Thursday, January 06, 2011
All Economics is Local
The straits of cities and counties are hurting the recovery
Nov 18th 2010 | Los Angeles | from PRINT EDITION
Blame it on City Hall
AMERICA’s most sordid government scandal of the year was probably one that took place inside one of its tiniest governments: that of the city of Bell. Bell is really more of a blue-collar neighbourhood within the vast conurbation of Los Angeles than anything recognisable as a city. But the city elders, eight of whom are now awaiting trial, nonetheless paid themselves outrageous pensions and salaries—almost $800,000 a year in one case, about twice what Barack Obama makes—while fleecing residents in countless innovative ways.
Bell is a reminder that local government can cause big problems. There are roughly 90,000 local governments in America, mainly cities, counties and school and utilities districts. Together with the 50 state governments, they account for 15% of total employment. But whereas the private sector did most of its job-shedding early in the recession and is now slowly hiring again, state and local governments began lay-offs later and still have far to go. The National League of Cities thinks nearly 500,000 workers in local government will lose their jobs in the current and coming fiscal years.
The main revenue sources of local governments are sales and property taxes. Sales taxes dropped along with consumer spending and remain depressed. Property taxes only began falling some time after the housing bust, because the houses first had to be reassessed at their lower values. But now they are down for the foreseeable future. So are other local revenues, such as hotel fees, which depend on travel.
These revenues are falling just as many costs are rising. Unemployment benefits are a federal matter. But cities, counties and school districts, like states, showed indecent largesse during the boom years in their pension promises, often using wildly unrealistic investment assumptions.
The result is budget deficits at the local as at the state and federal level. But local and state governments cannot legally run deficits. Nor can they easily declare bankruptcy. Each state has different laws about whether and how municipalities may file for bankruptcy. But even when a state allows it, this results in a gauntlet of legal woes, requiring insolvency tests, negotiations with bondholders and so forth.
Most cities are cutting costs by laying off workers instead. Tom Cochran, the director of the United States Conference of Mayors, which represents 1,207 American cities (those with 30,000 or more residents), says art programmes are typically cut first, then library hours. Rubbish may be collected less often, sewage pipes fixed more slowly and staff sent home on certain days. When firefighters and police face cuts, cities can become more dangerous.
To examine other options, the Milken Institute, a think-tank in Santa Monica, recently convened a forum of state and local officials. There was no single big idea. Municipalities should adopt better accounting standards, dole out saner pensions and start rainy-day funds—all of which might help in recessions yet to come.
They might put fewer people in county jails or broaden their revenue base by extending sales taxes to services (which many currently exempt). They might even merge with other municipalities to eliminate duplication of services. That can be risky, however: a city called Maywood outsourced its administration to a neighbouring city this year, but that neighbour turned out to be none other than Bell.
The other option is to ask the federal government for help, though given the mood of the electorate regarding stimulus and bail-outs, that would be controversial. One idea floated at the forum would thus tie federal aid to specific covenants (such as pension reform), as the International Monetary Fund or World Bank does when helping countries. Then again, that sometimes leads to riots.
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