How did these mistakes occur in the first place? Michael A. Pagano, dean of the College of Urban Planning and Public Affairs at the University of Illinois in Chicago, blames the Me Generation — baby boomers like himself. “We expected to have everything handed to us,” Pagano contends. “We were products of the ’50s and ’60s, which saw the largest growth rate in GDP in history, and assumed the trajectories would continue. We figured pensions would grow 8 percent forever because that was the historical average. We gave away free health care because it was good for society. We were extremely generous — to ourselves.”
Today those decisions were woefully short-sighted. Says Pagano, “We never expected we’d live well into our 90s, GDP would stall, medical care costs would skyrocket and there’d be no money left to make good on the promises. We had designed these [pension and health care] systems that didn’t require the legislatures to make hard choices. Now we’re left holding the bag.”
Vallejo: Unsustainable Contracts
Vallejo, Calif., is a case in point, forced to seek bankruptcy protection in May 2008. “We had labor contracts in place that were unsustainable,” says finance director Deborah Lauchner. “We owed our police, fire and other union members about $79 million, and we had only about $78 million in the general fund. Then the recession began and our revenues took a dive. We were a month away from running out of cash.”
Like elsewhere across the country, property- and sales-tax revenues were increasing at a 6 percent to 8 percent annual clip in Vallejo, before tanking in 2008. “We lost 30 percent of our budget in one year just from shrinking property-tax revenues,” Lauchner says. “No one expected such severe decreases because everything was going so well. Sales-tax revenue also dried up, as people stopped buying cars and the malls became ghost towns.”
She e-mailed some figures indicating that the city had budgeted $19 million for property taxes and $13.9 million for sales taxes in fiscal year 2007/08. Together, the revenue accounts for nearly 40% of the budget. When the dollars were counted at year-end, they were short by more than $5.2 million.
Vallejo did what it could — cutting city payrolls and trimming the ranks of firefighters, police officers and other union personnel. The labor unions didn’t take the news lightly — promises were made, after all. But, as Lauchner reiterates, “We simply had no money left. We had labor raises coming in place and the unions were unwilling to negotiate. Our expenditures exceeded our revenues by a substantial margin. If you’re out of cash and you can’t pay the bills, something has to happen to continue to pay the bills.”
That “something,” of course, was Chapter 9. “We’re now able to negotiate with all four labor unions to get some things back in line,” she says. “We still don’t have a sustainable budget yet — for instance, we just passed a budget with a $5.2 million placeholder of expected employee concessions. We’re not done negotiating.”