Bankrupt Cities--"The Tip of the Iceberg"?

I can’t resist the temptation to climb up on the old soap box briefly today.  Earlier today there was an article published on Yahoo Finance’s “The Daily Ticker” about municipal bankruptcy declaring that it’s the “tip of the iceberg”.

In the article, Richard Brodsky, senior fellow at and former 14-term New York State assemblyman, said "This is the tip of the iceberg for different reasons in different places.”

The article specifically referred to this week’s decision by the City of San Bernardino, CA to seek Chapter 9 bankruptcy protection. “San Bernardino, Calif., is the latest municipality to seek bankruptcy protection for its $45 million budget shortfall, following Mammoth Lakes and Stockton, which was the largest U.S city to ever go bust. Bankruptcy filings by these three California cities have raised questions about the scope of budget issues on the local level and whether there will be more,” the article said.

That’s well and good but many experts, including Brodsky, are predicting even more filings or other maneuvers to escape budget disasters than the cities in California—although California is arguably the most at risk state and its cities the one’s which are also most in peril.

San Bernardino’s woes are shared by cities such as Scranton, PA and North Las Vegas, NV both of which have attempted to take measures other than bankruptcy which is an option not available to municipalities in those states.

According to the article, Brodsky said that years of declining property values after the housing bubble burst  have left many cities strapped for cash. “If property values fall, so do revenues collected from property taxes. Additionally, while people do love their services, there's been a growing distaste for increasing tax revenues to pay for those benefits.”

And that’s my point of departure with this expert and others who are out there blaming these municipal failures on traditional “tax and spend” liberals.  The fault comes right back to anyone who was in elected positions passing ordinances and laws; setting policy and negotiation labor contracts from the mid-90’s through today.

Around the “turn of the century” I recall seeing and hearing news reports and “experts” addressing the question of “will the real estate bubble burst?”  Typically the answer was, “no”.  These experts in finance and business were calling for continued double-digit appreciation in real estate for the foreseeable future and beyond.  Budgets in government were predicated on it.  Bond issues were based on this ever-upward spiral.  Public employee retirement programs were banked on it.

And each time I would hear something like that I would cringe.  “Hell, yes!”  The bubble has to burst.   What goes up must come down.  Budget for a worst case scenario on income and make expenses match up.  I’m a huge believer in budgeting other peoples’ money as conservatively as possible.

Yeah, this is going to be the tip of the iceberg.  I wouldn’t be surprised at all if the entire state of California gets brought down by it.  Why?  Because NO ONE in government, anywhere, thinks to be a good steward of “the people’s money”. 

There are far too many public employees who live better than the people they serve.  There are far too many who receive much better health care and retirement benefits too.  It used to be that public employees made enough (barely) to live on but were assured of health care along with a decent retirement for their years of public service.  But public service was construed to be a bit of a sacrifice or trade-off—security after age 50 for 25 or 30 years of service beforehand.  Ain’t nothing wrong with that either.

Used to be that infrastructure was planned based on long-term needs.  It was added to new developments using “special assessment districts” or in commercial/industrial parks with tax increment finance. 

But, the bubble burst.  Our days of “sunshine and lollipops” and “everything’s going to be peachy-keen forever” were a fiction—a fiction that only someone intent on fooling themselves would advocate, believe or act favorably upon.  And yet governmental units at the city, county and state level all over America have been doing just that for a couple of decades.

But to hear so many tell it, it’s all Obama’s fault.  Bull-hockey.  It’s our fault.  We let it happen.  We got too busy living the good life to be involved or to scrutinize what was going on in our city or county.  We bought in and drank the kool-aid. 

And there’s not going to be too many “do-overs”.  Get ready to pull in your horns.  And folks, if you want to scream and shout “Save Our Schools”, “Keep Class Size Down”, “Lower the Crime Rate” or whatever make sure you know how you’re damn well going to pay for it first—that better be written in big letters on the other side of your placard.

Because yeah, this is only “the tip of the iceberg”.

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Comment by Lefty McGee on July 14, 2012 at 11:09am

I work in an industry, for a company that sells technology in commercial, nonprofit, education and government markets.  In my opinion, the monetary woes of the public sector are not the tip of the iceberg, but instead the trailing edge of the economic woes suffered by commercial entities and people.  Of course it all one great big organism. The woes of the various governments are the pain I feel in my armpits from having to use crutches after breaking my leg.  The broken leg is the meltdown in banking, the reduced disposable income of the people, the fallout of an outsourced economy.  The recovery corollary follows this train as well.  It will be years after the commercial sector recovers before the public sector is no longer feeling the pain.

Comment by Walter Blevins on July 14, 2012 at 11:51am

Thanks Lefty.  The "tip of the iceberg" I refer to is Brodsky's quote meaning that the several cities so far seeking relief through Chapter 9 are the tip of the iceberg of municipalities and other governmental bodies which will be seeking this or other relief because of budgetary woes.  While we may look to the private sector as the "big bad wold" (which most assuredly it is) we can also look at that old nemisis "greed".  Personal greed is what got people into messes with their mortgages.  When the "chickens came home to roost" is when the ground caved in forming a huge financial sink-hole.

About 10 years ago when people were surfing the wavecrest of rapid appreciation of real estate, low interest rates and "liars loans" it was not unusual for me to have customers come into the car dealership where I worked seeking to buy a new car for "cash".  The "cash" was home equity.  They either were ignorant of the fact that they were amortizing the vehicle for 30 years or ignored it.  In fact, when I suggested this to a couple of customers the left in a huff to buy elsewhere.  I quickly learned to keep my big mouth shut.  The worst of it was seeing the same people back a year or so later to do the same thing all over again.  And over the last several years I have seen people unable to qualify for a decent interest rate because of having done precisely those things several years previously and got caught "underwater" losing all.

One of the things that concerns me most is as you said the "woes of the various governments".  It is these woes which may "sink the ship" for they are the resources by which civil society exists, order is maintained, sanitation is assured and children are educated.  Government drank the kool-aid too and bought into the same line of garbage which many consumers did rather than staying within its means and being a sound steward of the people's resources.

Thanks again, and sorry for getting on my soap box again.

Comment by Alan Milner on July 18, 2012 at 1:10pm

Great post. Great reply from Lefty.

Years ago, my father called me to refinance his mortgage. I couldn't do that because I wasn't licensed in Florida back then. When I asked him why he wanted to refinance, he told me that he wanted to buy a new car. I started to explain to him that he was putting a depreciating asset with a ten year life span into a 30 year mortgage so that he would be paying off that car for the next 30 years. He laughed at me and said, "I'm not going to be paying off this note. You are!"

He was right. My son is now driving that same 1999 Buick, and I am living in the house that my parents left me....until Wells Fargo takes it away when they finish foreclosing on the reverse mortgage.

Comment by Walter Blevins on July 18, 2012 at 1:33pm

Alan--I appreciate your kind words.  Thank goodness that my Mother's house in Florida is paid for--when she and my father built it in 1974 they were able to pay cash.  A few years back it was "worth" about $300K.  Now, it's worth maybe $200K and the "family trust" owns it.  Mom is 81 but she's pretty damned sharp and smart!  Her 4 year old Caddy was bought with cash and she's getting the bug to replace it.  I suggested that with only 13,000 miles on it that she might as well keep on driving it.  (Hopefully she will). She's in far better shape financially than I am.


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