Yesterday I wrote about bankruptcy as a solution to the fiscal problems of the states. Today Bruce Krasting has a timely post on the potential for bankruptcies among cities:
Here is a (surprising to me) chart of both state and municipal revenue for the past few years. Of no surprise is the sharp drop off of revenue at the state level. But the municipal revenue has continued to increase. Given the foregoing discussion on the sources of muni revenue it would seem certain that their income is going to decline in 2011.
I don’t know about city and county governments in other states but in Illinois cities and counties face a serious conundrum. By state law they’re primarily dependent on property and sales tax revenues—they can’t levy income taxes on their own. And the income streams on which those things depend, real estate values and retail sales, are both contracting or torpid.
Not so their expenses. Payrolls are up. Local governments’ share of pension contributions are up. And, worst of all, healthcare expenses, the greatest source of cost increases among local governments, are up.
As I’ve documented here previously, local governments are able to weather the revenue shortfalls resulting from an economic downturn but not the precipitous increase in healthcare costs they’re experiencing. There is no practical way that they can increase revenues to meet those costs.
More Krasting:
Over the past 30 years of the 18,400 muni borrowers only 54 have defaulted on their debt. An admirable track record. One that is unlikely to be continued over the next few years. Not a pretty picture for a muni investor. To top it off BABs (the last pillar of support for munis) is gone. I wouldn’t be at all surprised if some big Muni became the Greece of America in the near future.
I strongly suspect that 54 over a period of 30 years will be looked back on as the good old days.
The mayor of Springfield apparently just killed himself; ain’t going to be easy here. Quite a shame.
I wouldn;t worry about property tax takes falling. Our home value is probably 30% less then when we bought it but our property taxes have increased a total of 12.5% the last two years. (After one year of dropping 0.8%.)
True, state aid could be an issue….but I’m not sure why munis should be running in such a way that requires state aid to break even.
The sales tax losses are pretty immediate; the property taxes, at least around here, stagger in slowly, they will constitute a long-term drag.
I also think a large part of the problem is that munis have immediate responsibilitities for their budget, but those who disagree with their choices will go to the state to lobby for better municipal pensions or tighter controls on taxing power. One of the more difficult issues facing Illinois cities right now are stringent state obligations to fund their pensions, obligations the state doesn’t itself meet. “Do as I say . . .”