By Rex Sinquefield, April 5, 2013
Those of you who have been following me know that about half of my columns deal with California’slackluster leadership and its resulting failed, irresponsible tax-and-spend policies. And, while I would prefer to shift my focus to other states and issues, this week’s Golden State-related headlines are — quite simply — impossible to avoid.
The leadership vacuum that exists in our country’s most populous state seems to have trickled down to local municipalities. Sadly, it is hard-working taxpayers and small business people who will pay the price for municipal ineptitude.
Tuesday, a U.S. Bankruptcy Court judge ruled that Stockton, California, may move forward with its Chapter 9 bankruptcy, which the city filed last summer.
Municipal fiscal crises seem to be spreading across the Golden State like wildfire. Stockton joins three other bankrupt California municipalities: Atwater, SanBernardino, and Mammoth Lakes.
The causes of Stockton’s crisis are being debated, but, without a doubt, two of the most significant contributors were recently identified by ReasonOnline, the free-market media outlet:
- unmanageable public employee pension debt
- out-of-control salary obligations
Stockton’s pension and other benefit commitments alone amount to more than $800 million – that’s huge for a city with a population of under 300,000. Without a doubt, it is the unbridled, irresponsible actions taken by its elected leaders that directly caused Stockton’s crisis.
What makes Tuesday’s ruling so worrisome is that bankruptcy court judge Klein’s decision will allow the city to rid itself of its debts without requiring it to fix the real problems that led to its insolvency. The message is loud and clear to cities across the state: “You too can avoid messy, politically difficult fiscal policy changes and attempts to reform unsustainable pension systems. Filing for protection under Chapter 9 of the federal bankruptcy code is your easy way out.”
It will take a titanium backbone, a strong political will, and a clear commitment to developing long-term economic development policies for leaders to undo the years of mismanagement of our cities and within their pension funds. In less than three years, there have been 33 municipal bankruptcy filings across the United States.
Though some cities’ have traveled unique paths on the way to fiscal hell, in many cases, the pension crisis that was predicted more than a decade ago is upon us, and taxpayers in each of those cities and states will pay for the fiscal mismanagement. At the very minimum, city governments should ensure that local leadership can manage 100% of their revenues, along with their liabilities.
A good example of this is the passage of Proposition A in St. Louis, Missouri. The successful effort returned control of the St. Louis Police Department from the state to the city of St. Louis. This move allows for greater efficiencies and accountability in the management of the department. It also saves the state and local taxpayers millions of dollars.
When looking to where the next municipal bankruptcies may occur, one key indicator lies with public pensions that exist in an unsustainable environment. Escalating and unmanageable public pensions cannot be fixed overnight. Payouts are guaranteed and therefore cannot be rescinded.
Only about half of the states have laws that govern municipal bankruptcies. Other financially distressed municipalities are taken over by state-appointed emergency managers. In Michigan, six local municipalities are under direct control of an emergency manager. In some cases, this would be the better path — but only if the new manager is dedicated to making the hard decisions and not afraid of the bare-knuckled political fight.