The Fiscal Condition of American Cities

The Fiscal Times has produced an analysis of the fiscal condition of large American cities. As will be surprising to practically no one, at least no one who reads this blog regularly, Chicago’s finances are in the worst shape of any American city. However, as may be surprising to some as it was to me, New York City is right behind Chicago:

While Chicago’s place at the bottom of the list is unsurprising, New York City’s position — just one step above — was unexpected. An extended bull market and soaring real estate prices have pumped money into the Big Apple’s coffers. Total municipal revenues rose from $60 billion in 2009 to $81 billion in 2015. But the city has been spending the money almost as quickly as it has been coming in.

At the end of its 2015 fiscal year, the city’s general fund reserves amounted to just 0.67 percent of expenditures — well below the Government Finance Officers Association recommendation of 16.67 percent (equivalent to two months of spending). A city’s general fund is roughly analogous to an individual’s checking account.

New York City also carries a very heavy debt burden. According to a report issued by City Comptroller Scott Stringer, New York’s per capita debt greatly exceeds that of all other large U.S. cities, and is even 50 percent higher than that of Chicago. But the comptroller’s report only focuses on bonded debt. Government financial accounting standards require cities to report other long-term obligations such as pensions, compensated absences for municipal employees (accrued sick and vacation leave payable at retirement) and “other post-employment benefits” (or OPEB).

It is New York’s OPEB obligation that really sets the Big Apple apart. In 2015, the city’s OPEB liability was $85 billion — roughly equivalent to its bonded debt.

The large OPEB liability is driven by the size of the city’s workforce and the relatively high cost of health care in New York. According to its most recent OPEB Actuarial Report, the city is providing retiree health benefits to 222,000 retirees, while another 315,000 current and separated employees are potentially eligible for future benefits. In 2015, benefits per retiree ranged as high as $17,000 a year (for workers who were not yet Medicare-eligible and who had eligible dependents).

When a city has prospered as much as New York has over the last 10-15 years and it still has fiscal problems, it’s doing something wrong. I’m in no position to prescribe a remedy for New York’s problems but Chicago’s situation is much worse. It is a city in dire financial straits in a state in dire financial straits. The city and the state are losing population. Chicago already has the highest sales tax of any major city, is nearing the limit of its ability to increase property taxes, and doesn’t have the power to enact a city earnings tax. That’s why the mayor is pushing increases in fees for city services.

Every measure that’s within the city’s power is terribly regressive. Sales tax depends on the volume of retail sales which is indirectly related to population. Property values vary with the market but ceteris paribus when the population increases they rise and when it falls they decline. Fees vary with use but that’s dependent on population, too. In other words all of the underlying factors in Chicago’s revenues are declining, too.

The city can’t borrow its way out of its problems, either. Its credit rating is too low which means it pays too much to borrow. The state and federal governments are our only hope for relief. The state has been supine for nearly two years. We’re losing what little leverage we had at the federal level.

Magic 8 Ball says, we’re behind the 8 ball.