Saturday, March 3, 2012

Update on Stockton ... Lessons for Anyplace U.S.A.

More misery for America's most miserable city provides a timely update on Stockton's financial woes:

"Stockton, Calif., . . . ranks among the nation’s most insolvent cities. . . . Last year, Forbes magazine said Stockton had been “ravaged by the housing bust” and placed it No. 1 on its list of “America’s Most Miserable Cities.”

But here is our question du jour: Is Stockton unique or should we consider that what's happening there could come to a city, state or even nation near us? Here's the warning from Stockton's city manager Bob Deis:

'“One of the things I’ve been asked, at least 100 times: How did we get here?” Deis, the city manager, said. “It’s an accumulation of decisions and mistakes over 20 years.”

Among the key mistakes, Deis blamed the city’s decision in the 1990s to offer generous health benefits to its retirees, a dearth of independent audits, astonishingly sloppy bookkeeping, and decisions to borrow hundreds of millions of dollars for civic projects, and then back the debt with the city’s general fund. . . .

{M}embers of City Council stopped Deis to ask questions: What is the general fund? What is it used for? And, where do the city’s revenues come from? . . .

(The article's writer) wonder(s) if Stockton’s sufferings and shortcomings are different only by degree (from other cities): an overly optimistic and undereducated people, electing ignorant and misinformed leaders, piling up debt, until the one day when they can’t. It’s a lot like so many other places I know."

Discussion and Analysis

At all levels of government, too many of our elected officials lack business knowledge and are financially illiterate. When it comes to financial decisions, many simply don't have a clue.

Still, they've been entrusted with big responsibilities, taxpayer money and often represent "easy marks" for self interested people who bring expensive 'public' project proposals for the officials to approve.

They're also frequently no match for experienced union leaders who proceed to negotiate expensive and unaffordable benefits for union dues paying public sector workers.

Running a government's operations and financial affairs is similar to running a business. In that regard, there's only so much money available to spend. In the face of these scarce resources, choices and priorities have to be made.

If we then choose to do more things than current resources will allow us to do, we need to raise the additional funds in order to be able to do those things. At that time, burdensome debt based on overly optimistic financial projections about the benefits associated with the proposed expenditures often comes into play.

When first presented for approval, the financial projections for the new projects appear to be both very affordable and quite reasonable. Of course, nobody would offer a proposal for approval that didn't on its face make sense, whether it in fact did or not.

Summing Up

Unfortunately, often what's proposed isn't what later happens. In fact, the financial results are frequently worse, and sometimes much worse, than predicted. Over time another 'Stockton' happens.

So we need to be most careful when we entrust our MOM to elected officials for safe keeping and prudent investing. Even if they try to do the right thing, their lack of knowledge in financial affairs will often lead them down the wrong path. And when they go down the wrong path, we taxpayers will follow close behind them.

And there are no "do overs" after the money's already been spent. That's why a small and a limited government is the best government.

As Thoreau said, "That government is best which governs least." I'll bet that the good folks in Stockton would agree with that one. Me, too.

Thanks. Bob.

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