Prosperity That Feels Like Austerity

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The city of San Jose is faring much better these days than it has in recent years. Gallup's latest Job Creation Index, which measures residents' reports of hiring in the 50 largest metro areas, found people in San Jose describing among the most bullish employment scenarios in the nation. No aging industrial city, San Jose already boasts a median annual household income at nearly $77,000 that is well above the national average, and the city is positioned in Silicon Valley to be a part of any robust new economy that emerges.

But residents of San Jose also face an uncertain fiscal future. All around them a local government that is awash in debts it can't pay is shrinking and cutting services. In January, the city's police department, which has reduced its force in recent years by 20 percent, announced that it would stop responding to burglar alarms unless someone can independently confirm a crime is in progress. The city has also cut back on library service and parks maintenance. San Jose budget experts predict deficits potentially as high as $22 million out through 2014. The city's reform-minded mayor, Chuck Reed, has even dared to say that if a major pension reform referendum scheduled for the ballot this November fails, San Jose could face bankruptcy.

Across America cities, towns and school districts have faced a harsh fiscal squeeze during this long downturn. Much of the attention has focused on fading former industrial powers like Detroit, which is struggling to avoid bankruptcy, and places that made unwise bets with taxpayer money, like Harrisburg, Pa., and Jefferson County, Ala.

But even prosperous places with a solid economic future face a severe long-term budget crunch thanks to crushing liabilities incurred by politicians who made promises that no one ever seriously figured out how to finance. In San Jose, the annual cost of funding employee pensions has grown from $72 million a decade ago to $245 million today. That amounts to a whopping $48,000 per worker and consumes 21 percent of the city's general fund budget. Had San Joe not reduced its workforce by 2,000 people in the last few years (a 27 percent cutback), those pension costs would be far steeper.

San Jose is not alone. Pittsburgh is a city that's been transforming itself in recent years. No longer regarded as a fading industrial center, it has relied for growth on its universities and its research institutions. Pittsburgh even finished first in job creation potential in the same Gallup survey that ranked San Jose so high.

Yet Pittsburgh also boasts probably the worst-funded municipal pension system in America. Last year actuaries estimated it had just 30 percent of the money needed to pay off promises the city has already made. The situation was so dire that Pittsburgh faced the prospect of a state takeover and big pension assessments against its budget. The city only avoided this by pledging new future revenues it was counting on spending elsewhere to the pension system. Even so, benefits add an additional 90 cents to every dollar the city spends on employee pay. Those costs are only likely to continue rising, given the city's severe pension underfunding, and squeeze out other spending.

Still, Pittsburgh's pension predicament is nothing compared to the fiscal mess in one of the nation's richest counties, Nassau. With median household income at $91,000 annually, or 80 percent above the national average, Nassau should have plenty of money to go around. For the second time in less than 15 years, however, Nassau is operating under oversight from a state financial control board because its finances are a wreck. With a $2.6 billion budget, the county faces a $170 million deficit in its current year thanks to staggering employee bills. For instance, the average annual cost of employing a county cop in Nassau, including benefits, is now $198,000, according to county budget documents.

Any effort get a grip on employee costs in Nassau is like having a tiger by the tail. The county's pension costs alone increased by 44 percent this year thanks to a growing funding gap in all New York State pensions. But the real budget killer is health care. From the time you start working for the county until the time you die in retirement, Nassau pays all of your healthcare premiums. This year, Nassau will spend more ($143 million) on healthcare for retirees than on the same benefit for its current workforce ($142 million).

How do you pay for employee costs like that? With sky-high taxes. Nassau's tax bite is the second highest in the nation among counties. That's a steep price to pay for insolvency.

Nassau might seem crazy to have promised workers so much, but Nassau isn't all that different from the rest of the country. Maybe just a bit ahead of the curve. Our states, for instance, have collectively pledged to workers health care benefits in retirement equaling about $627 billion, and funded just 4 percent of that promise. And they have $4 trillion in unfunded pension liabilities, up from $3 trillion just a few years ago.

Even as economic activity picks up, the price of these promises is accelerating so fast that they seem likely to outpace the growth in public revenues in the next five years and overwhelm budgets, squeezing out services including police and fire protection. Last week, for instance, Los Angeles' chief administrative officer, Miguel Santana, said that employee costs are rising so fast that without givebacks, pension reform and $150 million in new revenue, "We're facing the complete devastation of city services, including public safety."

This is what taxpayers in many places, including economically vibrant ones, have to look forward to: a new era of paying more for local government and getting less, in which even prosperity feels like austerity.


Steven Malanga is an editor for RealClearMarkets and a senior fellow at the Manhattan Institute

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