Local Governments Face Bankruptcy Quandary
The culprit is a decade of over-spending by governments, especially on pension guarantees, and an economic slowdown that refused to flip into a robust recovery. The money just isn’t there. And it’s not going to be there even if local governments raise taxes while cutting employees and services to the bone.
Things are just going to get worse for municipal finance. Most states, counties, cities and school districts have spent their cash reserves down to the legal minimum. And they have not made contingency plans for another 15 percent decline in revenue in the next year. Consequently, there is the potential for thousands of defaults in the 50,000 municipal bond issuers in the United States. Most cities can cut spending, but they cannot cut principal and interest payments without default and bankruptcy.
Unlike many cities facing bankruptcy, San Jose is well-off. It’s part of the prosperous, high-tech Silicon Valley. But San Jose officials have discussed bankruptcy as a possible option to over-spending.
Its prosperity turned out to be its undoing. In the November issue of Vanity Fair magazine, financial writer Michael Lewis wrote, “The city owes so much more money to its employees than it can afford to pay that it could cut its debts in half and still wind up broke.”
One city that did declare bankruptcy was Vallejo, in 2008. Unfortunately, the city missed a grand opportunity to pull itself from fiscal disaster. Government-worker unions made some concessions, such as higher payments by retirees for their health care insurance. However, pension plans for retirees and current city employees, including one that allows police officers to retire at age 50 with as much as 90 percent of their pay, remained untouched.
San Diego still bills itself as “America’s Finest City.” But the city’s pension payments are skyrocketing, from $229 million in 2010 to a projected $318 million in 2015 — 40 percent in just five years. By 2025, the number will be $512 million, a whopping 124 percent increase in 15 years.
No wonder City Councilman Carl DeMaio in September turned in 145,000 signatures to put a pension-reform measure on the ballot this year. Instead of pensions, it would enroll most new city employees in 401(k) programs for retirement. It would save the city $1.2 billion through 2040.
What’s dawning on officials is that there’s no panacea to budget problems. As budget realities have started to hit home, most cities now realize that just making tweaks in pension formulas for future hires won’t solve their problems — the mushrooming retirement obligations are just too large.