Monday, November 19, 2012

The Debt Death Spiral: U.S. City Edition

What Happens When Cities Go Bankrupt?

What happens when public employee unions begin calling too many of the shots in government?
Reuters reports on the backstory of the city of San Bernandino, California’s bankruptcy, which features a lot of politicians blaming everyone else for their dilemma:
Yet on close examination, the city’s decades-long journey from prosperous, middle-class community to bankrupt, crime-ridden, foreclosure-blighted basket case is straightforward — and alarmingly similar to the path traveled by many municipalities around America’s largest state. San Bernardino succumbed to a vicious circle of self-interests among city workers, local politicians and state pension overseers.
Little by little, over many years, the salaries and retirement benefits of San Bernardino’s city workers — and especially its police and firemen — grew richer and richer, even as the city lost its major employers and gradually got poorer and poorer.
Unions poured money into city council elections, and the city council poured money into union pay and pensions. The California Public Employees’ Retirement System (Calpers), which manages pension plans for San Bernardino and many other cities, encouraged ever-sweeter benefits. Investment bankers sold clever bond deals to pay for them.
Meanwhile, state law made it impossible to raise local property taxes and difficult to boost any other kind.
No single deal or decision involving benefits and wages over the years killed the city. But cumulatively, they built a pension-fueled financial time-bomb that finally exploded.
How out of whack did things become? Reuters describes how the city’s retired public employees became members of the Top 3.6% of individual income earners in the U.S. (and Top 12.9% of American households):

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