A tale of two bankruptcies

By Tom Quiner

Two bankruptcies are in the news.

Perhaps it is more accurate to say there are two categories of bankruptcies making waves right now: municipal and federal.

Both have been caused by poor political judgement. And yet the causes of each are the exact opposite from each other.

I’m talking about the rising tide of cities going bankrupt and the impending default of the U.S. Postal Service.

In California, a number of municipalities have filed for bankruptcies in recent years, including San Bernadino, Stockton, Mammoth Lake, and Vallejo. These come on top of bankrupt cities in Rhode Island, Pennsylvania, and Alabama.

Bankruptcies typically involve multiple and complex issues. And yet there are common threads in these cities: unsustainable pension and benefit packages negotiated with public union employees. City officials agreed to lavish deals with unions that taxpayers just couldn’t afford to sustain without draconian cuts to essential services.

There had been no municipal bankruptcies in the U.S. for fifty years. Now there have been dozens with many more expected to come.

The impending default of the U.S. Postal service has been induced, not by unfunded pension plans, but over-funded.

Congress placed an excessive burden on the Post Office in 2006. They passed a bill called the Postal Accountability and Enhancement law. The law mandates that the Post Office, unlike any other government agency or private business, pre-fund health benefits for their employees. As a result, the Post Office has had to pay $21 billion over the past four years to fund the health benefits of future retirees.

It seems that Congress was being a little over zealous to ensure that postal workers pensions were secure.  As the Postmaster General, Patrick R. Donahoe, explains:

“Unlike other American businesses, the Postal Service must pay cash today for health benefits that will not be paid out until a date far in the future. Other federal agencies and most private-sector companies use a “pay-as-you-go” system, paying premiums as they are billed.”

What happens to this money? It goes into a separate fund and is treated as “income” by the federal government, which makes the deficit look less horrendous than it already is. They do the same thing with the Social Security and Medicare trust funds, counting those proceeds as income.

You have read how the Post Office is losing money. It is because of this law. Could you imagine if the government forced other government agencies to abide by the same rule?

I have certainly been critical of the post office at times. Honorable people can debate the pros and cons of privatizing the post office.

In the meantime, let’s stop playing politics with the post office. They need more time to comply with the Postal Accountability and Enhancement law.

As for the growing string of cities going bankrupt, they need to look to Governor Scott Walker of Wisconsin for the solution. Union contracts have to be moderated in order for cities and states to survive.