U.S. Municipalities Falling Like Dominoes
Posted on March 21, 2012 at 11:38 AM EDT
I’ve been talking for some time about U.S. municipalities and their budget deficit problems. Just recently, I cited a Moody’s Investor Services study that highlighted how the number of bankruptcies has doubled in the last two years after remaining steady over the previous 30 years! Unfortunately, the cracks are starting to widen with budget deficits. Pensacola, Florida, is situated at the westernmost point in the Florida Panhandle. With it being the envy of many outside of the city because of its location, the roughly 55,000 residents would probably argue otherwise when discussing the municipality’s budget deficit and the payments on their municipal bonds. The pension liabilities of Pensacola are mounting to the point where, this year, the property taxes that the city takes in are not enough to cover the payout of pensions. This is before all of the other expenses and services the city has to deal with in the budget deficit. The budget deficit facing the city is enormous. The solutions being tabled are going to be painful if instituted, but necessary when one considers that the pension fund is deeply underfunded due to the market crash of 2008 and low interest rates, worsening the budget deficit. The options the city is tabling include raising taxes, cutting pension benefits, and raising the retirement age to be eligible for benefits (the norm with most municipalities these days). Naturally, none of these are sitting well with the unions and Pensacola’s citizens—budget deficits and municipal bonds be damned. As has been customary since this crisis began in 2007, many municipalities have cut defined benefit retirement plans (traditional retirement plans most people have been accustomed to) for new municipal employees, to cut costs. However, those who were on those plans still have to be paid. Since the crisis, municipalities (as budget deficits grew) and corporations couldn’t afford traditional retirement plans and are now opting for new employees to handle their own retirements. One study revealed that defined benefit retirement plans declined from 62% in 1983 to just 17% in 2007 (source: Boston College Center for Retirement Research). I have a feeling that 17% will be dropping rapidly right into 2012. Detroit automakers are back on their feet and showing signs of life, but the government bailouts haven’t made their way to the city’s coffers. The city of Detroit says it won’t have enough money to pay its bills by April and could be in a position to declare bankruptcy by the end of June—its budget deficit proving overwhelming. The city admits that income and sales tax from automakers has increased lately, but not fast enough or nearly large enough to make up the shortfall in its budget deficit. …
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