Friday, October 24, 2008

Why All Our Cities Are Bankrupt

Article after article has hit the wire in the past couple months about cities in distress forced to cut budgets. Pundits frame the issue in a variety of ways, but by and large people are of the view that after this period of belt-tightening, things should return to business as usual.

I am pleased to see localities finally forced to live within their means, and I am doubly happy to see them not immediately look for new sources of tax revenue. But I do not agree with the standard assessment of the problems' roots. I believe government has reached the outer limits of largess and will be forced to trim back time and again to avoid Vallejo's fate.

Actually, I think many cities will fail. There will be more than a few bankruptcies.

The standard line is that we have a revenue shortfall due to a decrease in consumer spending, falling house values and less real estate turnover. There is no question that this state of affairs has brought governments' problems to our attention, but it is not the core of the problem.

As things stand today, most cities are effectively bankrupt, as is the state of California. Consider this: The Wall Street Journal reported recently that the California retirement system (CalPERS) lost 20 percent of its money in the recent stock market turmoil. That means the pension plan is only 68 percent funded.

But it gets worse. That 68 percent figure is based on assumptions about future performance of the assets in the retirement system. According to Pensions & Investments magazine, the retirement system expected to generate a going-forward rate of return of just over 9 percent per year the last time it revised its asset allocations in December of 2007.

Will they accomplish this objective? Possibly not, if the current recession drags out as long as many think it could. As one economist describes the situation, "CalPERS must pay out hundred-cent dollars to meet its obligations, and as things stand they just don't have the money."

This situation is not unlike what has destroyed the American auto industry. Everyone criticizes General Motors for selling big SUVs -- and rightly so. What people ignore is the fact that GM must do this because those are the only vehicles which generate sufficient profit to pay its massive retirement-system obligations. One amazing thing about GM that most people don't know is that they have nearly 10,000 employees they pay not to work. It's called the "Jobs Bank," and it should sound very familiar to anyone who has witnessed the explosion of social programs in recent decades.

GM's coming bankruptcy is a consequence of insane union contracts -- the exact same type of contract which is only now beginning to lay low cities like Oakland and states like California.

The city of Oakland has employees who, upon serving the city for 30 years, will receive 100 percent of their retirement-level pay for the rest of their life. So, someone who becomes a fireman at age 25, works until age 55 and lives until age 85 will spend as much time being paid not to work as he did working.

So, while it's nice to see the Oakland City Council cutting its own salary by 5 percent, they really are just rearranging chairs on the Titanic, as usual. As I've mentioned previously, I expect to see a slew of large tax increases sometime soon.

I also think it's possible citizens will refuse to go along. Perhaps if the media spent some time educating about the preposterous deals unions have negotiated at the state and municipal level, they will make the right decision.

So what happens then? Sadly, I think the best course of action is bankruptcy. That's the only situation in which these terrible bargains can be renegotiated. I think it's very telling that the unions were the major opponents of Vallejo's bankruptcy. They knew that allowing the city to go bankrupt would be perhaps the only situation that could threaten their sweetheart packages.

Unions have a long history in our country of bleeding companies and municipalities as dry as possible. They very frequently refuse to negotiate even with companies on the brink of bankruptcy -- witness the frequency of bankruptcies in the airline industry. Ironically, they accuse their employers of greed as they take the greediest position one can possibly take: "I would rather kill you than receive every penny I can get from you."

So it is with our cities and states. The years to come will not be pretty, but we can hope the coming rash of insolvencies will spell the end of the evil government employee union.


  1. Didn't know these things. Thanks for the info.

  2. The euphamism is "legacy costs." Europe is in the same pickle, only worse. The current market melt down is a mere hiccup compared to the actuarial nightmare that has been looming in plain sight for years. Bankruptcy is the best way out, assuming that the contractural obligations to retirees are rewritten in ways to preserve solvency. That loud shriek you hear is NOT a pig being stuck.

  3. There is a way out and that is to have economic growth AND cut gov't. It is laughable (but not funny) that 1. the Mayor didn't know anything about the deficit until 6 weeks ago, 2. that the city council proposes $42M in cuts just now - and they have more to cut. I wrote in a blog - don't know which one- that when the mayor said he would cut $10m which translates into 120 jobs I did the math and that's $83.33K per employee. A subsequent poster said hey that's not too bad it's probably $55K of salary and the rest benefits- but I thought about it and think $83.33K per yr. is a lot especially when I go from retail shop to retail shop -owners of businesses have risked their capital to make a store and they aren't guaranteed $83.33K per yr. nor the vacation time of a city employee- they are working all the time. And for an hourly employee it's even worse- they don't make that kind of $. These are fat plum jobs, and it is so corrupt to get one and many positions are not even needed. So part of me would like to see the city go BK so that it can rebuild and get out of these awful union contracts. On the other hand the $ crisis can force the unions to get real, the city of OAK could put forward an economic vision. The green city is OK, only we don't do it. OAK is chasing recyclers out, it is not business friendly and plants locate in Hayward, the taxes here are high. so where is the economic engine and vision? Why is Emeryville so successful and OAK not? Taxes, bloat, no vision.

  4. What Can we common Poeple do about the Bailout? Nothing.. we just have to wait and see if the company comes up and develops new cars and prototypes to please the americal consumer