The Cities Where Taxpayers Will Get Shorn

Financial ranking reveals rising tide of unfunded obligations
April 6, 2020 Updated: April 7, 2020

Commentary

The U.S. economy is heading into an unparalleled storm that will unhinge the budgets of governments and taxpayers alike. Across the country, a slew of cities are facing dramatic revenue crunches, ordering pay cuts, laying off workers, and enacting hiring freezes.

The CCP virus is the straw breaking the camel’s back, but warning signs were already evident regarding the financial health of U.S. local governments. The ticking time bomb of debt is upon cities now, and it will continue once the health emergency subsides.

As revealed in Truth in Accounting’s fourth annual Financial State of the Cities report, issued in January, 63 of the United States’s 75 most populous cities had insufficient assets to pay their bills in the 2018 fiscal year. In total, U.S. cities have racked up $323 billion in municipal debt, mostly from unfunded retiree benefits such as pensions and medical care. Even that is a low estimate, given misleadingly high discount rates from municipalities.

Which Cities Are Worst?

Truth in Accounting, an educational nonprofit devoted to fiscal transparency, has named the five municipalities at the bottom of the ranking “sinkhole cities.” Even if these cities sold all their assets, they would still leave taxpayers with per capita debts in the tens of thousands.

Worst Cities Based on Highest Taxpayer Burden for 2018

Ranking| City Taxpayer Burden
75 New York City $63,100
74 Chicago $37,100
73 Honolulu $26,400
72 Philadelphia $25,500
71 New Orleans $18,800

 

For example, if New Orleans were to sell its assets, it would have $979.7 million, nowhere near enough to cover almost $3 billion in liabilities. Every taxpayer in the city would have to cough up another $18,800. To compound the problem, New Orleans has a 25 percent poverty rate and has been among the hardest-hit cities in the United States by the CCP virus.

If you think New Orleans is in trouble, take a look at Chicago. The Windy City is one of four cities to receive an “F” grade from Truth in Accounting. If Chicago sold all its assets, it would have $10.7 billion available, yet it owes $45.1 billion. Chicago taxpayers would have to fork out $37,100 each for $30.1 billion in pensions and $684.6 million in retiree medical benefits. People see the writing on the wall, and Illinois is a national leader in outmigration.

The biggest financial basket case is New York City, which also received an “F.” The Big Apple has a $186.7 billion shortfall. As a major U.S. epicenter of the CCP virus, New York City expenses are spiking and revenues are plummeting. The Metropolitan Transportation Authority has already requested a federal bailout.

Why Is This a Problem?

Public-employee unions are among the most powerful special-interest groups in the United States. In addition, the cities with these types of financial problems are home to many elites. They will demand a bailout from working-class Americans across the country to pay the benefits these cities could never fulfill.

Although tempting, perhaps to maintain a veneer of stability, bailing out these cities would set a ghastly precedent. It would come with strings and further centralize power in Washington, and it would incentivize state and local governments to expand welfare benefits without regard for funding. Bailouts would allow cities to kick the can down the road regarding fiscal reform and holding irresponsible city managers accountable.

The conflict between bondholders, public-employees, and taxpayers will get ugly—with all three set to get a haircut. Puerto Rico and Detroit are indicative of the tug of war set to take place. That outcome is icky, but it’s better than sweeping fiscal negligence and deceit under the rug.

What Cities Should Do Instead

If the federal government shouldn’t bail out public-employee unions in cities, what should happen instead? City officials have two real choices: raise taxes or reform retiree benefits.

Cities have only so much capacity to raise taxes without cannibalizing their base, although that will not stop them entirely. Closing loopholes and ending corporate welfare would do the least damage, though it would be politically difficult.

Under the U.S. federal system, cities and states compete with each other to provide the highest possible quality of life with the lowest tax burden: better services at lower prices. The draconian taxes needed to fill these major fiscal gaps entirely would hamper job creation and harm cities’ ability to lure businesses.

As businesses and individuals leave, voting with their feet, resources for public services such as law enforcement and infrastructure dwindle. At the state level, Illinois taxpayers are already witnessing a hollowing out of public services as more of their funds go for past services—to retirees who used to work for constituents.

Alongside smarter tax policies, that leaves retirement-benefits reform as the only realistic approach to fixing these fiscal crises. However, what can’t happen will not happen, and in the near term, there will have to be reductions to payouts, as there have been in Detroit and Puerto Rico.

Many government employees claim to have given up higher private-sector salaries in exchange for better benefits. That is false, particularly since government workers enjoy vastly greater job security. Regardless, the point is moot, since the prevailing payouts are simply unsustainable in most U.S. cities.

These cities have pension plans that promise specific benefits upon retirement, whether there is sufficient money set aside or not, no matter how poorly pension funds have performed. City officials throughout the United States have mismanaged pension funds, both in terms of paying excessive fees and investing too riskily.

Cities must move to defined-contribution plans that resemble the 401(k) retirement schemes many U.S. companies offer their workers. As researchers with the Mercatus Center at George Mason University have pointed out, making benefits depend on contributions and investment returns forces politicos to assume realistic market risks and avoid underfunding long-term obligations. Retirees then get what was set aside from them, no more and no less. Medical benefits can go entirely once the retiree reaches the minimum age to receive Medicare. Some states are already moving in that direction.

The short-term orientation of the electoral cycle incentivizes spending now and making future promises, with an aversion to paying for them. The chickens, however, have come home to roost for freewheeling cities. A prudent taxpayer will avoid the crossfire by escaping hikes. He shouldn’t be on the hook for politicos’ outlandish promises made in cahoots with public-sector unions.

Fergus Hodgson is the founder and executive editor of Latin American intelligence publication Econ Americas. He is also the roving editor of Gold Newsletter and a research associate with the Frontier Centre for Public Policy.

Views expressed in this article are the opinions of the author and do not necessarily reflect the views of The Epoch Times.