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Although national attention has largely focused on state budget battles like Wisconsin’s union showdown and Minnesota’s state shutdown, the real spending struggle is actually taking place at the local level.As federal stimulus money runs dry, states are scaling back on municipal aid and revenue sharing. The cuts are adding immense pressure to strained local governments, many of which are already struggling under huge debt burdens. After years of declining tax revenues, cities and towns across the country are now running out of ways to deal with their ballooning budget deficits.
Public employee costs account for a large share of municipal budget woes. While worker compensation accounts for just 30% of state spending, personnel costs tends to eat up between 70% and 80% of local government funds.
Skyrocketing employee costs — the result of overly generous union contracts, an ageing workforce, and bad pension investments — are now pushing several municipalities to the brink of fiscal ruin. Without union concessions or substantial reform, these cities will edge closer to insolvency while residents pay higher taxes for deteriorating public services.
Here’s a look at 14 cities where the problem is particularly acute.
- Annual pension contributions have skyrocketed from $1.5 billion -- 6% of the city budget -- in 2002 to an estimated $8.5 billion -- 18% of the budget -- in 2012. Pension costs ate up more than one-third of all of the city's revenue increases in that period.
- Pension contributions for New York school districts are projected to swell from $900 million to $4.5 billion over the next five years. Property taxes will have to rise an average 3.5% per year to keep up with the payments.
- To cut compensation costs, Mayor Michael Bloomberg has called for state lawmakers to raise the retirement age from 55 to 65 and calculate retirement pay based on an employee's base pay, excluding overtime.
Source: City Journal
- Worker costs eat up a full 85% of the city's budget. Pension and salary increases are projected to grow to $479 million by 2015.
- Los Angeles faces a nearly $200 million deficit in the 2013 fiscal year. The city closed part of this year's $336 million shortfall with furloughs, cost deferrals and one-time revenue transfers.
- Moody's downgraded Los Angeles' bond rating to Aa3 Tuesday over concerns about the city's rising labour costs. The downgrade affects $3.3 billion in debt, including $378 million scheduled to be sold July 19.
- Employee compensation make up 83% of Chicago's spending. Despite major layoffs, worker costs have risen nearly 10% since 2007 due to cushy union deals that increased wages and benefits for the city's public employees.
- Chicago's unfunded pension obligation is $44.8 billion -- nearly eight times the city's annual revenue.
- Mayor Rahm Emanuel has threatened to lay off 600 city workers if unions don't agree to cost-cutting concessions. He has also proposed opening up some city services, like sanitation, to competitive bidding.
- San Francisco faces a budget shortfall of $306 million. The deficit is projected to grow to $829 million by 2016 as the city's operating costs steadily outpace revenue.
- Employee wages and benefits are the largest driver of the budget shortfall, and are expected to grow to $648 million over the next five years.
- San Francisco's pension system, which covers most municipal workers, has an unfunded liability of $4.4 billion, or $35,000 per household. The city also faces $4.3 billion in unfunded retiree healthcare costs.
- Half of Pittsburgh's tax revenue goes to cover city worker pension and healthcare benefits.
- Pittsburgh's unfunded pension liabilities total more than $700 million. The city's public pension plans are less than 30% funded, one of the lowest pension funding percentages in the country.
- If the city's public pensions are not 50% funded by September, Pennsylvania will take over the pension systems. The state will likely force Pittsburgh to increase its annual pension payment from $56 million to as much as $120 million, a move that will strain the city's $450 million budget and likely result in major layoffs and service cuts.
- North Las Vegas, a rapidly growing Las Vegas suburb, faces an $8.6 million budget deficit after the city's police and firefighters unions won a court decision prohibiting layoffs that would have closed the city's budget gap.
- The city now has an ending fund balance of just $7.2 million, or 4.8%, which is just enough to make one payroll. If the balance falls below 4.1%, it could trigger a state takeover of the city's finances.
- A state takeover would raise taxes on North Las Vegas residents to the maximum levels allowed by law. Residents already pay the highest property taxes in the region.
Source: The Las Vegas Review-Journal
- The city closed this year's projected $115 million budget deficit through one-time revenue fixes, employee concessions, and significant service cuts, but failed to fix a structural budget deficit. San Jose officials project a shortfall of at least $85 million next year.
- The city laid off 500 city employees, or 10% of its workforce, to close the deficit this year, shrinking staffing 1980s staffing levels.
- San Jose's police and firefighter pension costs have quadrupled over the past 10 years. Without reform, the city estimates that its annual pension costs will rise to $650 million in 2015, up from $63 mill lion in 2000.
Source: San Jose Mercury News
- Providence faced a $110 million budget deficit this year, after borrowing $48 million and draining most of its reserve fund to balance last year's budget. The city's use of one-time budget fixes led Fitch and Moody's to downgrade the city's bond rating.
- A large part of Providence's structural deficit is caused by city retiree costs, which eat up 50% of the city's tax revenues.
- The city-run pension system is only about 34% funded and has an unfunded liability of at least $829 million. The city has made its full annual pension contribution only three times since 1995.
- City worker compensation eats up 72% of the budgets of New Haven's city departments.
- The city's $475 million budget is expected to grow just $4 million this fiscal year. Employee pension and healthcare costs will rise $12 million.
- The city laid off 82 workers this year to close a $5.5 budget shortfall after city officials and unions failed to reach an agreement on cost-cutting concessions. The mayor now wants to get rid of 200 school janitors and outsource the work to a private company.
Source: Public Sector Inc. Forum
- Newark's employee costs have swelled 60% over the past five years. Compensation now consumes four-fifths of the city's budget.
- Newark's crime rate has been on the rise since the city laid off 10% of its police force after union negotiations broke down earlier this year.
- Newark faces a $40 million budget deficit this year after city officials closed last year's shortfall by selling and then leasing back city buildings at a cost of $125 million in principal and interest over the next 20 years.
Source: City Journal
- Stockton has been in state of fiscal emergency for the past two years. Union concessions helped the city close a $37 million budget gap this year, but deficits are projected to grow to $48 million if no further steps are taken to reduce worker costs.
- Public safety worker costs alone consume 80% of Stockton's general fund. The city also faces a staggering $544 million in unfunded retirement benefits.
- Stockton also has $224 million in outstanding debt, which poses a risk to the city finances. Moody's cut Stockton's bond rating last month to A3, four notches above a junk rating, and said further downgrades are possible if the city doesn't resuscitate its general fund.
- Personnel costs make up 70% of Colorado Springs's expenses. In an effort to trim the cost, newly-elected Mayor Steve Bach has enacted a hiring and wage freeze for city employees.
- The city slashed spending by more than $26 million, or 11% of its budget, to close a $38 million shortfall last year; the move led to deep cuts in public safety services, transportation, and street and park maintenance -- the city even turned off one-third of its streetlights. Increased tax revenues have improved finances, but Colorado Springs isn't out of the woods yet.
- The city owes money to its public employee pensions, but the exact amount is undetermined; earlier this year, the Colorado Springs City Council rejected a proposal to determine the city's unfunded pension obligations.
- Pension contributions eat up 16% of Costa Mesa's $93 million budget. Within three years, one in every five tax dollars will be spent on employee retiree benefits.
- The city's annual pension costs have tripled from $5 million to $15 million in the last decade. City officials warn they could total $25 million by 2015.
- Costa Mesa fired 43% of its workforce this year, outsourcing services like firefighting to the county. The layoffs help save the city from future employee pension costs, but do nothing to shrink the existing pensions payments.
Source: Washington Post
- The tiny Rhode Island city has literally run out of money. Central Falls is at least $1.8 million short of what it needs to fund current expenses and needs to close a $5.5 million gap in next year's budget. Deficits are projected to grow to $25 million over the next five years.
- Central Falls faces a staggering $80 million in unfunded pension liabilities. The city's pension fund will run out of money by October without additional funding or union concessions.
- The city has asked retired city workers to accept at least $1.75 million in benefit cuts to help close this year's deficit. If no agreement is reached, the city may have to file for Chapter 9 municipal bankruptcy.
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