Saturday, January 1, 2011

Muni Mess Updates

During the Depression, local governments found themselves in a pickle like today's municipalities do.. tax collections were way down, the social demands of the people way up. Initially, these towns and counties (called muni's) were not allowed to file bankruptcy. This forced some local governments to hike taxes to obscene levels.. West Palm Beach had a property tax of 41% of assessed value. After a long fight, Congress enacted the Municipal Bankruptcy Act in 1937. By then, it was simply a formality.. hundreds of towns and cities had long ago stopped paying creditors. Between the law's enactment and 1939, 106 municipalities formally filed bankruptcy.

After Meredith Whitney's startling prediction for a cascade of local government bond defaults, I did a little digging and came up with a few updates on just how bad things are in some places. It appears that in some 26 states, municipal governments are simply not allowed to file bankruptcy. Most of these are smaller and middle sized states such as Iowa, Kansas, Maine, Wisconsin etc. The bigger (and more distressed) states like California, New York, New Jersey, Pennsylvania, Ohio, Texas and Florida do allow municipal bankruptcies.

There are three states that are in the process of changing this. The first is Indiana, where Governor Mitch Daniels has given his blessing to a plan that would allow municipalities in Indiana to hand over their finances to a state emergency manager, who would have vast powers to solve the problem, including re-negotiating contracts with public service unions. This emergency manager would also be empowered to file bankruptcy if he felt it necessary. A few towns in Indiana are already lining up to surrender their governments to an emergency manager, led by the City of Gary.

Next on the list is Michigan, where Detroit has recently halted all garbage pickup and stopped police patrols in 20% of the city.. a city which is already known for its high crime. Their budget deficit in 2010 was around $450 million. The city's public service unions are'nt budging an inch, forcing the city to slash deeply. Newly elected Republican governor Rick Snyder has come out in favor of allowing bankruptcies, and Detroit will be followed to the bankruptcy courthouse by a number of other cities and towns in Michigan.

In Wisconsin, newly elected Republican Governor Scott Walker began talk of de-certifying public employee unions. The outgoing Democratic Governor Jim Doyle tried to tie Walker's hands in the lame duck session by negotiating new contracts with 17 Unions covering 39,000 state workers. But at the last minute, a few Democratic state senators, including senate majority leader Russ Decker, pulled their support and the legislation failed. The Democrats removed Decker as majority leader and tried ramming it through again, with the same failed results. The lame duck session is now over. I look for the Gov.Walker to allow bankruptcies as well as de-certifying these unions. Rumors were that the City of Milwaukee is in serious trouble and would likely be the first in line if the state were to allow bankruptcies.

In general, the benefits promised state and local public employees are exceedingly generous. In early 2000's and the ever increasing tax revenues and property values of that time, keeping these promises was not a problem. This has changed. Property tax revenue is plunging, as is sales tax revenue. Roughly 30% of the revenues for municipal governments come from the state government. In some states, this support will be drastically reduced.. muni's in bigger states will be hit hard. Budget slashing Republicans have taken over a number of state governorships and legislatures in the last election, and tax hikes won't fly. Even worse was the ending of the Build America Bonds program, which essentially allowed muni's to borrow and employee people at low interest rates. All considered, 2011 is beginning to look like 1932 for municipal governments.

Lets remember that there are 14 million people employed by municipal (local, not state or federal) governments today... they make up 11% of the entire US workforce. 90% of municipal governments have announced spending cuts are coming in 2011, with more cuts possibly coming depending on the reliability of the above mentioned aid from states. Because the unions are so obstinant, they'd rather the local government simply slash the number of employees than have any of them take cuts in pay and/or benefits. Muni spending amounts to 9% of our nation's GDP. Here's my guess.. a few dozen will file bankruptcy, but most muni's will muddle thru with a combination of slashing jobs & salaries, borrowing, and simply not paying their bills on time..including bond defaults. Muni governments will take a queue from the State of Illinois, which is perpetually six months behind on nearly all its bills, and becoming more and more delinquent. In California, state employees have endured pay cut after pay cut. I fully believe that at least 750,000 muni jobs will be lost and another million will see their wages and/or benefits slashed, mostly in bigger states. State governments will probably lay off another 250,000. Obama will try to throw them a lifeline with howls about saving teacher jobs, but I believe the Republicans in the House will nix this one. For many local governments, it's 1932 once again.

1 comment:

  1. Thank you Mr. K for an insightful and realistic explanation of the situation many city county and state governments find themselves in. IMHO they should do both. Cut spending (reduce staff and payroll) and pay benefits retirement benefits equivalent to realistic tax revenues. It was easy to promise pie in the sky when revenues were skyrocketing, but now reality has to be dealt with. I don't mean to seem heartless to the government employees, but offer me a better choice and I will consider it. The public sector is strangling the private sector and this is tantamount to "killing the goose that lays the golden eggs."