From the screenplay for Frank Capra’s 1947 movie, It’s a Wonderful Life: the run on the bank.
GEORGE: No, but you … you … you're thinking of this place all wrong. As if I had the money back in a safe. The money's not here. Your money's in Joe's house … [to one of the men] … right next to yours. And in the Kennedy house, and Mrs. Macklin's house, and a hundred others. Why, you're lending them the money to build, and then, they're going to pay it back to you as best they can. Now what are you going to do? Foreclose on them?
Fragments gathered from remarks made by Dallas Mayor Mike Rawlings mayor in recent weeks concerning an impending run on the Dallas Police and Fire Pension System:
“Walking into the fan blades … horribly ironic … irreparably harming the pension system’s solvency and liquidity … pension system’s ability to pay its members future benefits has been irreparably reduced. Financial suicide! Immediately cease payments!”
The difference between the two scenes? In Wonderful Life, George Bailey talks the good folks of Bedford Falls out of withdrawing all their money from the small savings and loan his father founded. He convinces them he has a plan, and he gets them to trust him to carry it out.
In this new scary movie, Dallas Down the Tubes, Rawlings seems intent on saying every single thing he can think of to provoke panic and persuade the people with money invested in the pension plan to head downtown with paper bags and baseball bats and get all their money out by nightfall.
George Bailey calmed the waters. Rawlings is neck-deep, screaming that we’re all going to drown. I guess we’ll know pretty quick how this version ends.
In a letter to the board of the pension system Tuesday (copy below), Rawlings demanded that they shut down major withdrawals of money that already belongs to the pensioners. It’s not promised payments. It’s their money, like money you put in a savings account. How would you like to hear you can’t get it out?
Board members have been informed by multiple lawyers that voting to shut down withdrawals would constitute a breach of fiduciary responsibility and render them all personally liable should the board get sued. The four City Council members on the board would be protected by their general immunity as elected officials, the other members not so much.
The whole mess goes to trial today before state District Judge Ken Molberg. Molberg is hearing a lawsuit to stop a membership election among Dallas cops and firemen for approval of a plan to resolve the city’s near-$7 billion unfunded pension liability crisis. Maybe Rawlings’ letter was some kind of smoke signal to Molberg, telling him to drop the gate on pension fund withdrawals so the board won’t have to do it.
If that’s the small game, somebody at City Hall really doesn’t seem to get the big one. Talking about any kind of one-sided shut-off can only fuel the fires of panic among people who are worried anyway about their money. And in any ultimate showdown between cops and firefighters on the one side and the mayor and the city’s business elite on the other, the cops and firefighters hold all the cards.
Not just here. Everywhere. When Stockton, California, went through bankruptcy in 2012, its pension funds went to court and argued they were specially and specifically protected from haircuts by the state constitution. A federal bankruptcy judge said fine, he agreed, but he was undoing that. Since federal bankruptcy trumps even state constitutions, the judge was able to give Stockton permission to shave down its pension payments and pay the money instead to bondholders.
Guess what? They didn’t do it. When the Stockton bankruptcy plan was completed, there was a haircut for the bondholders and no haircut at all for public pensions. Guess why? Bondholders are viewed as old rich guys who smoke cigars in private clubs. Their political clout is zip.
For the same reason politicians scrape and bow for police and fire union endorsements, for the same reason the same politicians agree to plump up their pension benefits in the first place, the politicians won’t touch those benefits even in a bankruptcy. The reason? The police and firefighters have political clout coming out of their ears.
And that’s everywhere. I spoke a couple days ago with Greg Clark, head of muni research for Debtwire, a national subscriber-based service providing analysis to big clients like mutual and hedge funds. He said the political clout of public employee unions can be a major factor in a bankruptcy. He said in cities that have been through bankruptcy in the most recent wave — roughly the last eight years since the Bush financial crisis — pensioners have done well.
“Pensioners in Detroit, for instance, did better than bondholders overall,” Clark said. That history, he said, should offer a certain caution: “Using bankruptcy as a tool to impress the unions or to shaft the unions is far from assured.”
In the meantime, whatever his game may be, Rawlings is already drawing attention to Dallas by using what Clark calls “The b-word,” for bankruptcy, so often, so publicly and so volubly.
It’s not that Dallas is the only city with pension and debt problems. “There’s a lot of mayors who are concerned,” Clark said. It’s how Rawlings is handling it. “There’s not a lot of mayors who are seriously mentioning bankruptcy,” he said.
Clark used to work for a bond rating agency, His guess is that Rawlings is using strong rhetoric to put the fear of God into the unions but that he probably backs off some of that when the credit rating agencies call.
“Probably someone will get on the phone and ask him, ‘What exactly did you mean when you used that term?’” Clarks says. “I would bet that those conversations have already occurred from each of the three rating agencies that rate the city’s bonds.” He says he assumes that our mayor backpedals pretty hard from the b-word when the ratings agencies do get him on the phone.
But the word is still the word and it’s still out there. Fidelity, the mutual fund Goliath, is talking about Dallas and the b-word these days on its blog. Something called “Dividend Yield Investor” has posted an item under the headline, “Dallas to declare Bankruptcy?”Another blog – I don’t know, maybe a crazy one — has an article under the headline, “Dallas on Verge of Bankruptcy Due to Pensions; Just a Matter of Time …” I guess you can’t do much about stuff like that.
But back to George Bailey and the run on the bank in Bedford Falls: These are all situations that finally come down to the social compact and how much we trust each other. George was able to pour oil on the waters by invoking his own family name and the trust people awarded it. He sweet-talked his shareholders into believing he could and would guide their little ship through stormy waters and bring her safely to shore again.
Our mayor, on the other hand, always sounds like he’s mad at somebody about this. He’s mad at the Legislature for creating this mess. He’s mad at the pension board for making stupid investments. He’s mad at the cops and firefighters for pulling their money out of the fund in lump sums.
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Fine. I think we can all understand why he might be mad. But guess what. If I’ve got a sock of money in that fund and I see how mad the mayor is at me, I’m going to wait until he and the judge are all done blowing about it. Maybe the pension board shuts down withdrawals for a while. Maybe the judge does it.
But I know some day they have to lift that gate back up again. And the one haircut I know they can’t give me is on money that’s already mine in that fund. So on that day, early on that day, the minute they open the doors again, I’m going to be there waiting with my paper bag.
I’m going to suck out every cent I’ve got coming. I’m going to heave it through the car window and tell my wife to put the pedal to the metal. And the second our rear tires cross that city line, I’m going to say, “Hey, baby, let’s go see what Stockton looks like.” I already know what Detroit looks like.