Then there were three. This week, San Bernardino became the third California city to file for bankruptcy as a result of unrestrained government spending. It was preceded by the cities of Vallejo and Stockton. What economists and other cities are wondering is if there is a pattern developing or if this was just a fluke. If it was just a fluke, there is nothing to be worried about. On the other hand, if this is a glance into California’s future, we will be living in a real fiscal nightmare.
The usual suspects for this fiasco were rounded up to see if they had any part in this mess. And as usual there was a lot of finger pointing going on. Some of the suspects include more than generous public salaries, inadequately funded public pension funds, and health benefits both for present public employees and those who have retired. Another suspect is the decline in property values and the resulting loss of tax revenue. In addition, when unemployment soared, private spending slowed down and with it came a reduction in sales tax revenue. In short, there were many players in the perfect storm leading to bankruptcy.
These cities said “let the good times roll” assuming that tomorrow would be brighter than today. A new mantra that real estate always increases in value, and that employees can continue to expect wage increases, replaced the old adage of “what goes up must come down.” With the new mantra firmly ensconced, promises made by city planners cannot now be fulfilled.
These cities ignored the warnings and did not make the necessary fiscal changes. And now they are suffering for it. Will California be next?
California also has a stubborn debt problem that is not going away any time soon. Cuts in the state budget are mostly based on accounting gimmicks, hidden fees, and delaying payments to cities and counties or “borrowing” money from dedicated funds like the gasoline tax. For example, taxes on gasoline and diesel fuel are to be used for road and bridge repair. To my “surprise,” a significant portion of these monies are transferred to the General Fund to help balance the budget. That is why I am not surprised that roads and other infrastructure languish in disrepair. Yet even with all the smoke and mirrors, Governor Brown is still telling us we need to raise taxes this fall.
Our cities are microcosms of the state. The state continues to add burdens to an already woefully unfunded public pension fund. Public unions continue to hold an inordinate sway over financial decisions. And even with all the crocodile tears being shed for cutting the budget and raising taxes, suddenly there is plenty of money for an unwanted, unneeded, and unprofitable boondoggle train. So, it is understandable that cities copy many of the same errors of fiscal profligacy; they are simply following the state’s lead.
These bankruptcies are a wakeup call to the entire state. The fiscal methods presently being used are not working and instead are leading to financial ruin. Returning to the sound policies of the past is a good place to start. Either we make a paradigm shift in the approach of government on both the state and local levels, or what we see in San Bernardino will be commonplace.