On the Mark: Bankruptcy: A possibility for cities and states

The recent change in our economy has left many short on funds and behind on payments. We have become accustom to people who have lost vehicles and homes. Businesses closing their doors has become another common sight. But going broke is not limited to individuals or corporations. Something we may be hearing a lot more about in the days ahead are municipalities going broke...at all levels.

Cities are able to declare bankruptcy as a potential solution to their financial woes and some have done exactly that as a result of the last recession (cities in states like California, Rhode Island and soon possibly Pennsylvania). After cutting services and reducing personnel, it is still difficult for some of the hardest hit cities to carry the burden of operations and long term liabilities like pension plans and health care. Besides being too dependent on unstable revenue sources (such as that provided by growth) many cities have become too accustomed to both state and federal aid. With both state and federal governments feeling unprecedented pressure, routine grants and aid can be expected to change.

The last federal stimulus package provided states with $150 billion in spending, but that has ended. This package upped the average percentage of dependency of state budgets on federal aid to 35 percent and now that the stimulus is over, states will have to adjust.

Part of that adjustment will be less of the trickle-down effect in the form of financial aid to smaller municipalities like counties and cities. This will only exasperate an already desperate problem for many local governments. But failing to make necessary cuts will leave state budgets in greater financial jeopardy and cause some to seek a way out of their financial mess that may go beyond just cuts.

There is a difference between how far cities and states may go in using bankruptcy as a way out. As it is today, cities can, states cannot. That may be changing if some politicians have their way. Congress is discussing the possibility to allow states to declare bankruptcy. While some may see this as a possible solution to long term liabilities such as funding public employee pensions and other labor contact obligations, with it comes the harsh demands of restructuring that could impact far beyond city or county boundaries.

Many municipalities rely on municipal bonds as a means to fund everything from special projects to infrastructure. These have always been looked upon as secure investments. If another shoe is to fall in this recession and that one becomes the muni bonds, the impact to investors will not just be a temporary reduction in earnings, but a permanent loss of some or all of their investment.

Avoiding bankruptcy at all levels of government is a priority and that means other demands have to give first. There are no winners in bankruptcy, neither what will remain in the restructured local governments nor the balances left on the table by investors in municipal bonds. Bankruptcy would reduce payroll, it may remove many employee benefits, and public services will be annihilated.

No one wants to see their income, whether current or planned, cut. Reducing benefits and seeking participation in pension plans can be a compromise for public employees but should not be an easy scapegoat to turn to until local governments get serious about savings and efficiency at all levels. And that includes the perks our politicians unfairly receive along with a variety of changes to the standard operating methods that waste tons of our money.

Government is wasteful, plain and simple. There is little good about a recession, but the outcome for municipalities may mean a tightening up of their spending and becoming better with what remains. Locally, as example, there have been massive layoffs on a part of Collier County's government that was dependent on growth. The former Community Development and Environmental Services Department, which includes planning and building review, saw a loss of many personnel but in doing so, many of the most efficient and knowledgeable were retained. That has resulted in a smaller work force doing more.

If we can increase efficiency and productivity in one area with fewer personnel, we can do it in all and if it can be done at one level of government, why not at all levels? Out of this recession and the massive loss of government income we may see a better system evolve and every consideration needs to be on the table to get there. That includes public employee labor negotiations.

There will need to be sacrifices by a whole lot of people, some of that may come in the form of early retirement, layoffs or reduction in benefits. Some may come in compromising on how employees play a part in pensions and other benefits. And there will be needed sacrifices by the public in what services we can reasonably expect in the future. The private sector has seen its workforce shattered by this recession, personal losses are staggering yet we will still be paying the taxes that fund public operations and payrolls, we just need the burden to be as collaborative as possible.