Many Cities Are in Deep Financial Holes, and Most States, as well as the Federal Government, are in No Position to Help Them Get Out ... Not Taxpayers Either

Hard Times Spread for Cities is subtitled 'Rising Health, Pension Costs, Top the List as Municipalities Struggle to Recover From the Recession.'

Here's an excerpt:

"Fiscal woes that have caused high-profile bankruptcies in California are surfacing across the country as municipalities struggle with uneven growth and escalating health and pension costs following the worst recession since the 1930s. . . .

In a majority of the nation's 19,000 municipalities—urban and rural, big and small—stagnant property tax revenues, less aid from states and rising costs are forcing less dramatic but still difficult steps.

Moody's Investors Service recently said that while municipal bankruptcies are likely to remain rare, it warned of a "a small but growing trend in fiscally troubled cities unwilling to pay their debt obligations." . . .

A study by the Center for Retirement Research at Boston College found that annual pension payments for state and local plans more than doubled to 15.7% of payrolls in 2011 from 6.4% a decade earlier.

The Nelson A. Rockefeller Institute of Government said local governments made roughly $50 billion in pension contributions in 2010, but their unfunded pension liabilities still total $3 trillion and unfunded health benefit liabilities are more than $1 trillion.

Local government cuts are one factor slowing the broader economic recovery, offsetting stronger private-sector growth. State and local government spending and investment fell at a rate of 2.1% in the second quarter, according to the Commerce Department, the 11th consecutive quarterly drop.

Local governments also have cut 66,000 jobs in the past year, mostly teachers and other school employees.



"Cities are still going to be facing very rough waters for the next couple of years," said Michael Pagano, dean of the college of Urban Planning and Public Affairs at the University of Illinois at Chicago. . . .

To be sure, some cities are in better shape. In June, Atlanta passed a balanced $542 million budget that secured more funds for the police and increased the city's reserve fund to about $110 million, up from about $7 million in January 2010.

States also are slowly starting to recover. Last year, state tax revenue of $776 billion eclipsed a prerecession peak for the first time, although growth remains weak, according to the Rockefeller Institute. State-level job cuts also have slowed.

Towns and cities in energy-rich regions likewise are faring well. . . . five hotels have been built in the past four years in downtown Williamsport, Pa., where natural gas companies have flocked to develop the Marcellus Shale. A new civic arena, residential housing and an airport terminal to provide direct flights to Houston are being planned. "Most citizens you talk to, they're very excited," said Williamsport Mayor Gabriel Campana, who refuels his natural-gas powered car at home.

But in far more cities, the outlook is darker. Although some suffer from specific problems—a bloated incinerator project in Harrisburg, Pa., and a bad real estate bet in Mammoth Lakes, California—most cities face falling revenues and rising costs.

Indeed, while housing is showing signs of improvement, real estate assessed values remain depressed, eroding property tax receipts, which provide 29% of revenue for municipalities, according to a Moody's analysis of census data. State aid, the biggest source of revenue for local governments at 34%, is falling and the growth of receipts from wage, sales and other taxes, which provide 10% of local budgets, is slowing.

At the same time, pension and health-care costs are rising despite efforts to restructure those benefits.

The most vulnerable cities are ones that experienced drastic reductions in property values or are in states like California that limit municipal options to increase revenues. In addition, nearly a third of California cities require collective bargaining and prohibit outsourcing of administrative and maintenance services.

Since 2008, four California municipalities have filed for bankruptcy protection—Vallejo, Stockton, Mammoth Lakes, and most recently, San Bernardino, which declared bankruptcy Aug. 1, in large part because sales and property taxes fell after the real estate bust. The assessed value of homes in San Bernardino dropped to $10.3 billion in 2011 from $12.2 billion in 2008.

On top of a declining property tax base, the city has faced a significant drop in sales tax collections since 2005. Economist John Husing said San Bernardino's retail sales fell 30% during that period. Likewise, a decline in construction means less revenue from things like building permits and development fees.

While many municipalities nationwide have offset property-tax declines by raising tax rates, California's 1978 law dubbed Proposition 13 caps property taxes at about 1% of a home's value and forbids major tax increases unless a home is sold or rebuilt, though it permits taxes to fall if a home's value drops.

Residents in El Monte, Calif., 15 miles east of Los Angeles, will vote in November on a soda tax that could raise about $10 million annually. The city, which lost four major car dealerships that generated a large share of the city's sales tax revenue, cut nearly 30% of its workforce to help close a $3 million budget deficit but still faces $2 million deficit for the current year.

Local merchants oppose the measure. "I'm struggling to stay open and here they want to tax me even more. It's crazy," said Arthur Meier Jr., who owns Arts World Famous Burgers in El Monte.

Elsewhere, the cost of shoring up underfunded pension plans for public workers is going slowly. In many states, benefits are guaranteed and difficult to modify unless a city is declared "fiscally distressed." "Because of the guaranteed nature of benefits, there's no quick fix," said Thomas Fitzpatrick, an economist with the Federal Reserve Bank in Cleveland.

Steven Kreisberg, collective bargaining director at the American Federation of State, County and Municipal Employees, the nation's biggest public-sector union, said pension problems were caused by investment losses that can be gradually recovered, rather than due to overly rich benefits. "When you lose 20% of your assets in a single year that's what created the problem," he said.

Providence, R.I.'s $423 million pension system staved off bankruptcy after reaching a tentative deal in May to cut pensions for retirees and current police, firefighters, and municipal laborers, resulting in a savings of about $18.5 million a year. Its pension plan was expected to consume about 20% of city tax collections in fiscal year 2012.

Pensions were "unaffordable and unsustainable," said Mayor Angel Taveras, a Democrat, who lowered his own salary 10%, cut 200 city employees, closed five schools, and secured $40 million in voluntary payments from tax-exempt universities and hospitals, including Brown University.

In Chicago, Mayor Rahm Emanuel, facing a projected $369 million budget gap, created an infrastructure trust backed by financial companies including J.P. Morgan Asset Management and Citibank. The investors will put up $1.7 billion for projects approved by a five-member board, the first being considered is a $200 million energy retrofit of city buildings expected to save $20 million a year in heating bills.

Boston is increasing property assessments of tax-exempt organizations like universities, while Maryland passed a law allowing cities to assess a storm water fee to help pay for projects to clean up the Chesapeake Bay.

Other cities like Cleveland and St. Louis are imposing new fees for city services, such as trash collection. Such fees "can better link the funding of services to people that actually experience the benefit" said Michael Nadol, managing director with Public Financial Management, who advises municipalities on fiscal issues."

Summing Up

Cities get one third of their money from states. States get much of their money from the national government. Neither individual states nor the national government has money to help cities.

When property taxes are included, cities are funded almost two thirds by financially strapped states (34%) and local property taxes (29%) which, of course, continue to be negatively impacted by the depressed housing market. School districts are struggling with funding pensions and retiree health care benefits.

Meanwhile, states are tapped for various reasons, such as Medicaid being funded about 50/50 by states and the national government. In that vein, nursing home related expenditures are the single biggest component of the Medicaid program.
Something has to give.

We can't pay teachers and other public sector employees the promised pensions and retiree health care benefits, provide all the local government services long considered obligatory, take care of the poor and elderly in nursing homes, and then be unwilling to raise property, sales, income and other taxes dramatically. And dramatic it would have to be.

And if we do raise taxes, it will have to be across the board and not just on the 'millionaires and billionaires' either. Otherwise it's just political grandstanding and not a serious attempt to get our financial house in order.

But if we dramatically increase taxes on our citizens to provide the 'normal' public services and also pay these unaffordable and underfunded benefits, the U.S. economy will become even weaker than it already is.

Then unemployment will remain high indefinitely, tax receipts from weak sales will suffer even more, property values will take another hit, and a most vicious economic spiral downward will create economic problems of immense proportions.

Finally, to repeat the completely obvious, something has to give --- and soon.

Thanks. Bob.