Local Governments Choose Bad Over Worse

By Stateside Associates

As state governments continue to deal with budget gaps, so too are the nation’s cities, counties and towns. Local governments’ fiscal concerns mirror what is going on in most states, with employee-related costs for health care coverage and pensions having the largest negative impact on the local government’s ability to fund.

Similar to the states, local governments are taking varied actions to help deal with these costs. Many are requiring employees to pay more for their health care or pensions. A number of cities and counties in California included referendums on the November 2010 ballots to cut public pension costs. In some cities, such as Huntington Beach, California, employees voluntarily agreed to pay more into their pensions to avoid cuts. However, for other local governments, funding pensions has become very difficult to accomplish. The Prichard, Alabama public pension fund ran out of money in 2009 and the city stopped sending checks to retired workers. This is an extreme example, but it shows how some localities must make substantial changes to their pension systems, or risk running out of money.

According to an analysis conducted by Professors Robert Novy-Marx (University of Rochester) and Joshua Rauh (Northwestern’s Kellogg School of Management), underfunded pensions for municipal and local government employees total $574 billion, which averages $14,000 per household. For residents of some large cities, the pension situation is worse. For example, New York City’s unfunded pension liabilities total nearly $39,000 per household. Cook County, Illinois Treasurer Maria Pappas announced June 21 that the debt carried by the various governing bodies within the county total $108 billion, with pension benefits totaling over $50 billon of that amount; $25 billion of that is unfunded pension liabilities. The debt load averages $63,525 per Chicago household and nearly $33,000 per suburban household.

Local governments in some states have asked for help from their state legislatures. June 13, the Rhode Island League of Cities and Towns requested legislation to revamp the rules for municipal pensions, in order to financially assist struggling local governments. In Florida, Governor Rick Scott (R) signed legislation that requires state and local government employees to contribute to their pensions. The Florida League of Cities supported the legislation and participated in the Governor’s bill signing ceremony on June 23.

In these times of tough fiscal conditions, as revenues for local governments are declining and funding from other sources disappearing, are local governments becoming more fiscally conservative? To deal with the shrinking revenues, many local governments have cut spending and instituted hiring freezes, furloughs and/or layoffs. It is estimated that local government job cuts in 2010 and 2011 will approach 500,000. Some localities are also privatizing services, and are looking for other innovative ways to save resources, such as sharing services with other local governments, or even consolidating government functions and/or local governments. The Rhode Island League of Cities and Towns has also requested legislation to make it easier for communities to enter into agreements to share services.

What about increasing revenue? It appears that more localities are looking for ways to reduce spending rather than looking for additional revenues. In an era of falling home prices, property tax-dependent localities are going to find filling deficits with tax increases a very hard sell.

If revenues continue to decline for localities, as predicted, what path will local governments choose? Will we see more requests of state legislators to provide regulatory relief? How long can localities be innovative in finding fiscal savings before they are forced to find ways to increase revenues?

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