THREAT: Pensions, Loss of Tax Revenue Put Other Cities at Risk for Bankruptcy

Daily News (Los Angeles, CA), July 15, 2012 | Go to article overview

THREAT: Pensions, Loss of Tax Revenue Put Other Cities at Risk for Bankruptcy


Don't be surprised if more California cities go belly up.

Certainly a number of experts around the state won't be. The pressures that pounded San Bernardino, Stockton and Mammoth Lakes into bankruptcy mode aren't much different from those threatening other cities around the state: stagnating tax revenue, spiraling pension obligations and decreased financial support from the state, among others.

"It seems inevitable that there will be more bankruptcies," said economist Ed Leamer, director of the UCLA Anderson Forecast, which studies the regional and national economies.

"Our leaders have made budget commitments premised on optimistic and unrealistic expectations about future revenue growth and future gains in the stock market that aren't materializing and are not likely to materialize."

Predicting which cities are next to fall, however, is difficult, he said.

San Bernardino's looming bankruptcy, for example, was preceded by little warning, though the city was known as one of the epicenters of the housing foreclosure crisis.

Dwight Stenbakken, deputy executive director of the League of California Cities, agrees other cities might be just as vulnerable, but it's hard to know for sure.

"We don't know of any cities that are at this point seriously considering bankruptcy," he said. "Usually cities, if they're in financial trouble, they're reluctant to let anybody know until they finally make the decision."

"We might have a few other bankruptcies," he said. "It's not entirely impossible. ... But I don't think we'll have a great number of bankruptcies."

Mammoth Lakes is somewhat different because its bankruptcy decision was driven by a $43million court judgment that was many times larger than the tiny city's total budget.

Economy is key

Leamer suggests it would take two national developments to prevent more cities from collapsing.

First, the economy overall has to improve, bringing more tax revenue into municipal coffers.

And second, the equities markets have to show a stronger rebound, to boost the performance of government pension funds.

Pensions, in fact, are one of the thorniest issues facing city managers because they represent long-term legal obligations that can't simply be dropped by a city council vote.

Many cities took on generous pension obligations when the booming stock market was powering their investment portfolios, only to be forced to subsidize the funds when the market tanked.

"Stockton and San Bernardino took some risks that turned out badly, but almost every city in the state faces labor and pension challenges (and) the same overall economic challenges and the same difficulties that the state has put in their lap," said Dan Schnur, director of USC's Jesse M. Unruh Institute of Politics.

"These two cities might have been the most endangered, but no city is completely safe," he added.

In Los Angeles, for example, pension obligations sap about one- fifth of the general fund, diverting money for other services, according to the city administrative officer, Miguel Santana. Earlier this year, he warned the city could follow in Stockton's footsteps if it doesn't boost its bottom line.

He has proposed raising $100million more in documentary transfer taxes, pressing unions for more concessions on health benefits and scaling back pension benefits for new hires.

Jessalynn Moro, managing director for U.S. public finance at Fitch Ratings, noted, "The largest spending item for local governments is related to labor, which includes not only pensions but salary increases that - depending on the contract - can be quite burdensome."

Daniel Mitchell, professor- emeritus at the UCLA Anderson Graduate School of Management, blamed poor planning by those who negotiated the contracts.

"There is the Warren Buffett quote that when the tide goes out, you find out who has been swimming naked," he said. "Pensions are a problem because they weren't properly funded in the past, and now the bills are coming due when dollars are scarce. …

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