by Piet Coetzer

US Financial difficulties

Roots of financial trouble run deep and wide

US fiscal crisis extends to towns and cities in debt and unable to pay civil servants

What makes San Bernardino a special example of what is happening to the US on the economic front is that it is the birthplace of one of the globally most recognisable symbols of the American way of life: the McDonald's fast food outlet. It is such a strong symbol that during the revolution in El Salvador in the late 1970s it was one of the first targets of the rebels in the capital San Salvador.

Today the City of McDonald's, which can no longer even afford to pay its police officers or deal with its own waste, is also a typical example of what went wrong with local governments and, to some extent, state governments. 

At all levels there was a failure during prosperous decades to ensure long-term sustainable, functioning government.

During the good times, before the Recession of 2008/09, local governments doled out patronage by increasing pension benefits to their employees. These costs impact the budget years later, when the officials who gave the benefits are safely retired themselves.

Due to the fact, among others, that local governments are highly dependent on consumer spending, which carries city taxes as part of the sales tax structure, local governments were hard hit by the recession. Another structural tax problem for local governments is their further dependence on property tax on houses and real estate, now nearly worthless since the sub-prime lending crisis of 2008.

In the case of San Bernardino the city, prior to filing for bankruptcy, was running a $45 million deficit on a $130 million budget. In negotiations its creditors, being workers and retirees, only offered to allow newly-hired public safety workers to retire with 90% of their salary at the age of 55 instead of 50, which had been the earlier deal. 

The city’s retirement fund contributions have constantly risen over the years and are now three times what they were a decade ago, devouring 15% of the city's budget.

Similar problems exist at state level and California's pension-related costs rose 20-fold in the decade from 1999; a trend found almost throughout the US. 

A recent research survey found that the gap between states’ assets and their obligations for public sector retirement benefits is $1.38 trillion. It rose by 9% in 2010 alone and it will likely keep rising unless benefits can be renegotiated.

The State Comptroller of Texas, Susan Combs recently reported that local government debt jumped more than 122% over the past 10 years. The debt grew at a rate more than twice the 53.3% combined measure of population growth and inflation.

Analyst Meredith Whitney, who predicted the fate of Citigroup and Lehman Brothers, warned in late 2010 of a possible collapse of America's cities and towns. Up to 100 cities were at risk of going broke with potential losses of several hundreds of billions of dollars. City-level debt amounts to a total of $2 trillion, she warned.

A recent report by the Centre for Budget Policy and Priorities (CBPP) said the steep revenue declines have resulted in the largest budget gaps on record. “Moreover, almost every state is dealing with budget gaps. Of the 48 states that CBPP surveys, 45 have projected budget gaps for fiscal 2012 ... Projections are not complete, but so far 22 states are estimating shortfalls for 2013”. 

A large contributing factor to the problem is that the US government's investment in its economy has declined steadily since the 1970s. Publicly held assets accounted for 72% of the country's gross domestic product in 1975, but have come down to less that 55% at present.

In July the city of Scranton, Pennsylvania went belly-up. At the time World Press published an article that stated about cities going bankrupt.

These cities are the canaries in the toxic coal mine that is the US economy. Smaller and more fragile than states, they are succumbing to their economic ailments in tragic ways. But the canary analogy breaks down at that point because, unlike the coal miner who leaves the mine after watching his canary keel over, state and federal policymakers are not heeding the warning. Washington’s failure to reverse its debt-driven economic course means it will soon be in a situation far more tense than that of beleaguered Scranton”.

If the handling of the next round of the fiscal cliff saga has the US drifting back into recession, this scenario foreseen in the World Press article seems most likely.

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Issue 392


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