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Investor's Business Daily


Federal Bailouts For Cities Would Reward Bad Behavior

November 06, 2013

By Steven Malanga

Advocates for cash-strapped municipalities want Washington to clean up their mess.

Detroit’s July bankruptcy filing, prompted in part by its huge worker-retirement debts, has led to calls for a federal bailout of the beleaguered city and also, by extension, of retirement debt in other fiscally squeezed municipalities. From the New York Times to blogs and union-issued position papers, bailout supporters argue that the citizens and workers of Detroit and other troubled places aren’t to blame for their retirement debts.

Even if they were, the arguments go, the damage that insolvency will do to government services for average citizens and to the retirements of muni workers demands federal intervention.

"The 700,000 remaining residents of the Motor City are no more responsible for Detroit’s problems than were the victims of Hurricane Sandy for theirs, and eventually Congress decided to help them," investor Steven Rattner wrote in the New York Times last summer.

But remember the long road that Detroit and other cities have traveled to financial distress. Politicians consistently made bad deals for constituents, while union leaders regularly sued for plusher benefits, thoughtless about how city governments could pay for them.

And voters persisted in electing those governing in this irresponsible way.

Detroit’s emergency fiscal manager, Kevyn Orr, recently said that the city has been going broke "openly and notoriously" for over a decade, without confronting its problems.

He’s right. Though the Motor City has faced fiscal challenges since its economic decline began in the late 1970s, things worsened considerably when financial markets plummeted in 2000, hitting the city budget hard.

Detroit found itself with one of the nation’s lowest municipal bond ratings; a Moody’s analyst told the Detroit News that the city’s budget was "very, very challenged."

Yet the very next year, Detroit voters elected as mayor an inexperienced 31-year-old state legislator, Kwame Kilpatrick, who gave no sign that he had a plan to deal with the city’s fiscal crisis. Kilpatrick would employ a series of transparent financial gimmicks to paper over Detroit’s budget woes, including borrowing millions for the city’s pension fund, just as municipal retirement debts were getting onerous.

In 2005, the city’s auditor warned that if the gimmicks continued, "insolvency is certain."

Despite the fiscal crisis and media reports that Kilpatrick was charging hundreds of thousands of dollars in personal expenses to the city, Detroit voters re-elected him in November 2005. For three more years, the financial machinations went on, until Kilpatrick resigned amid investigations into his improprieties in office.

After prosecutors argued that he had turned city hall into "Kilpatrick Incorporated," a jury convicted him earlier this year on fraud and racketeering charges.

Though Chicago is more economically robust than Detroit, its budget is also under severe stress, thanks to a pension system that’s in even worse shape than the Motor City’s.

One of Chicago’s pension funds has just 25% of the assets needed to pay its retirement promises; another has just 31%.

Fixing the system under current law would require an untenable doubling of property taxes, city officials estimate. That makes Chicago another likely candidate for a federal rescue.

Local budget watchdogs have warned about this looming catastrophe for years. Back in late 2000, for instance, the Civic Federation of Chicago reported that the city’s pension funding was so flawed that "the city may have a difficult time meeting the unfunded liabilities."

Meanwhile, city officials and unions negotiated richer and richer contracts, driving the cost of employing the typical Chicago government worker to about $95,000 per year, counting pay and benefits.

Pension costs threaten Los Angeles, too.

Last year, L.A.’s chief administrative officer, Miguel Santana, reported that America’s second-largest city risked bankruptcy if it didn’t control exploding employee expenditures, including a projected near-doubling of pension contributions, to $1.2 billion annually, in 2015, up from $639 million in 2008.

Santana’s report might have served as a call to reform for city voters, who had the chance to elect a new mayor this year. Instead, only 17% of eligible citizens showed up for the crucial first round of voting.

The two candidates who emerged for a run-off, city council member Eric Garcetti and Controller Wendy Greuel, were municipal union favorites. The eventual winner, Garcetti (endorsed by the teachers’ union), even assured workers during the campaign that no significant compensation givebacks were necessary.

Politicians and unions have been emboldened in resisting reform because they expect that the federal government won’t let big cities or their major pension systems fail.

And bailout advocates argue that some American cities have such massive retirement debts that they could never repay them without Washington’s help.

Former L.A. Mayor Richard Riordan, for instance, has proposed federal guarantees of state and local pension debts in return for reforms that would improve the accountability of retirement systems. But what these nearly insolvent governments really need are voters angry enough and worried enough to bring an end to the special interests’ tight grip on the public purse.

Original Source:



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