Harrisburg bankruptcy casts shadow to California
The announcement that Pennsylvania's capital city, Harrisburg, has filed for bankruptcy protection has sent shockwaves throughout the nation's financial community. That was followed by Pennsylvania Gov. Tom Corbett signing legislation last week allowing for the state takeover of the city.
Harrisburg isn't particularly large, with its population of around 50,000, but it is the capital of a large state, and many observers believe that our nation might be seeing a wave of municipal bankruptcies as localities can't pay their bills after years of overspending.
In Rhode Island, Central Falls sought bankruptcy protection in August because of its excessive pension debt. Other communities, from Jefferson County, Ala., to the city of Los Angeles, have explored, or at least discussed, the possibility. Vallejo, in the San Francisco Bay Area, recently emerged from bankruptcy, although its union-dominated City Council preferred a workout plan that protected huge salary and pension benefits for public employees while dramatically cutting services.
Local governments blame all sorts of things for their problems.
Harrisburg officials blame the middle-class flight to the suburbs for hollowing out their tax base, ignoring that the city's tax-and-spend policies helped push taxpayers out of town. Harrisburg also floated bonds to build a museum and to create a trash incinerator that was supposed to generate jobs and revenue but instead has become a drag on the budget. This is yet another reminder how cities fail when they try to play entrepreneur.
The biggest problem for cities nationwide is the past decade's growth in pension benefits for public employees. Stanford University estimates California's unfunded pension promises at up to a half-trillion dollars. Others have estimated the nationwide pension debt — mostly the result of city rather than state pension promises — at more than $2 trillion. Governments have been on a wild spending spree, believing that a rising economy will keep paying for their unreasonable promises to special interest groups, but when the economy went south the entire edifice crumbled.
The main problem has been that local government employee unions, especially police and fire unions, have so much clout that local officials have done their bidding and figured that future politicians can deal with the problem.
California's union-dominated Legislature and governor responded to the growing threat of insolvency by making it more difficult for cities to declare bankruptcy. But that does nothing to fix the underlying problem — cities have overspent for years and are going to have to slash services, raise taxes and fees or go bankrupt.
We wouldn't be surprised to see Harrisburg's plight replicated, especially in pension-debt-ridden California.
