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The Second Wave of Municipal Defaults

Reuters reports that a growing number of U.S. cities, from Rhode Island to California, are now facing municipal defaults. Up to now, the crisis has primarily affected localities that  made particularly poor decisions on expensive public works projects, but last year the number of municipal defaults in America doubled from 6 to 13, and that number could continue to rise.

The reasons for the defaults are well known by now. The recession hit cities hard. Falling employment and stagnant wages eroded tax bases, and foreclosures and the slump in the housing market are keeping property values low, depriving cities of another top source of revenue. And many localities were profligate spenders when times were good, giving cushy contracts to public unions that have proven difficult to rescind when they become unaffordable. In the past, cities and towns could turn to state or even federal government when times got tough; these sources are no longer in a position to extend aid.

Fortunately, there is a way forward. Most municipal and state governments have not been constructed with an eye to efficiency. School boards and other administrative positions are often overstuffed with, essentially, patronage posts. Many cities have done little to streamline their operations; techniques the private sector has used to increase white collar productivity can reduce headcount and costs even as services improve. Bankruptcy, grim as it is, offers the opportunity to restructure pension obligations and union contracts to make them sustainable. Combing through city regulations to eliminate unnecessary rules, simplify and rationalize necessary ones, and to find ways to make compliance less time consuming can both cut the costs of administering cumbersome regulatory systems and give a boost to economic growth and new business formation which will help the revenue picture down the road.

Not all of these steps will be easy or pleasant, but they offer real hope to America’s cities and the people who live in them. Thinking beyond blue can restore the economic vitality of America’s cities.

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  • Bruno Behrend

    There are 6.3 million people employed in K-12 public education. 3.1 million are “administration and support.”

    That 3.1 million could be cut by over half, and not one American child would suffer one less connected neuron.

  • Andy Vranich

    Kudos to Bruno you hit the nail right on the head.I wa a high school teacher and the number of administrative and support staff was not only extreme but redundant and the pay was also outrageous to pay principals and vice principal $90,000.00 and $100.000.00 for 180 days of work is sheer robbery and partly due to inattention by citizenry ANDY

  • Andy Vranich

    In San Jose we pay our policemen and firemen over a %100,000.00 a year and retire them at 90% of that for 30 years work What city do you think is next on the bankruptcy list????

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