After Delaying Inevitable Budget Woes, Municipality Woes Come Crashing Down

Cities and states around the country are again facing massive budget deficits. Cities are looking to cash-strapped states for bailouts. It's a recipe for fiscal disaster but it isn't one that couldn't have been predicted.

The stimulus package of 2009 - the ARRA of 2009 - including hundreds of billions of dollars in transfer payments to prop up cities and states. It was meant to keep them afloat, but instead of using the money to close budget deficits and curb spending to rectify awful fiscal positions, some cities and states increased spending precipitously.

That includes New York State, where the budget continued to bloat by billions that the state simply didn't have.

Now, many of the same cities and states are begging for a bailout because they can't close their budget deficits.

The increasingly common pleas for state assistance — after two relatively quiet decades — reflect the yawning local budget deficits that have appeared in the last two years.

As tax revenue has fallen, the cost of providing labor-intensive government services, like teaching and policing, has proved hard to reduce.

The programs, which vary by state, generally allow troubled communities to tap emergency credit lines while restructuring their finances with some form of state oversight.

Many places may indeed bridge shortfalls and make necessary changes in services.

But some public finance experts worry that the states, mired in their own financial problems, will not force communities to attack their problems head-on and solve them. If states let towns keep borrowing, without acknowledging the magnitude of the towns’ existing debts — like the pensions they owe retired public workers — they might never solve their problems and just keep drawing on the states. They could end up like miniature versions of Fannie Mae and Freddie Mac, stuck in conservatorships under government oversight with no clear way out.

Better off in bankruptcy court?
“It’s like throwing you a life preserver but never pulling you into the boat,” said Daniel Miller, a certified public accountant and the city controller in Harrisburg. He says he believes that the city might be better off in federal bankruptcy court.

Worse yet, the municipal requests for state assistance could spell problems for already beleaguered state finances. One head of a municipal bond trading desk at a major Wall Street firm said he worried more about problems bubbling up from the local level than he did about the possibility of a sudden state collapse.

If the downturn is prolonged and deep, and local governments fail to act aggressively, he said, dozens of small communities could be pushed into the arms of a state, weighing it down so much that it, too, would need a bailout. Something like that happened in Arkansas during the Great Depression, causing the only default by a state on general-obligation bonds in United States history.

Restructuring only works when the cities and states can make major changes to contractual relationships with various unions that represent teachers, law enforcement, fire and other municipal workers. The benefits bubble that has led to driving up pension obligations is untenable and something has to give.

Allowing municipalities to restructure by taking on still more debt isn't a workable solution either. Many cities are simply incapable of taking the steps necessary to cut the structural deficits and attacking the problems that cause out-of-control spending.