After Detroit, Who is Next?

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As most of us are aware, the City of Detroit declared bankruptcy in July, the largest municipality to do so thus far. This sent tremors through many state governments, particularly Michigan, who are wary of fragile government economies. The American public though doesn’t seem to realize the magnitude of the problem yet, or perhaps they choose to simply ignore it (I suspect the latter). Nonetheless, according to “Governing” Magazine there is already 37 municipal bankruptcies in progress. The cause is rather simple, they have made some bad decisions along the way which has crippled their economies, for example:

* STOCKTON, CALIFORNIA filed for Chapter 9 bankruptcy protection last summer (2012). Reported reasons include unmanageable salary obligations and public employee debt. Such benefits are said to account for $800 million alone. With a population of just under 300,000, that represents $2,666 per citizen. Stockton joins San Bernardino and Mammoth Lakes in seeking bankruptcy protection in California.

* SCRANTON, PENNSYLVANIA is facing a $21 million budget gap. Last year (2012), the city was literally running out of money, causing the mayor to cut government salaries to minimum wage and sell off assets. This was not enough and last year the mayor urged a 78% tax increase, which was vetoed by the town council. Even if the tax increase was supported, it wouldn’t have been enough to solve the city’s finances.

* CAMDEN, NEW JERSEY – Once known as a major manufacturing and shipbuilding area, Camden is facing urban decay. The city is located on the Delaware River across from Philadelphia. As corporations slowly closed their doors and moved away, they put a sizable dent in the city’s tax base. State subsidies were used to prop up the government, which actually grew while manufacturing declined. The city’s budget is currently at $150 million, but tax revenue is less than $25 million. This has caused massive cuts in government service, including the entire police department. The streets are now patrolled by Camden County.

* DETROIT, MICHIGAN – As mentioned, Detroit filed the largest U.S. municipal bankruptcy in July. Over the last 50 years the city lost half of its population and now is at approximately 700,000. Detroit is now saddled with a whopping $18 billion in long-term debt and an operating deficit close to $400 million. One-third of the city’s budget is going toward public employee retirement benefits.

Following Detroit’s announcement, other major cities started to report they are also beginning to feel the squeeze. For example, CHICAGO owes the state of Illinois $30 million in back taxes. Their current budget deficit is expected to grow to $1.6 billion by 2016, thanks in large part to growing public employee pensions.

NEW YORK CITY’s Mayor Michael Bloomberg has already begun to warn New Yorkers tough financial times are just around the corner and will have to be addressed by the next mayor (as he exits stage right). Raising taxes will be highly unpopular in a town with some of the highest taxes in the country already.

Beyond the cities, states are also standing under the Sword of Damocles. CALIFORNIA is well remembered for providing creditors with I-O-U slips as opposed to cash. The state’s financial problems are still very much real, even though Governor Jerry Brown signed a $92 billion budget that appears balanced, assuming voters pass an $8.5 billion tax increase next month. At the heart of the problem is the state’s various retirement programs representing $500 billion in unfunded liabilities. In addition to California, Illinois, New York and New Jersey are not far behind with similar problems.

All of this means our various government bodies can no longer afford to conduct business as usual. Increasing taxes is placing a hardship on taxpayers and forcing companies to move their operations to more tax friendly locations, such as the South. Cuts in spending are inevitable as it is becoming clear we can no longer afford expanding government bureaucracies. Public employee retirements will have to be reviewed and likely modified, at least the rules for participation. Unions will also come under the microscope as companies find “right-to-work” states more attractive. In its annual Labor Day report, Gallup found fewer Americans approve of labor unions today (54%) than they did when the survey began in 1936 (72%) during the height of the Great Depression.

And then we have the federal government which is saddled with a massive $16.9 trillion debt. The amount is so large, the average taxpayer cannot comprehend it. Now, in October, lawmakers must decide whether to raise the debt ceiling again or assume their fiduciary responsibilities and finally do something about it. Because of the divisiveness in our capitol, I’m betting nothing of substance will be done, just more “Rearranging the deck chairs on the Titanic.”

Over time, something will become apparent to American taxpayers, filing for bankruptcy protection is one thing, fixing the system of tax-and-spend is quite another. Bankruptcy only represents a temporary reprieve from your creditors. Unless you make significant changes in your attitude and operations, you will likely repeat your mistakes again and again. Like it or not, correcting government bankruptcies means the taxpayers are going to have to settle for less public service. Obviously this will be unpopular as it will affect our standard of living. If governments are to survive it will be necessary to reduce costs, streamline services, flatten the bureaucracy, and save money, not simply tax-and-spend. Then again, politicians are rarely elected for promising less.

Keep the Faith!

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Copyright © 2013 by Tim Bryce. All rights reserved.

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