Until
a few years ago, running a U.S. city was pretty easy. You added services when
voters asked, you hired more workers (who were likely to vote for you come
election time) to provide the services, and you promised lavish retirement
benefits to cops and teachers who weren’t going to retire until long
after you left office. If tax revenues didn’t cover day-to-day
operations, no problem; Washington was sending plenty of aid to make up the
difference.
No
longer. The gap between what a typical city gets from sales and property
taxes and what it owes its employees is a now a chasm that even trillions in
federal stimulus money can’t fill. So for the first time in most
Americans’ memory, cities actually have to live within their means. The
result, according to today’s
Wall Street Journal,
isn’t pretty.
As
Slump Hits Home, Cities Downsize Their Ambitions
MESA,
Ariz. — The police department in this city of 470,000 has lost about 50
officers, and is hiring lower-paid civilians to do investigative work. The
Little League has to pay the city $15 an hour to turn on ball-field lights.
The library now closes its main location on Sundays, and city offices are
open only four days a week. This holiday season, the city didn’t put up
festive lights along the downtown streets.
Mesa’s
tax receipts, depressed by the recession, will likely come back one of these
days. But Mayor Scott Smith doesn’t believe city services will return
to prerecession levels for a long time, if ever. “We are redefining
what cities are going to be,” says Mr. Smith, a Republican who ran a
homebuilding company before his election last year.
Months
after many economists declared the recession over, cities are only now
beginning to feel the full brunt of it. Recessions often take longer to
trickle down to local government, in part because it takes time for the sales
and property-tax revenues on which municipalities depend to catch up with a
depressed economy.
But
the sting this time around is expected to be far more acute and long-lasting
than in previous recessions. Projected deficits are especially deep in some
places and tax revenues could be pinched for years as consumers turn thrifty
and real-estate prices remain diminished. That means the relatively painless
measures such as borrowing, deferred payments to pension plans and scattered
layoffs that have been used during past episodes of fiscal strain are
unlikely to be effective in some cities.
In
the decade through 2008, municipal tax revenues grew at a rate of 6.5% a
year, faster than the overall economy’s 5.1%, unadjusted for inflation.
Those revenues have started to slip. A national tally isn’t yet
available, but state tax collections fell 11% across 44 states in the third
quarter of 2009, from the same period a year ago, according to a report by
the Nelson A. Rockefeller Institute of Government at the State University of
New York. In a recent survey by the National League of Cities, 88% of city
budget officers said they were less able to meet their financial needs than
they were a year ago.
The
specter of lean budgets for years ahead has some of the nation’s 89,000
local governments rethinking what services to provide and how to pay for
them. From Mesa to Philadelphia, this means some combination of higher taxes
and fewer services. In some places, it means more and higher fees for permits
and recreation programs. Museums, pools and the like are relying more on
income from fees charged to users and from nonprofit organizations, and less
on taxpayers.
These
cuts matter greatly to the economy at large. Local government spending
accounts for 8.8% of the nation’s total output, including everything
from employee salaries to snowplows. The sector employs one in nine workers
— 14.5 million in all, or about 8 million in education and 6.5 million
elsewhere. More Americans work for cities, counties and school boards than in
all of manufacturing.
More
likely to be union members, government workers tend to be better paid and
have greater job security than many of the taxpayers who pay their salaries.
Benefits are often better, too. Virtually all full-time state and local
workers have access to retirement benefits; in the private sector, about 76%
of full-time employees had retirement benefits. Employment in local
government peaked in August 2008 and has fallen by 117,000 since then, or
less than 1%, compared with a 6.3% fall in private employment from its
December 2007 peak.
In
Philadelphia, where sales and corporate taxes have taken a hit, budget cuts
are limited by the large fixed costs of city workers’ pension and
benefits plans. About one fifth of the city’s $3.7 billion budget goes
for health-care and pension costs for current and retired workers. The
city’s overall tax revenue has fallen 6% over the past two years, while
pension costs have risen 6% and health-care costs 11%. Philadelphia Mayor
Michael Nutter, a Democrat, is pushing union employees to pay more of their
health costs and is looking to move new employees to a less generous pension
plan.
The
city has cut about 800 positions in the past year, mostly through attrition,
and suspended some services citizens used to take for granted. It has stopped
providing snow removal on some smaller, one-way streets, except in
emergencies, and it suspended mechanical leaf pick-up in some spots. This
fall and early winter, older, tree-lined neighborhoods like Mt. Airy and
Chestnut Hill were littered with rotting leaves.
Anyone
who wants to have a parade in Philadelphia now has to pick up the tab. The
city’s Mummers Parade, where 10,000 or so string bands and other
performers don bright costumes and march up Broad Street on New Year’s
Day, won’t receive the $336,000 in prize money that used to go to the
best string band and other parade participants. The last time that happened
was during the Great Depression.
Some
thoughts:
-
Local governments have been able to hang on this long mainly
because the federal government has borrowed trillions of dollars and handed
some of it to mayors and city councils. Since federal borrowing is
functionally the same as city borrowing — in the sense that U.S.
citizens living in towns or cities eventually have to pay it back —
this can go on only as long as someone out there is willing to lend us the
money. Which is to say as long as the dollar holds up.
-
Right now the dollar is holding up pretty well, so the Feds will
almost certainly step in with more aid for local governments in 2010. This
will prevent wholesale cuts in public employment and pension plans, but once
again at the cost of bigger problems down the road.
-
In the end we’ll run out of money because our obligations
exceed our income. And that means massive cuts in state and local services
that First World citizens have come to see as a birthright. Pools and ball
fields that used to be free will now charge users. Streets that used to be
plowed after a snowstorm will be left untouched. Permits and licenses that
used to cost a few dollars will now cost many. After-hours school programs
will end, putting low-income kids on the street. Libraries will be closed
most of the time. Fewer police will be there when needed. And let’s not
even think about what the DMV will be like.
-
These service cuts won’t come smoothly. Public sector
wages and benefits now vastly exceed those of comparable private sector
workers and the public sector unions won’t give up their advantages
without a fight. So on the way to fewer services there will be strikes and
slowdowns and tax increases. Things will get messy.
-
But the cuts will come. TINA, as Margaret Thatcher used to say:
There Is No Alternative. The price of having it too easy for the past three
decades will be having it a lot harder for the next three.
John
Rubino
DollarCollapse.com
Also
by John Rubino
John
Rubino is co-author, with GoldMoney’s James Turk, of The Collapse of
the Dollar and How to Profit From It (Doubleday, 2007), and author of Clean
Money: Picking Winners in the Green-Tech Boom (Wiley, 2008), How to Profit from
the Coming Real Estate Bust (Rodale, 2003) and Main Street, Not Wall Street
(Morrow, 1998). After earning a Finance MBA from New York University, he
spent the 1980s on Wall Street, as a Eurodollar trader, equity analyst and
junk bond analyst. During the 1990s he was a featured columnist with
TheStreet.com and a frequent contributor to Individual Investor, Online
Investor, and Consumers Digest, among many other publications. He now writes
for CFA Magazine and edits DollarCollapse.com and
GreenStockInvesting.com.
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