Thursday, February 28, 2008

Municpal Government Distress

All of the big financial bloggers are chasing down bankruptcy rumors of Vallejo, California, but I want to focus a little closer to home to an area that has already had several effective municipal bankruptcies handled by the ACT 47 law. the rest of the region is also in trouble.

The University of Pittsburgh is finishing up an analysis of regional governmental financial capacity and it is not pretty. The Post-Gazette is reporting most of the region has some bad spending habits:

The analysis was produced by a team at the University of Pittsburgh Graduate School of Public and International Affairs.

Between 2000 and 2005, the latest data year, 58.5 percent of the region's municipalities had two or more deficits and 80.2 percent had at least one....

Professor George W. Dougherty, who directed the study. "Healthy communities run a small annual surplus that allows them to build a rainy day fund and budget for long-term capital and infrastructure needs. Governments that run regular deficits, commonly defined as two or more annual deficits in a five to six year period, show significant signs of fiscal distress."

I would imagine given the froth of the housing bubble that if you replaced 2000 with 2006, the number of communities running a single deficit and multiple deficits would decrease by a small amount. The analytical period in question had a short recession that had minimal real impact on real estate values but a decent impact on wages and then several years of decent to good times where the cyclical flow of funding/expenditures should lead to short term surpluses if a municipality has a structurally balanced to structurally surplus budget.

Between the bursting of the real estate bubble and continous rational voter pandering against re-assessing real estate at near market values, the region's governments will be facing a tough couple of years. Budgets will be cut, services reduced, and maitenance on the locally decrepit infrastructure will be deferred or minimized.

Pittsburgh and its city region may have more severe cuts and contraction than most regions as this area has an older population, lower income growth which means less wage tax income for municipalities, and a declining population so fixed costs are higher on a per capita basis as time progresses. However the same basic squeezes that will be impacting this region today and in the future, namely declining real estate values, declining sales and income tax revenue, higher costs of borrowing and higher employee costs due to healthcare will be impacting most municipalities.

Retrenchment will occur as most if not all local governments have balanced budget constraints of varying strength. Retrenchment is pro-cyclical which means it will make the current trend of slow growth or recession more severe. And since local governments rely heavily on a revenue source (property taxes) that is bound to get hammered with a secondary dependence on income taxes, this trend will be severe and potentially self-reinforcing.

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