City Bankruptcy Rulings Challenge Constitutional Democracy

Cities in the U.S. are going bankrupt. The most important fact to realize about this is that it is not the people who caused the bankruptcy, or the big corporations. It is not the private sector of the cities that is causing the bankruptcy but the public sector, specifically public union spending. 

These cities spent so much money on public salaries and pensions that they couldn’t tax the people enough, so they began to borrow money. Then they began to borrow money again to make the payments on the money they  had first borrowed.  In the private sector this kind Ponzi scheme is a crime. But since government does it, and they won’t jail each other, they get away with it.

No public sector union has yet shut down. They always find ways to engineer their finances so the public is stuck with the bill. They get all the benefits and force the taxpayers to take all the risks. And in all cases so far the cities doing this, the public unions, are all run by Democrats, that lovely group of public servants who devote their lives to income equality, justice, and fairness.

Public pensions are out of control. Today Los Angeles, CA has four retired Fire Department. officials who earn over $800,000 a year in their pension.  All of these had less than 30 years of service. And there’s dozens more who earn from $300,000 and more.

By 2020, Illinois will have 25,000 retired government pensioners who earn $100,000 or more in a pension. 

The important question is: what can voters, who are on the hook to pay this debt, do to stop these growing destructive city and state debts? 

The core issue is whether city governments can act independently of the electorate and engage in binding contracts with public unions without the consent of the taxpayers. In short, they have managed to create and maintain a distance between their fiscal decisions and the will of the people.

The city bankruptcy rulings of Stockton, CA and Detroit, MI give some clues as to the constitutional context of this pubic debt.

Federal bankruptcy law is written to address only in the private sector debt. Person A, the debtor, contracts to borrow money from Person B, the creditor. If Person A is not able to pay back Person B due to some reason such as loss of income, illness, etc. Person A can go to bankruptcy court and ask a Federal judge to allow them to pay less or have the debt discharged completely. 

City bankruptcies are created by public sector unions. This model of debt is different. No longer is Person A indebted to Person B for their own debts, but a new Person, Person C -- the taxpayer -- is on the hook to pay for the pension debts created by Person A. And often these debts were secretly created. To this day, many communities do not know how much pension debt they have. This debt has been created for them without their permission and is hidden from public knowledge. Taxpayers are the unknowing third party being set up to be the debtors in this scheme. Is it legal and/or constitutional for a third party to be forced to pay debt?+

It remains to be seen whether an individual taxpayer can sue a city government for this debt. Then the constitutional question becomes: if a taxpayer has no standing in establishing the debt, or in stopping it, then where is the Constitution? What rights do taxpayers have? 

Two major cities have recently gone through Federal bankruptcy proceedings.These are Stockton, CA and Detroit, MI. By Federal law the state must authorize the local city to file for bankruptcy. This in itself is questionable because if a state is totally run by one political party, as the states containing these bankrupt cities are, then there is a built-in obstacle to filing for bankruptcy and mandating financial solvency. 

The Constitution establishes that the people cannot be governed without their consent, and also that states can only enforce contracts with the people’s consent.

New Jersey’s Constitution (Art. VIII, § 2, ¶ 3) provides a legal safeguard for protecting the consent of the people from these contracts. In 2015, when Governor Chris Christie said he couldn’t contribute $1.6 billion of the state budget to the pension fund, he was sued. The NJ Supreme Court ruled in favor of the governor, using an 1844 “Debt limitation clause” that states that no expenditure can be rolled over from one budget to the next year if it exceeds 1% of the budget without a vote by the taxpayers. This empowers taxpayers to protect their right to consent to taxation, something that would put a stop to the relentless indebtedness found among states today. 

In both Stockton and Detroit, Federal judges ruled in favor of theft of money from muni bond investors and keeping the public pension system mostly intact. In fact, a word search of the judges’ rulings in both cases reveal that neither presiding judges, Steven W. Rhodes in Detroit and Christopher Klein in Stockton, ever mentioned the word “taxpayer”, or discussed the tax burden on future taxpayers. Only government officials were represented, and they fought to maintain this three-party arrangement. 

This three-party contract may be unconstitutional for several reasons. One, when judges rule to maintain the public sector contracts and force Federal bailouts of the cities, they are legislating taxes on all Americans and Article 1 Section 7 of the  Constitution clearly states “All bills for raising revenues shall originate in the House.”  Federal judges have no authority to issue rulings that raise revenues on all Americans. 

Secondly, these three party contracts are taxation without representation. While the public unions would argue that the city mayors and aldermen had a hand in the contracts, in reality the only way the taxpayers could have a say is for the entire contract and its terms to be placed on ballots. They were not. 

Third, cities force taxpayers to pay property taxes based on the threat of selling their home for back taxes. The Fifth Amendment clearly states that government may not take property for public use without just compensation.  Some day SCOTUS may rule that this is a violation of the takings clause. 

Fourth, there is nothing in contract law that legalizes three-party contracts. This type of contract is only practiced by government. Illinois and Michigan both state that public contracts cannot be “diminished or impaired” yet this standard does not apply to private contracts. These states may be violating the equal protection clause of the Fourteenth Amendment and this issue should be address by SCOTUS. So far it has not. Judge Rhodes astutely noted that the Fourteenth Amendment does not allow anyone to sue for damages. This alone creates a distinction between the public and private sectors. 

It is only by dodging these two types of constraints, private sector and constitutional, that cities are able to create these huge debts, abuse the rights of the taxpayers, and run their communities into bankruptcy and economic ruin.