Cities on the Brink

Municipal finance chiefs are fighting to keep their troubled cities solvent. Sometimes it’s a losing battle.

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.”

13Oct_Cities_VallejoLike 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.”

3 thoughts on “Cities on the Brink

  1. I was the city manager in 2008 that recommended BK for Vallejo. We had no choice; the city ran out of money to pay for union contracts. The city labor unions were stupid and they could not comprehend the math involved in operating a city.

    Basically, the math goes something like this: The fire union charged their members $175.00 month x 12 months/year x 100 fire fighters x 2 ( election cycle every 2 years) = $410,000. Police union charged $125 per month x 12 months/year x 145 cops x 2 years (election cycle once every two years) = $435,000. Together these two unions bought their elected Council members every 2 years since they financed the local elections by the tune of $$845,000 for every election. No one could compete with the fund raising. They controlled the City Council, their own contracts and the rest of the city too. Hence, their contracts were not sustainable and bankruptcy was the result. The Fire and Police union cooked their own “petard” as the saying goes.

  2. A couple of comments related to the County of San Bernardino: the County did not borrow $37M to help solve its budget problem, it actually prepaid $37M in debt using one-time funds to generate ongoing savings to help bring the budget in line. Second, the County is moving away from cafeteria style benefit plans, which are pensionable in our system and thus cost substantially more.

    These types of actions, combined with cooperation from employee bargaining groups and an elected Board willing to make difficult financial decisions in a timely manner have allowed the County to continue to adopt structurally balanced budgets throughout the economic downturn.

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