An ill wind blows out of Olympia

Pity the state government. But your real worry should be about municipalities, who are going to be stuck with their own excesses and the problems of the states.

Pity the state government. But your real worry should be about municipalities, who are going to be stuck with their own excesses and the problems of the states.

Two straws in an ill wind in recent news: Washington cities may lose $87 million in liquor revenue that the state would otherwise send their way, and state support for school buses at the local level, amounting to $220 million or 67 percent of the cost of busing, may be chopped. Both proposals are in Gov. Gregoire's list of budget cuts, floated out to close the latest $2 billion hole in her budget.

Some of this is political theater: orchestrating the howls of protest from well-armed interest groups so that the draconian budget cuts draw maximum fire. But the underlying reality is that hard pressed states are going to be pushing costs down on the municipalities and counties, who are relatively powerless to resist.

The cuts are quite painful. In the case of liquor revenues, which the state has been sharing with localities for 70 years, Seattle, for instance, gets $7.2 million. Take that away and the city would look at cuts in human-service projects. As for the cuts to school buses, this is one of the few areas where the state can cut without running afoul of the state constitution's requirement of full funding of "basic education," since bus service is presumably not a basic component of education. Seattle's hit would be about $16 million a year.

The ill wind that is blowing from state capitals stems from the power relationship of states to cities. As the states get closer to insolvency, particularly in facing up to unfunded pension and medical benefits for governmental retirees, they can avoid declaring bankruptcy by pushing their fiscal problems down to the localities. (This assumes they can't solve their own political problems, for instance by raising taxes.) The buck will stop at the localities, and many cities will have to declare bankruptcy, as some already have. That will ruin the market for municipal bonds, slamming on more brakes.

Michael Lewis's new book, Boomerang: Travels in the New Third World, has a riveting chapter about all this, focusing on California, which is also excerpted in a long Vanity Fair article, "California and Bust." The article takes its point of departure from a famous, market-rattling episode on "60 Minutes," where correspondent Steve Kroft interviewed Meredith Whitney, a stock analyst famous for correctly spotting the subprime loan mess as far back as 2007.

The 60 Minutes segment noted that U.S. state and local governments faced a collective annual deficit of roughly half a trillion dollars, adding that another trillion-dollar gap existed between what the governments owed retired workers and the money they had on hand to pay them. Whitney pointed out that even these numbers were unreliable, and probably optimistic, as the states did a poor job of providing information about their finances to the public. New Jersey governor Chris Christie concurred with her and added, “At this point, if it’s worse, what’s the difference?” The bill owed by American states to retired American workers was so large that it couldn’t be paid, whatever the amount. At the end of the piece, Kroft asked Whitney what she thought about the ability and willingness of the American states to repay their debts. She didn’t see a real risk that the states would default, because the states had the ability to push their problems down to counties and cities. But at these lower levels of government, where American life was lived, she thought there would be serious problems. “You could see 50 to a hundred sizable defaults, [maybe] more,” she said. A minute later Kroft returned to her to ask when people should start worrying about a crisis in local finances. “It’ll be something to worry about within the next 12 months,” she said.

The Lewis article then goes on to depict, in harrowing terms, how all this is hitting some California cities. San Jose, despite its wealth, estimates that the city workforce will have dropped, by 2014, from 7,450 in good times to 1,600, with nearly all of the budget consumed by police, fire, and pensions. Vallejo, also in the Bay Area, declared bankruptcy in 2008 and has reduced city services to "effectively zero."

After a while you are no longer a city government; you may not even be a city. Welcome to the New Third World.


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