Tag Archives: Bloomberg News

To merge or not to merge?

Princeton Image

Consolidating municipalities is a common policy prescription from across the political spectrum. In New Jersey in particular, many democratic and republican elected officials have thrown their support behind merging municipalities. In part, this support is based on the experience of Princeton. In 2011, Princeton Borough and Princeton Township moved, the first New Jersey municipalities to do so:

New Jersey GOP Gov. Chris Christie as well as governors in Ohio and Pennsylvania have been urging local governments to seek savings by eliminating unneeded costs. Christie endorsed the Princeton plan and offered to pay 20% of the $1.7-million unification cost, Bloomberg News reported.

The forecast is that Princeton taxpayers will save $3.1 million annually by consolidating services, including those for police and fire protection.

“We have redundancy in government,” borough resident Cole Crittenden told NJ.com in explaining why she supported the merger.

Framing municipal mergers as a way to get more bang for the taxpayer buck makes the proposal difficult for anyone to oppose except for those municipal employees who are redundant after a merger. However, the cost savings of consolidation are not well-understood. In an article in Governing Magazine earlier this week, Justin Marlowe writes:

It turns out that consolidations rarely save money. In fact, for the majority of citizens directly affected in these cases, consolidation has meant higher taxes and spending. Some cities consolidated because a larger government could improve local infrastructure. This has usually meant new debt and new taxes to repay that debt. Others offered generous pensions and health-care benefits to employees pushed out in the consolidation, thus saddling the new government with expensive legacy costs. In the consolidated town of Oak Island, N.C., per capita spending is two or three times higher than before consolidation, and that’s by design. Consolidation allowed this coastal community to offer new services needed to build a vibrant tourist economy.

Superficially, municipal consolidation looks like an opportunity to reduce taxes or to provide increased services for a given level of revenue. However, as Marlowe indicates, larger jurisdictions do not always result in anticipated efficiencies. As policymakers’ gain control of larger jurisdictions and in turn the ability to access more funds from revenue from the state and federal level, they may spend more, rather than less, per capita.

Central Falls bankruptcy exit plan approved

In what is described as, “the quickest bankruptcy adjustment in U.S. history,” Central Falls, Rhode Island has reached an agreement to exit from bankruptcy with a plan that will fully repay bondholders (including any legal fees incurred), while slashing worker pensions by as much as 55 percent. None of Central Falls’ workers will get less than $10,000 and all will have to contribute 20 percent more for their health care until they are 65 and eligible for Medicare, according to Bloomberg News. The agreement was reached when the state promised to help supplement retiree pensions for five years.

Bondholders will be repaid via higher municipal taxes, or a four percent increase in property taxes each year for the next five years. No one escapes unscathed, except the bondholders, which is attributable to the fact that Rhode Island passed a law explicitly protecting them from municipal default last year. The bondholder protection law appears to have the intended effect with Moody’s promising to increase Central Falls’ credit rating.

Retirees are understandably upset but it’s important that the cause for plan underfunding be properly diagnosed. Accounting distortions rooted in risky discount rates are to blame. Central Falls’ Police and Fire Plan was deeply underfunded based on numbers that underestimated the liability. That is the lesson to be learned and the inescapable problem facing many other jurisdictions with defined benefit plans in the US. It is in the best interest of governments to accurately calculate their unfunded liabilities with reference to a risk-free discount rate and come up with a plan today. Waiting and gambling on a future market boom doesn’t do retirees any favors.

Stockton, California tries to avoid bankruptcy via mediation

Stockton, California could become the largest city to declare bankruptcy in the US. On Tuesday the city council voted to skip $2 million in payments on $320 million in bonds. The bond insurer has promised to pay creditors in the event that the city cannot.

Now Stockton is in mediation. A new process, mediation is the result of AB 506, the intent of which is to slow bankruptcy proceedings by requiring all affected parties (debtors, creditors, unions) to meet and hammer out deals with a neutral party.

According to The Los Angeles Times, the city council is working on a restructuring plan. Since 2010 the city has twice declared a fiscal emergency. Pressure on city finances from rising health care benefits and debt associated with development projects have coincided with a period of depressed revenues and weak economic activity. Stockton has the second-highest foreclosure rate and eighth highest unemployment rate in the nation, reports Bloomberg News.

How the city reorganizes its finances is surely to be driven by the politics of unions and pension reform. The city faces a $417 million unfunded liability for employee health care benefits. How could that be allowed to happen? As a local city official tells The San Francisco Gate: “The problem is, nobody asked the question: ‘How do you fund it?’ And consequently there was no money set aside to fund those commitments,” Deis said. “It was an unsound decision and it has similarities to a Ponzi scheme.” Unfortunately, Stockton is not unique in this regard. Nearly all public sector health care benefits in state and local governments are unfunded.

In addition to its retiree health care costs, Stockton is paying 94 retired police pensions of $100,000 per year. As already accrued benefits, it’s not clear that the city has much room to modify this portion of the budget. And in fact, the police union is suing the city for reducing benefits. Another lesson in the importance of clear-eyed budgeting comes from Stockton’s troubles. Officials were caught off guard by the city’s sudden shortfall in part due to accounting gimmickry which included double-counting parking ticket revenues and overstating the city’s balance by $2.8 million.