Tag Archives: county

Bankruptcy in Birmingham

Jefferson County, AL has filed for bankruptcy protection, joining the ranks of Vallejo, CA; Central Falls, RI; Boise, ID; and Harrisburg, PA. In this case, the debt that the county used to finance a new sewer system is the main driver of insolvency. The county currently owes about $4.15 billion on the sewer system.

The Associated Press reports:

The problems were years in the making.

Its debt ballooned after a federally mandated sewer project was beset with corruption, court rulings that didn’t go its way and rising interest rates when global markets struggled.

Since 2008, Jefferson County tried to save itself the cost and embarrassment of filing for bankruptcy. But after three years, commissioners voted 4-1 to bring the issue to an end.

“Jefferson County has, in effect, been in bankruptcy for three years,” said Commissioner Jimmie Stephens, who made the motion to file for protection in federal bankruptcy court in northern Alabama.

While the last few years have seen a few cases of municipalities filing for Chapter 9, Jefferson County’s case represents by far the largest. Unlike other recent bankruptcies that were a result of both poor financial management and the economic downturn, Jefferson County’s problems were in part a result of corrupt public officials. Twenty-two people have been convicted for illegally refinancing the sewer bonds to benefit local and Wall Street financiers. Residents in Alabama’s largest county will likely face higher sewer rates as a result.

But the biggest problem for residents when municipalities file for bankruptcy protection is the resulting policy uncertainty. Businesses are typically reluctant, with good reason, to move to a bankrupt municipality. The shadow of Chapter 9 means that for years, residents and businesses will be paying higher taxes in exchange for fewer services because of the remaining debt burden. This will put the county and even the state in a poor competitive standing for new jobs.

In 1994, Orange County, CA, filed for Chapter 9 protection on $1.7 billion in debt, and residents there are still paying taxes toward that debt today. In the short term, Jefferson County will face painful and immediate cuts. The Birmingham Business Journal spoke with Commissioner Jimmie Stephens on what the future holds for the county:

“We’re looking at all of these services that are not mandated by the constitution and, from there, we will begin the reductions and take it as far as we need to, keeping in mind the services that the citizens need,” he said.

 

Fitch Downgrades Cook County’s Bond Rating Because of Pension Liabilities

Fitch Ratings downgraded the general obligation bond rating of Cook County, Illinois, from AA to AA- earlier this week. Moody’s similar downgrade last June makes this Cook County’s second downgrade of the year.

It is of no surprise that the county’s pension liabilities were cited as an important factor in the downgrade. Cook County’s local governments currently face more than $108 billion in outstanding debt, almost a quarter of which can be attributed to unfunded pension liabilities.

This problem is further compounded by the fact that the City of Chicago has its own unfunded pension liability of $48.8 billion or $42,000 per capita.

Illinois’s pension problems, however, run much deeper than Cook County. Illinois’s FY 2012 operating budget reports that the state’s pension system is 45 percent funded with total unfunded liabilities amounting to $75.7 billion.

Although, in recent research, Eileen Norcross and I find that when using discount rates that reflect the risk of public pension liabilities, Illinois’s unfunded pension liabilities amount to $173 billion and the funded ratio across systems drops to 36 percent in FY 2010.

By 2018, Illinois pension system will require a tripling of the state’s annual contributions from $6 billion to $17.5 billion. Therefore, without serious structural reform, it is likely that Illinois’s pension liabilities will lead to additional rating downgrades in the future.

 

Jefferson County, Alabama postpones bankruptcy meeting

A meeting was to be held today to decide whether Jefferson County’s government would file for bankruptcy over a $3 billion sewer project. The meeting was canceled on the news of a potential deal from JPMorgan Chase & Co that would cover $1 billion of the debt. Municipal bond markets are not likely to react much to the troubles in Jefferson as they have been obvious since 2008 when the county found itself unable to pay its debts. If the deal works Jefferson County may avoid filing the largest municipal bankruptcy in U.S. history.

Abusing disability pensions in Montgomery County?

The Washington Examiner takes a look at  disability pensions in two counties: Montgomery County, Maryland and Fairfax County, Virginia. Each county has a similar-sized police force. Between 2000 and 2008, no Fairfax County police offers received a disability pension. Between 2004 and 2009, a total of 91 police officers and 49 firefighters and sheriffs deputies received disability pensions. A further 34 Montgomery County firefighters either received disability payments or have an application pending in 2010.

Councilman Phil Andrews (D-Gaithersberg) is investigating the practice, “What is suggests is that disability retirement here is used as an alternate retirement system.”

Why? It’s a good deal, a retiree receives two-thirds of their annual salary in a tax-free pension. Secondly, according to one anonymous police officer, “Do you have any idea how easy it is to claim disability?”

State and Local Economic Development Programs

Fairfax County’s Economic Development Authority has opened a new office in Los Angeles. Their aim is to lure Californians who are fed up with the Golden State’s web of taxes and regulations. 

It is true, of course, that California’s business climate is abysmal. According to Sorens and Ruger, California is number 44 in terms of fiscal freedom (with 50 being the least-free), and 46 in terms of regulatory freedom. Other indices come to the same conclusion. Kail Padgitt of the Tax Foundation, for example, evaluated states based on their business tax climate and California came in at #49.

Virginia, by contrast, does decently well in both reports. By Sorens and Ruger’s measure, the state is the 13th most-economically-free in the nation and by Padgitt’s, its business tax climate is the 12th-best.

Given the important link between taxes and economic prosperity—see studies by Agostini and Tulayasathien (2003); Mark, McGuire, and Papke (2000); Harden and Hoyt (2003); and Gupta and Hofmann (2003) or reviews by Helen Ladd (1998) or Padgitt (2010)—it might seem only natural for Virginia to highlight its relatively low-tax environment. 

The irony, however, is that taxpayer-funded projects like an economic development office located 2,285 miles away from the county make it more-difficult for Fairfax to maintain its competitive tax rates. More expensive than the office itself are the handful of subsidies and tax expenditures that the state and the county offer to businesses that relocate or that meet special criteria (these subsidies include the option for the state to dole out “discretionary, deal-closing” benefits).

Proponents of economic development programs will no doubt contend that these expenses pay for themselves. But the economic literature is far from conclusive on that score.

Some studies find that targeted incentives lead to employment growth in the industries they target.

But others find evidence to suggest that these results are exaggerated. Examining 366 Ohio firms, for example, Gabe and Kraybill (2002) found that incentives have large effects on announced employment growth but modest or even negative effects on actual employment growth.

According to a recent Wall Street Journal article, some states and localities have begun to notice this discrepancy. John Garcia, the economic development director in my hometown of Albuquerque recently announced that the city was trying to collect nearly half a million dollars in property tax abatements that were given to a call center that relocated and then closed shortly thereafter.

But the real question is not whether these types of incentives are a good deal for the firms that receive them (one would think they would be!), but rather are they a good deal for the state at-large?

In a case study examining Virginia giveaways, Alwang, Peterson, and Mills (2001) draw attention to the fact that “most economic development events involve winners and losers.” For example, other firms may have to pay higher costs for purchased inputs. They found that the benefits doled out to one firm cost others more than $1 million, annually.  

Sweet deals can also crowd-out legitimate government expenditures on true public goods. Burstein and Rolnick (1996), write:

[W]hen competition takes the form of preferential treatment for specific businesses, it misallocates private resources and causes state and local governments to provide too few public goods.

Furthermore, cost-benefit analyses of economic development deals rarely account for the so-called rent-seeking losses that such deals inevitably invite: firms will sink millions of dollars into societally useless activities—lobbying and ingratiating themselves to the politicians—in an effort to win these privileges. The money they spend on smart and expensive lobbyists, lawyers, and accountants would be better spent developing new products and services that actually provide value to customers. These losses are hard to measure but that does not mean that they don’t exist.

In my view, states and localities should aggressively compete with one another over businesses. And part of that competition should involve figuring out ways to provide public goods at the lowest possible tax and regulatory cost. But this cost should be low for everyone, not just for the politically-connect firms.

HT to my colleague, Dan Rothschild, for directing me to the news about Fairfax County.

More on the Dangers of Inequitable Taxation

Last week, I opined on the problems with inequitable taxation: when two similarly-situated firms or individuals encounter different tax regimes, there are perverse incentives to alter economic behavior so as to lower one’s tax bill. This means individuals and firms make decisions based on the whims of politicians and lobbyists rather than on the values of consumers and investors. The result is inefficiency and waste.

A new paper by Daria Burnes, David Neumark, and Michelle White explores another problem with inequitable taxation: governments themselves can alter their behavior as a way to steer economic activity toward those industries that face higher rates of taxation. The authors note that local-option sales taxes “give local government officials an incentive to encourage retailing, since retailing generates more sales tax revenue than other land uses.”

How do they do this?

[T]hey can zone additional land for retail use, they can allow land zoned for retailing to be developed at higher density levels, and they can reduce the often‐formidable set of approvals and inspections that are required for construction or renovation. They can use all of the same policy instruments and practices in reverse to discourage other land uses.

They find that local officials in higher sales-tax jurisdictions do seem to concentrate on attracting large “big-box” stores and shopping centers. The effect is larger in the center of counties, where inter-county competition is weakest. Moreover, they find that high-tax jurisdictions tend to discourage manufacturing employment.

Saving Playgrounds and Amphitheaters

In the coming years expect more of these kinds of discussions in local government.  Revenues are sluggish to modest. The recovery is weak. Spending growth in entitlements guarantees a future with diminished economic growth. Pension obligations in many state and municipal governments will crowd out other areas of spending. There will be tax hikes proposed and there will be spending cuts proposed and someone is not going to like them.

Is there a rational way to make cuts that satisfy all voters? Unfortunately, no.  Budgets do not reflect individual market exchanges. Without the profit motive, or market prices, making choices on the grounds of economic efficiency is difficult to impossible. V.O. Key’s 1940 discussion of The Lack of a Budgetary Theory gets at this core problem in government budgeting. Budgets are not technical documents. Budgets reflect subjective and political choices.

One criterion to use in determining what belongs in a budget is to limit government spending to only providing public goods.

Arthur Brooks mentions the other criteria for government intervention: in the case of monopolies, information problems and market failure.

Amusement parks and amphitheaters do not qualify as public goods. They are club goods. It is possible to exclude free-riders by charging admission. But parks are also non-rival. One person’s use of the facility doesn’t preclude someone else’s. What is telling is how interested parties – those who consider “club goods” valuable to society and worthy of subsidy- respond to the cut.

First consider Playland in Rye, New York. Operated by Westchester County, Playland is one of the few government-operated amusement parks in the United States. It has been so since 1928 after residents decided the expanding hotel-resort-amusement business that had sprung up along Long Island Sound was attracting “bawdy hotels and unsavory crowds.” They asked the county to take it over and reinvent it as a family-friendly park. (An interesting question is how might the community have achieved this outcome without a county takeover?)

With attendance cut in half, a series of recent accidents, and the latest addition of a $30 admittance fee, according to the Wall Street Journal, Westchester County Executive Rob Astorino is seeking to “reinvent the park,” since operating an amusement park, “isn’t an essential service for government to operate…”

There are several bidders offering to take it over, mainly private amusement park owners. One group is non-profit, Sustainable Playland, started by a resident who wants to ensure the park doesn’t become an “over-the-top casino”.  She and her husband have raised $150,o00 for their proposal to revive Playland as a public-private partnership.Their proposal involves a combination of park profits, government grants, and debt.

Now consider the Lubber Run Amphitheater in Arlington, Virginia. Built by the county in 1968, the Amphitheater was found in 2010 to be in violation of  federal and local regulations including the Americans with Disabilities Act, floodplain requirements, Chesapeake Bay Preservation Act requirements, and building codes. The county cut of funds last year due to budget constraints and allocated $10,000 for summer events in 2010.

Residents have launched a petition to save the Amphitheater. Their proposal is pretty basic. “Make room in the budget for the Amphitheater.”

Their discussion board sheds some light on the subjective nature of budgets. Most posters insist the Amphitheater is a priority because they have used and enjoyed it. Posters wonder why the Newseum in Rosslyn got $15 million or why the county is subsidizing low-income housing. In their eyes these are lower or equal priority items.

But there is the crux of the matter. What is a priority of government when the government is choosing to spend funds among a whole list of  non-public goods?  The priority is determined by the most successful special interest.

 

 

 

 

 

Boise County, Idaho files for bankruptcy

Boise County, Idaho filed for bankruptcy this week. In this case, the county is not struggling to pay its bondholders, but was found by a court to be in violation of a federal law.

The county owes a housing developer $6.2 million after a court found the local zoning commission put too many restrictions around a building project for a treatment facility for troubled teens. In December a federal judge ruled the action constituted discrimination under the Fair Housing Act and found in favor of the developer. Boise County (which is, despite its name, not home to the state’s capital) with a budget of $9.4 million has recently raised sewer fees, and claims the debt will need be paid off over a 20 year period but needs federal bankruptcy protection to come up with a plan to pay it. That plan will involve higher taxes, a county official notes, “every property tax owner in the county will have to pay a share of this debt.”

The project in question, Alamar Ranch, was the subject of alot of local discussion when it came before the Boise County Planning and Zoning Commission. Some residents were in favor of the facility because it was shown that it would create jobs. In addition, the facility’s mission is to help troubled teens, a project with many positive benefits for society. Other residents worried that the facility would lead to local crime, introduce traffic, and constitute another expense for the local government. Opponents to the facility, it is claimed in legal documents, swayed the local zoning commission to block construction. Residents interviewed see it differently.

(h/t http://edwardweinhaus.com/)

Three Perspectives on the State Fiscal Crisis

NPR’s Jim Zarroli takes a close look at the fiscal troubles Nassau County on Long Island. He quotes Lawrence Levy, executive director of the National Center for Suburban Studies at Hofstra University in Hempstead, N.Y.:

Even without the recession hitting the county as hard as it did, the county was still on a trajectory where it was spending more than it was taking in.

Josh Goodman at Stateline reports on the state fiscal crisis facing all of the states and highlights the tradeoff between short-termism and long-term reform:

What’s not clear yet is whether these fiscal circumstances will prompt a desperate scramble to balance budgets now regardless of the long-term consequences or whether they’ll prompt a thoughtful reassessment of what government should do and how it should do it.

And over at National Affairs John Hood has one of the more-thoughtful assessments of the problem to date. He notes that the crisis has been a long time coming:

But alarming as these recent developments have been, the states’ fiscal calamity is not simply a function of the recession. Their shaky financial foundations were in fact set long ago — through unsustainable obligations like retirement benefits for public employees, excessive borrowing, and deferred maintenance of public buildings and infrastructure. The result has been a long-building budget imbalance now estimated in the trillions of dollars.

Devolving Power in California

California Governor Jerry Brown has a proposal to deal with state spending – shift it to the local level. California’s budget deficit is anticipated to be $24 billion this fiscal year. The governor’s plan would pass on the costs and responsibilities for certain programs to county government. For example, low-level offenders would be sent to county rather than state jails. Governor Brown is also talking about getting rid of unfunded mandates and spreading the cost of local programs to the local level.

The proposal sounds like it is an application of sound fiscal federalism principles – local services should be locally administered and paid for via local levies. If implemented correctly, Governor Brown’s plan may be a fiscal blueprint for other cash-strapped states.