Good Money After Bad: How NOT to Bail-out Local Governments
As Published in the San Diego Daily Transcript; November 20, 2008
Thursday, November 20, 2008
In a recent letter to Treasury Secretary Henry Paulson, Mayors Michael Nutter of Philadelphia, Shirley Franklin of Atlanta and Phil Gordon of Phoenix asked for some of the $700 billion of bailout money to help their cash-strapped cities. Mayor Chuck Reed of San Jose, CA recently suggested that as the 10th largest city of America, his city “deserved” $14 billion. Other mayors, city council members, and city managers are making trips to Washington, putting their hand out and talking about the pain that slashing their budgets will cause on Main Street.
While cities need help, Capitol Hill should not write a blank check.
One of the biggest flaws with the proposal put forward by Mayors Nutter, Franklin and Gordon is their call for the federal government to provide a low interest loan to public pension systems that have unfunded pension liabilities. That proposal, if serious, is simply staggering. A 2006 report had the total unfunded liability of municipal and state public pension plans at more than $1 trillion. That was before the recent market meltdown.
Moreover, the proposal would not provide much of an economic stimulus. Because of the way that pension plans “smooth” investment losses and the lag between portfolio declines and the requirement for increased employer contributions, the investment losses we have experienced this fall are not going to immediately impact most city budgets for many months. In the case of the City of San Diego, the dramatic downturn in the value of assets in its pension plan will not increase costs to the City until June 30, 2010. Even then, during the next 20 months there are concrete steps, including continuing to hold the line on salary increases and continuing to look to become leaner and more efficient, that can be taken to lower what could be the $38 to $75 million hit the City could face.
It is also wrong to ask taxpayers to bail out poor decisions by municipal governments and a flawed retirement system. Since benefits are guaranteed and employers almost always are the ones asked to make up shortfalls when assets under-perform, taxpayers assume all of the downside risk in defined benefit plans. Absent reforms, for example mandating a greater contribution from employees covered by these plans or requiring a public vote before enhancing benefits, there is a likelihood that unfunded liabilities will reemerge. Even better, in our opinion, would be to transition these plans from defined benefit plans to defined contribution systems. The proposal by Mayors Nutter, Franklin and Gordon to federalize the debt violates the first rule of holes - when you are in one, stop digging.
Far better is the other part of their proposal - to leverage federal funds to speed up groundbreaking on billions of dollars worth of new infrastructure projects. In the case of the City of San Diego, its FY 2009 budget identified $587 million in capital improvement projects such as road expansions, water and sewer upgrades, and accelerating work on the City’s deferred maintenance backlog. Many of those projects are at risk as a result of tightening credit markets and a decline in revenue generated from private sector construction. Governments throughout the region have done a good job in getting permits in place so that many of these projects are good-to-go as soon as funds are available. Having the federal government help get those projects moving would be a way of immediately injecting new money into the economy and, most importantly, would provide San Diegans with tangible assets that would benefit the region for years to come.
Getting through the current crisis is going to require fundamental restructuring and rethinking on the part of municipal government. Rather than only putting their hands out or cutting budgets without a strategic vision, mayors throughout the country and the region need to use this crisis as an opportunity to fundamentally transform their organizations and refocus attention on core municipal services.