Setting the Record Straight on State and Local Finance

This is not particularly relevant to Birmingham specifically, but it is interesting to consumers of information regarding state and local government finance generally. 

2010 was a year of dire predictions for state and local government finance.  An October 12, 2010 report titled, “The Crisis in Local Government Pensions in the United States,” (http://www.kellogg.northwestern.edu/News_Articles/2010/municipal-pension...) predicted six big city pension plans would be insolvent in 2020 and an additional 18, including Detroit, would be solvent through 2020 but not past 2025. We are still eight years away from determining the accuracy of this prediction but I will wager against pension plan insolvency because the study assumed neither employees nor employers would make any additional contributions and investment returns would be nearly zero.  Perhaps the authors realized the error of their assumptions because they released another study on June 22, 2011 titled, “The Revenue Demands of Public Employee Pension Promises” (http://www.kellogg.northwestern.edu/News_Articles/2011/Rauh-Public-Emplo...).  That study calculated the increases in pension contributions required to achieve full funding over the next 30 years.  Long-term full funding seems much more likely than insolvency since many of these pension benefits are guaranteed by contracts and state constitutions (including Michigan’s). 

If those studies did not catch your attention, the December 19, 2010 60 Minutes segment "State Budgets: The Day of Reckoning" (http://www.cbsnews.com/video/watch/?id=7166293n&tag=contentBody;storyMed...) may have.  It was noteworthy in and of itself because the national media devotes so little time to state and local government finance.  However, it also helped mainstream the pension plan insolvency prediction and included a new prediction about municipal bond defaults. 

Governor Chris Christie (R-New Jersey) blamed his state's financial problems largely on public sector employee benefits stating, "Totally unsustainable. We have a benefit problem. It's not an income problem from the state. It's a benefit problem.” However, Christie and his predecessors contributed to this problem by failing to contribute the state's share of its pension obligation in 13 of the last 17 years.

Later in the segment, Wall Street analyst Meredith Whitney made what became an infamous prediction regarding municipal bond defaults.  "There's not a doubt in my mind that you will see a spate of municipal bond defaults," Whitney predicted.  When asked how many a “spate” is Whitney predicted 50 to 100 defaults.

The facts are in: Ms. Whitney’s prediction did not come true and the municipal bond market has since recovered.  While cities and counties have faced ongoing fiscal constraints, the vast majority are managing their obligations without dire consequences.  Unfortunately, perception is reality so state and local government finance continue to be the target of increasing scrutiny from a variety of sources, including the federal government, which has considered intervention in state and local financial matters. 

Eleven national organizations representing state and local government officials recently released a report, Facts You Should Know, to set the record straight.  They may not know how to title a report, but they know how to provide the facts on state and local government finance.  It probably will not draw as much attention as those dire predictions, but it is worth reading if state and local government finance interests you.  Visit http://icma.org/en/icma/newsroom/highlights/Article/101780/Setting_the_R... to read it.