The rise in municipal bankruptcies, yet there is hope

With Detroit declaring bankruptcy in the past few weeks, there have been numerous news articles and reports on laying blame and asking is this a start of a trend? The answer is this has been going on for several years with 36 declared bankruptcies since 2010 as noted on the attached link: http://www.governing.com/gov-data/municipal-cities-counties-bankruptcies-and-defaults.html. And, we will see other bankruptcies as well in the future. I read a comment two years ago that noted the Euro debt crisis will hit the US in its cities more likely than in its federal government given actions taken to avoid it at the national level.

Yet, rather than point the finger to blame political parties (as both can share it), I would suggest we look at why the bankruptcies are occurring and will occur, so that action can be taken now to right the ships. Plus, there are many very good things (which will be noted below) going on in cities to turn troubled situations around such as in New York, Pittsburgh, Cleveland and Houston, e.g. Even in Detroit, some concerted actions were being taken, yet they were too late to avoid the plunge into bankruptcy. These actions will help Detroit recover more strongly when it emerges from bankruptcy. And, perhaps the obvious should be stated. Declaring bankruptcy is not the end of the world, but it is a strong wake-up call.

The reasons for bankruptcy vary, but there are some common themes to which we need to pay attention. Many of these themes are interrelated, which will be important to remember in devising potential solutions. The other day I wrote a post called “Most things tend to be interrelated” and can be accessed with the following link: https://musingsofanoldfart.wordpress.com/2013/07/21/most-things-tend-to-be-interrelated/. Some of the key reasons are as follows:

– Aging Employee demographics: This is at the heart of most of the troubles of the cities, which is why it is noted first. With an older population, there is an increase in healthcare, disability and pension costs. As an example, the average healthcare cost of someone in their late fifties is 2 1/2 times that of someone in their early thirties. This is why France, Greece, Portugal and Spain have the financial woes they have given their aging populations. The US is not as old, on average, as these countries, but some of our city employee populations are.

– Restricted growth in tax base: The above aging is heightened by budget restrictions due to a restricted revenue base. The city is not growing fast enough or is not growing at all, but services are still needed. So, fewer new employees are hired and the overall population ages which contributes to the first issue. Also, certain commodity functions are outsourced to do them more cheaply and this often leaves an older base of workers.

– Highly competitive retirement benefits: With very limited incentive pay in governments, to retain employees longer, cities and counties have resorted to providing more competitive retirement benefits than could be gleaned in the private sector. Whereas many private employers have cut back on retiree medical benefits and have shifted the focus from defined benefit pensions to capital accumulation type benefits, the governmental employers have been slower to do this. Even when they have made changes, they usually made them for new employees or non-grandfathered groups of employees, who have time to save more under a new plan or scheme as our British and Australian friends like to call it.

– Greater liabilities already out the door: The above three issues heighten another problem which is harder to remedy, as the greater obligations are owed to former employees. It would be grossly unfair to change someone’s employee equation once they retire. Private employers would tend to be sued if they did this, there are certain legal protections and it would be a public relations disaster. They same holds true for government employers. Fortunately, most benefits are trusteed and are largely funded, with a key exception of retiree medical benefits. The lone exception to the above rule is when bankruptcy occurs and underfunded or unfunded benefits need to be paid for and there is a priority allocation based on amount and when and how close you are to retire.

– Flight of the affluent: We cannot overlook a key problem that all cities have faced over time and that is the suburban flight of the affluent. The more creative cities have had better urban planning which has attracted or kept more affluent people in urban areas, but over time, the tax base shrunk as people moved outside of city limits. Detroit was making the city more attractive with many projects and investments, yet it was started too late. As noted below, the new forward thinking will build off community assets and focus the attention on the metro area.

– Bureaucratic inefficiencies: One of the hardest things in any business is dealing with inefficient fiefdoms that have grown and multiplied. Overtime, businesses have more burning platforms that cause them to deal with these inefficiencies. Unfortunately, in cities these bureaucracies tend to get bigger unless definitive actions are taken. So, we all need our cities and counties to do various services, but we need to challenge them to be as efficient as possible.

– Deteriorating assets: By deteriorating assets, I am referencing assets owned by the city or part of the city. Those owned by the city often suffer without capital improvements and ongoing maintenance. These assets could be infrastructure, buildings or modes of transportation. Or, there could be a demise in a community asset like a polluted waterway or a key industry that has become less relevant. To thrive, a city must nurture its assets as they are a lifeblood to the city. And, if they see a future decline, they can shore them up or invest more in other assets. But, the longer they forego improvements, the worse the deterioration.

I recognize I have left off other reasons, but my thrust is to focus on the predominant ones. Crime of course increases in correlation to poverty and deteriorated assets, which need resources to combat it. Yet, if we can address these bigger issues, the cities can plan accordingly to address other ones. And, there is hope. Per a recent PBS Newshour piece that included three experts, Kathy Wilde (CEO of Partnership for New York City), Richard Florida (Director of the Martin Prosperity Institute at the University of Toronto) and Bruce Katz (of the Brookings Institute who has authored several books including “The Metropolitan Revolution: How Cities and Metros are Fixing our Broken Politics and Fragile Economies”), they focused on the asset based community development that several cities have successfully deployed. Here is a link to the PBS piece:

http://www.pbs.org/newshour/bb/nation/july-dec13/fiscalhealth_07-29.html

For example, Pittsburgh reinvented itself with the decline of the US steel industry and focused on healthcare, education and its beautiful three rivers location. Cleveland, who declared bankruptcy many moons ago, also focused on healthcare after the demise of key industries located there. Houston is using technology to drive planning and energy usage as well as developing an innovative downtown with its new arts and sport complexes. Durham, NC has reinvested in an old tobacco mill to make an innovative business, retail, and tourist destination complete with downtown arts and sports venues. New York City made a conscious effort to clean up the city and improve its infrastructure to make it the attractive and safer place to work and visit it is today.

The theme of the experts is the city and community leaders looked beyond politics as this is where they live. They want a safe, healthy and attractive place. They understand budget limitations and look for ways to marry private business, foundation and various levels of government operational and capital investment dollars. These are the paths forward. A path where finger-pointing occurs and the blame game is present has no place in these efforts. If it occurs, it should be identified and ferreted out.

Yes, we do have issues with our cities and counties. And, we will have more bankruptcies. But, we do have opportunities. There is hope as there are numerous places where improvements have occurred. We must work together, though, as if we don’t it makes the path forward more difficult.

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7 thoughts on “The rise in municipal bankruptcies, yet there is hope

  1. I agree with your analysis of what’s behind cities downfalls, but I do think that overly generous retirement benefits will be the main downfall of many more cities in the future. Our local big metropolis, for example, when going though negotiations with the unions 20-30 years ago, gave incredibly generous benefits to the unions, particularly firefighters and police. A big cause was the over the top egos of the city council, and their refusal to hire outside consultants to negotiate for them. So now we have a police chief, “retired” in name only, receiving 100% of his former salary as a retirement, but still on the payroll as a consultant. Routinely fire personnel are retired with 80% pensions, plus 100% free healthcare.

    The fact is, this can’t go on, and cities in similar situations will go broke. The calif. Courts have ruled these pensions must be paid, but the simple question to the courts is, “When the city runs completely out of money, what then?”

    Like most government agencies, everyone is keeping their head in the sand until the inevitible happens.

    Great post, as usual

    • Barney, thanks. You are right about egregious levels of retirement benefits in some places. Several of the California city bankruptcies are due in large part to this issue. What the public may not know, is the generous system can be gamed further with people buying additional service in a city pension plan to recognize their military service, people using unused vacation time to buy or get credit for additional service (or counted as pay) and so on. This is one way those percentages you cite occur. We need to address this issue now while we can and not let the ticking time bomb grow more. Taxpayers want fairness, so a reasonable pension for a loyal employee is fine especially for a deserving firefighter or police officer, but no one wants to fund a windfall for someone. Thanks for your comments, BTG

  2. Portland, about twenty years ago, was extremely fortunate in having forward-thinking planners who put in place our mass-transit system…with options for expansion. One can move about the downtown area virtually car-free, and outlying areas (including Portland Airport) conveniently reached by a 45 minute MAX train ride.

    As a downtown Portland dweller (and now careless) I personally see what a difference it makes, and has made, during the economic downturn. Every positive “change” talking-point in your post, BTG, has happened or is happening here in the Pacific Northwest.

    • Raye, the Pacific Northwest, especially Portland, is widely known for its forward thinking planning. It is an exemplar for others. Your mass transit example is a good one. One of the reasons our former Mayor, Anthony Foxx is the new transportation secretary is his embrace of the light rail (which was spawned by his predecessor, a moderate Republican before he forgot who he was as governor) and expanding it up a new corridor. The urban development around the first corridor has been tremendous. Keep beating on the Portland drum. It is well deserved. Thanks for writing, BTG

      • After reading Barney’s comment re: retirement packages, et.al…..it is also well known that Portland’s Tri-Met retirement/health packages/perks rate second highest in the U.S….one notch below the BART/San Francisco union. THAT will be, may be, possibly could be….our undoing.

      • Interesting. The key is for them to look at the issue now. As of June 30, the markets are well up and recovered from the recession, so the pension plans will be in a much better position today funding-wise than when Obama came into office. I am aware of a city that was not growing, but still needed a strong police force, but had over a 20% of payroll pension cost. They sat down with the police union and said we cannot continue this and we need to do something. So, they developed a capital accumulation plan for new police officers, freezing participation in the now too expensive plan. The key is they sat down with the police union, city council and staff to identify the problem and develop a solution with everyone’s buy-in. This collaborative forward thinking is needed in many places on many issues. Thanks for your thoughts. BTG

  3. Readers, I was reading an editorial this morning about Detroit and was reminded yet again how things are interrelated. One of the bellweathers for the US auto industry which impacted the City of Detroit was back in the 1970s, when Detroit automakers started making less than quality cars. What Toyota experienced over the last five years is what GM went through – they cut corners with suppliers and it started showing. But, Ford and Chrysler did the same. Ford used to have two unflattering acronyms in the 70s – Found On the Road Dead or Fix Or Repair Daily. Some Dodge cars used to cut off in traffic while driving. So, Detroit basically fueled the growth in the Japanese auto industry. It took more than a generation of car buyers for them to start winning back customers with better cars. So, when industry falters, jobs are cut. When jobs are cut, taxes decline. The City and Leader’s Achilles Heel was not recognizing this and looking to other industries as did Pittsburgh when the steel industry took a major hit. Thanks all, BTG

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