Saturday, October 01, 2011

Which American Governments are Bankrupt and Why

I was reading "Nine American Cities Going Broke," and noticed similarities between the cities in the most financial trouble. Many of them simply forgot their core functions and decided to go into projects like redevelopment and stadium building. These are "grand" projects that appeal to the egos of petty politicians, but for the most part, they do little good for, and much harm to, the taxpayers. Next, you have simple corruption and finally you have politicians buying the support of city workers by offering overly-generous pension schemes.

You may remember Vallejo, CA., actually filed bankruptcy as a result of the extreme pension costs for city workers, especially those given to unionized fire fighters. The city politicians, always wanting to be on the good side of the unions, caved in repeatedly. For years the taxpayers were able to cover the costs of buying political support from the unions, but long term it was unsustainable.

The nine cities listed are those "with the worst credit ratings assigned by Moody's." Here are the worst nine cities in from least bankrupt to most bankrupt.

#9 Camden, NJ. A very corrupt political system meant that three of the last five mayors ended up in prison for corruption. For some odd reason more than half the property in the city is tax exempt meaning taxes are imposed on the remainder. The city, not the school system, got over $1 billion in state aid in the last decade and is still going bankrupt. The state took over managing the finances and spending actually sky-rocketed while tax revenues plummeted. And in 2010 the state paid 80% of the costs of the city to stay afloat.

The city gave tax exemptions to a for-profit aquarium as well as to the a high-rent apartment complex. And greedy trade unions used their political clout to push through high pensions for police and fire fighters. Fringe benefits for those two departments doubled since 2001 after being adjusted for inflation. The city now pays out 28% of its budget in fringe benefits to these greedy city employees who use the clout of unions to their own selfish benefit.

Even while they are going bankrupt the unions increased their clout by getting more members hired. Full time city employees went from 1,131 in 2001 to 1,562. And the police department is 20% larger than the average for a city this size while there are 17% more firefighters than in other similar cities.

#8 Strafford County, NH. The main problem here is that the county went into the business of running a nursing home. And it is losing millions per year. About 40% of the entire country budget goes into this one nursing home. Most the patients are Medicaid patients and the country is finding that the reimbursements from Medicaid simply don't come close to paying the actual costs. This is a problem all health care providers face: government health care refuses to pay the actual costs of health care and this forces up prices for private patients. It is one way that government health care can pretend to cost less, while forcing up the cost of health care for everyone else, and then blaming the higher costs on private health care providers.

#7 Riverdale, IL. The main problem here just seems to be bad budgeting with the village consistently spending more than it takes in.

#6 Salem, NJ. The city decided to get into the office building field by guaranteeing bonds issued to construct the complex. Politicians said they could pay the bonds from revenue from leasing office space. But construction delays, a common thing in government run projects, meant they were paying out with no revenue coming in. Government officials tend to make bad investments like this all the time. They all dream of being the one credited with "revitalizing" the city, or having some grand project attributed to them. They are much more careful when they invest their own funds. But politicians are used to playing with other people's money.

#5 Detroit, MI. Trouble here is long term and tied to the heavily unionized auto industry which continued to push up costs for employers. General Motors and Chrysler both declared bankruptcy which substantially hurt the city. In addition the city was never well run to begin with. The net result is that debts are more than double the annual tax income for the city.

#4 Harrison, NJ. The city got involved heavily in redevelopment and spent $39 million to build a stadium. The income from the stadium, however, is well below what the politicians pretended it would be when they pushed it through. The stadium is one massive subsidy to the privately-owned New York Red Bulls, a soccer team. Bloomberg reports:

Town officials in December had to borrow $3.1 million -- 21 percent of its municipal tax collections -- to make the debt payment on the 2006 issue, and they anticipate doing so again this December, Moody’s said.

Meanwhile, the New York Red Bulls, whose owner is No. 208 on Forbes magazine’s list of the world’s billionaires, are challenging their taxable status. The team refuses to pay a $1.4 million property levy, according to Moody’s.

To close its $6 million budget gap, Harrison plans to dismiss 17 percent of its police and 29 percent of its firefighters on July 1, according to an e-mail from Town Clerk Paul Zarbetski. Mayor Raymond McDonough is also considering selling seven parking lots.

The city claimed that payments from developers would go from $2.3 million in 2008 to $11.5 million by 2011. But, in 2009 they only received $980,000 and $1.1 million in 2010 and 2011, just 10% of what they projected. The soccer team's managing director says the team shouldn't pay taxes since just being there "is a huge economic impact." Of course, it was an even huger economic cost.

#3 Jefferson County, AL. The county is in deep shit, literally and figuratively. It's 2o09 debt was $1,337,233,000 while revenue was only $308,440,000. The county decided to spend $3.2 billion on sewer overhauls. But numerous officials ended up in jail due to corruption connected to the project.

#2 Pontiac, MI. Here is another city hurt by the bankruptcy of union-riddled General Motors. But there was another stadium project involved as well: Silverdome Stadium. Built in 1975 it cost the city $55.7 million. The purpose was to "lure" the Detroit Lions to the stadium by given the wealthy owners a huge subsidy. They moved and stayed until they got a better handout leaving Pontiac holding a white elephant. The Jehovahs Witnesses rented it once a year for their annual get-together and a drive-in theater was opened up in the parking lot. The city decided to get rid of the stadium and asked for bids. In 2008 an offer of $18 million was made. The buyers were planning to turn the stadium into an entertainment complex. The city refused the offer and put it out to auction. Instead of getting $18 million the stadium was then sold for $550,000 in 2009. Brilliant!

#1 Central Falls, RI. Central Falls declared bankruptcy in August of this year. The reason was mostly due to the pension plans for city workers. The city owes $80 million in retirement benefits, which is equal to five years worth of the entire city budget. Once again it was the greedy unions redistributing wealth to fire fighters and police officers. The $80 million in retirement promises is for just 215 cops and firemen. The city has around 20,000 residents. The New York Times reports that Central Falls "is small and poor, but over the years it has promised police officers and firefighters retirement benefits like those offered in big, rich states like California and New York." (I don't know about New York, but big, rich California is in financial trouble as well and once again greedy unions have pushed through massive pension promises for union members.)

State regulations are also to blame here. State law favors unions and forces cities into binding arbitration. The law says that benefits are to be based on comparable benefits across the entire state and has to ignore the city's ability to pay. The result is that each time a city is forced into paying higher benefits the "comparable average" for the state increases forcing each other city to increase their benefits during the next union hold-up (I mean negotiation). Of course, as those benefits go up then the other cities are now lagging behind and have to catch up again. And so it goes in perpetuity. The Times report this means Rhode Island has "the nation's highest per capita spending for fire services and sixth-highest for policing." The law does not apply to other government employees but the teacher's unions are now pushing for a similar law to inflate the pay of teachers.

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