Wednesday, June 10, 2009

Crumbling municipal finance 

The financial crisis is now moving rapidly into the municipal sphere, and the dominoes are starting to fall.

Even though city officials would prefer to avoid a public conversation, behind closed doors the Oakland City Council has discussed filing for bankruptcy protection in the midst of a $100 million budget deficit.

"We have asked the (bankruptcy) question because we wanted to know the impact," said District 5 council member Ignacio De La Fuente. "In closed session, the question has been asked, and an answer was given." He would not elaborate.

"It's a possibility," he acknowledged. "Things are that bad."

Council President Jane Brunner was equally aloof. She ably acknowledged the city's dire financial problem while managing to avoid the b-word altogether.

"We're going to try to avoid it, but am I going to say it would never happen? I can't say that," Brunner said.

Consider the city's cash position: Out of next year's general fund of approximately $415 million, police costs are estimated at $212 million, fire protection service $103 million and $41 million in debt service payments. That leaves about $60 million to pay for everything else, from library services to recreation centers to public works.

And that calculation doesn't include $50 million more in deferred debt service in a budget proposal presented to the council last month by Mayor Ron Dellums.
Mish Shedlock adds some commentary:

Oakland should do itself a favor and beat the rush by declaring bankruptcy now unless the unions come forth and voluntarily agree to lower benefits and stop all defined benefit plans going forward.

The structural damage caused by ridiculous pension plans is staggering. A point of no return has been reached. Cities can no longer put off the problem and the public is not willing to put up with higher taxes. So what's it going to be? The article mentioned three choices. I have it at four.

Union Choices:

Huge pay cuts
Huge benefit cuts
Massive layoffs
For years municipalities have grown fat off the tax increases that naturally increased with home values. With home values falling, and a huge number of properties generating no taxes at all, counties, cities, towns and school systems around the country are coming to grips with bloated budgets that were predicated on revenue streams that are not likely coming back. This is a crisis that is only just beginning, and I suspect will have a large and painful impact on municipal workers, and Americans who rely upon the services they provide. As is often the case, Californina is leading the nation in what will likely be a widespread trend. I suspect the Obama Administration will do what it can to help some of these municipalities, probably by guaranteeing additional debt issuance. At some point, however, there must be some limit to the government's ability to cover everyone's obligations. If wonder if we'll find it.

Longer term, it will be interesting to see whether the pain of having overextended themselves will be enough to change the free spending ways of most local politicians, or whether this marks just a difficult interlude in the otherwise spend happy political culture that has marked our politics for decades. Time will tell.

In the meantime, watch for more dominoes.


By Blogger joe buz, at Wed Jun 10, 12:58:00 PM:

should there not be a fifth choice for the union?
5) Own a majority of and run the city  

By Anonymous Anonymous, at Wed Jun 10, 02:27:00 PM:

The sixth, and more likely option:
6) Appeal to the federal government for a bailout.

Oakland, like most major cities, is a Democratic stronghold. The Obama Administration and the Democratic Congress will bail all of them out in the course of the next four years.

Life is good when you can print money.  

By Blogger joe buz, at Wed Jun 10, 03:35:00 PM:

How about 6 then 5?  

By Anonymous Anonymous, at Wed Jun 10, 07:28:00 PM:

May 5 (Bloomberg) -- New Jersey’s tax-strapped residents can’t afford their government and the state needs to rein in the mounting costs of public worker benefits, said the mayor of Newark, the state’s largest city.

Cory Booker, 40, said rising expenses for health care, pensions and salaries are impinging on government finances. Operations need to be streamlined in a state with 566 towns and cities, 617 school districts and 21 counties, Booker said during a meeting with Bloomberg editors and on Bloomberg Radio today.

“New Jersey will go bankrupt in 10 to 20 years because we cannot afford our employees as a state,” Booker said. “I’m talking about every worker from the cities and counties to the state government. Eventually, we’re going to price ourselves out as a government or tax ourselves to death.”

Governor Jon Corzine in March proposed a $29.8 billion spending plan for next fiscal year that includes $4.3 billion to operate state government. Seventy percent of that, $3 billion, is for salaries and wages. Corzine, a first-term Democrat facing re-election in November, is seeking unpaid leaves and an 18- month wage freeze to save $400 million.

In Newark, Booker said he is looking to cut “hundreds” of jobs from the city’s 4,000-person workforce as he seeks to create a long-term balance in the municipality’s budget, which is currently $659 million. The mayor also wants to force city employees to take 18 unpaid days off to help reduce expenses and close an $180 million deficit by 2012.

Government Costs

Personnel accounts for 70 percent of the budget of Newark, Booker said. The first-term Democrat said the employment reduction was among “very difficult decisions” he faces.

“There should be a tax revolt in the state of New Jersey,” Booker said. “We’re the most inefficient state in the country. We have more government per person than we need. You would never manage a business the way we manage our government - - we have overlapping provision of services and in my opinion, it’s insane.”

Booker said he did not hold Corzine responsible for New Jersey’s financial crisis and considered the governor a political ally. When asked whether he planned to seek higher office, Booker said he intended to run again for mayor in 2010.

Economic Growth

The mayor blamed the city’s deficit on past mismanagement, not the U.S. recession. Booker’s predecessor, Sharpe James, a Democrat who held the office for two decades, is serving a 27- month prison sentence after his conviction last year on federal corruption charges. Booker said the economic slowdown was affecting city residents in the form of lost jobs and homes.

Booker called crime an “inhibitor” to economic growth. He said the city had half the number of murders in the first four months of this year as in the same period of 2006.

The mayor said his administration is exploring the creation of a utilities authority to improve management of its water system and collect more money from surrounding municipalities that rely on the city to provide drinking water.

To raise city revenue and reduce crime, police in Newark have stepped up enforcement for parking violations and public drinking, Booker said. The mayor also is counting on $1 million from fines for tickets issued through to-be-activated red light traffic cameras.  

By Anonymous Anonymous, at Wed Jun 10, 07:31:00 PM:

Booker is a Democrat and an African American, just in case anybody had a different impression.  

By Anonymous Anonymous, at Thu Jun 11, 01:14:00 AM:

Localities will appeal to Washington for bail-outs. Some have already. They will probably get them.

Then we will have a city without money printing money for cities without money who are not allowed to print money.

It sounds idiotic. But the states have already received billions in bail-outs. Why not cities?

But suppose bail-outs to localities are rejected. Then the action will shift to the courts. And to the state legislatures which can offer nothing and will dodge responsibility.

In court the public employees, etc. will seek judicial orders to seize property and lift tax limits. And also to suspend the powers of elected officials such as the city councils and Mayors.

They will argue that government services are too important to be cut beyond a certain level.

i.e. this is an emergency during which laws can be suspended.

IMO, this crisis is not going to be local governments against bond holders. It is not going to be about cutting government. It is going to be about whether there are any limits whatever when government wants money.


By Blogger Viking Kaj, at Thu Jun 11, 11:59:00 AM:

Mayor Daley sold the parking meters in Chicago for 75 years.

That's the nipple that Obama sucked for years...

Expect more of the same. Wait until the building permits office is owned by the local construction company.  

By Blogger CDR J, at Thu Jun 11, 08:33:00 PM:

The usual course for state and local governments is to first cut the things that are their primary responsibilities: police, fire, courts, streets, garbage removal. That way, people will scream.
Instead, they should cut things that are not government responsibilities, like welfare, and many other programs. They will also need to cut back on pensions, benefits and wages for workers.  

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