Local Governments Face Fiscal Desperation Amid Soaring Pension and Retiree Health Costs

I've got two related pieces that were front-page news stories yesterday at the Los Angeles Times and the New York Times, respectively.

First, at LAT, "Stockton residents watch their port city slip away."

Read it all at that link. Stockton's on the verge of declaring bankruptcy and the city government is in mediation over its debt obligations:

Within the next three months, Stockton could become the nation's largest city to file for protection from creditors under U.S. bankruptcy code. Using a new California law, the City Council is trying to slow or stop the bust by entering mediation with creditors, including public employee unions. In the meantime, the Central Valley port city of 300,000 has suspended several bond payments and will not cash out vacation or sick time for employees who leave.

And also at NYT, "Deficits Push N.Y. Cities and Counties to Desperation":

Even as there are glimmers of a national economic recovery, cities and counties increasingly find themselves in the middle of a financial crisis. The problems are spreading as municipalities face a toxic mix of stresses that has been brewing for years, including soaring pension, Medicaid and retiree health care costs. And many have exhausted creative accounting maneuvers and one-time spending cuts or revenue-raisers to bail themselves out.

The problem has national echoes: Stockton, Calif., a city of almost 300,000, is teetering on the verge of bankruptcy. Jefferson County, Ala., made the biggest Chapter 9 bankruptcy filing in history in November and stopped paying its bondholders. In Rhode Island, the city of Central Falls declared bankruptcy last year, and the mayor of Providence, the state capital, has said his city is at risk as its money runs out.

New York City’s annual pension contributions have increased to $8 billion from $1.5 billion over the past decade.

“We really are up against it,” Mayor Michael R. Bloomberg said during a recent trip to Albany, urging the state to reduce pension benefits for future public employees. In a radio interview on Friday, Mr. Bloomberg noted the spreading financial woes of local governments, saying, “Towns and counties across the state are starting to have to make the real choices — fewer cops, fewer firefighters, slower ambulance response, less teachers in front of the classroom.”

And Thomas S. Richards, the mayor of Rochester, recently described a grim situation facing New York’s cities in testimony to the State Legislature, saying, “I fear that Rochester and other upstate cities are approaching the point of financial failure and an inevitable financial control board — as is the case in Buffalo — unless something is done now.”

This is the big shakeout.

And to fix things will require massive reform --- and changes in expectations for the pay and benefits for public workers. I'm hearing dire chatter about the expected fiscal situation in California over the next year, and the dreaded notion of "reductions in force" (layoffs) is being mentioned a bit more often. In the end it will be a Schumpeterian period of creative destruction, where the market forces major changes on the public sector. It's basically like a payback after years of essentially socialization of the economy. And while this process is going to take a while, it'll be a good thing. It's a rationalizing process, one that's completely foreign to the public sector consciousness.

Amazing, isn't it?