familiar with the legal ramifications on taxpayers. That said, it seems reasonable to expect major headline risk, which would likely result in property value declines. This risk is offset by the fact that the recent tax increase had the same effect… so we’ve already absorbed this pain.

In order to solve this crisis and achieve financial health, sacrifices must be made by all major parties involved:

  • Labor – I appreciate the service our public employees provide and am not suggesting they receive below-market wages. However, I am suggesting they look at comparable communities and accept market-level wages and benefits. If our current employees refuse to make the necessary concessions, they should be replaced via bankruptcy proceedings with qualified professionals willing to work for market wages in our great town.
  • Management/Leadership – I appreciate the council’s willingness to lower/forgo their salaries, but this would only be a symbolic gesture and have no meaningful impact. What we need from them, the mayor and Ms. Tripodi is leadership to make tough decisions regardless of political implications.
  • Taxpayers – Ultimately, labor and management work for us…not the other way around. The recent tax increase was a major concession and painful event. Let’s not forget that many taxpayers are landlords. Therefore, renters will be affected as landlords pass through the tax increase in the form of higher rents.

In closing, bankruptcy protection is the only prudent solution to our complex and dramatic spending crisis. The short-term pain will result in the long-term viability of our great little town. Hopefully this letter stimulates dialogue among citizens and decision makers.

Regards,

Concerned Hoboken Taxpayer

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43 Comments on "Bankruptcy protection for Hoboken?"

truth1
Member
truth1

Reduction in salaries of elected officials does impact by showing the example of leadership 💡

truth1
Member
truth1

Yes: Tripodi to make hard decisions regardless of political implications ❗

geo8rge
Member
geo8rge

Chapter 9 related links:

Vallejo News: ibvallejo.com

Book: Taxpayers in Revolt, Beito, David T. http://www.mises.org/store/Taxpayers-in-Revolt-P545.aspx

Taxpayer ballot initiatives: http://en.wikipedia.org/wiki/Carla_Howell

John Moorlach: bloomberg.com/apps/news?pid=2060110...#038;sid=adSvg08A04KI&refer=us

stateline.org

RUHOBO
Member
RUHOBO

[quote comment=”124012″]RU, all bond issues defeased with US gov securities are AAA/AAA or in reality the ratings are withdrawn since there is no longer a need to maintain ratings analysis on the issue.[/quote]
I agree with you but I’m not seeing that on bloomberg. The rating has been downgraded by S&P and Moody’s in Nov. Fitch did withdraw it’s rating. This is the Hoboken PKG AUTH Rev muni bond mty 5/1/09 cusip 434133CY8.

OldNewComer
Member
OldNewComer

[quote comment=”123938″]I hate to the one to bring a dose of reality into the subject but municipal bankruptcy, which is governed by chapter 9 of the code requires, among other things, state approval – something that will never happen, and that the municipality actually be legally insolvent, which Hoboken almost certainly is not.[/quote]
Sounds probably true as of now. But when the Hospital craters and the $50mil extra comes due, plus potential other ‘ticking time bombs’ (who could have any confidence there aren’t more still swept under the rug?), then it may become a realistic alternative.

I’d want candidates for mayor and council to do their homework on it at least.

As far as technical arguments about muni bonds from *investor* POV, not sure how relevant that is. Bondholders also have to be ‘acountable’ for the bonds they buy, assuming the city is acting legally in declaring bankruptcy. The drop in market value of GO debt or any other debt it is affected, is really not the taxpayers’ problem, not directly. The taxpayer issue is whether higher borrowing rates after the bankruptcy will cost more than the bankruptcy will achieve in faster cost savings and reform, taking a responsible long term view.

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