The public employee compensation bubble burst in yet another city last week when nearby San Bernardino, Calif., declared municipal bankruptcy. The action highlights that the economic woes of California and its governments are not being exaggerated, and that Nevada would be wise to learn from its neighbor's problems.
San Bernardino's bankruptcy follows this month's Chapter 9 declaration from Stockton, Calif. While Stockton's budget problems were compounded by debt, the finances of that city and San Bernardino had much in common: generous salaries, benefits and retirement promises for municipal workers that couldn't be sustained amid free-falling property and sales tax collections, union concessions notwithstanding.
San Bernardino, with more than 200,000 residents, had let its reserves fall below $200,000 and couldn't make payroll going forward. Plenty of other California cities are budgetary basket cases. "We're going to see more of these," former California Finance Director Mike Genest, now a consultant, told the Oakland Tribune. "Many of us have been predicting a substantial number of municipal bankruptcies in California for quite some time, and those predictions are starting to come true. It comes as no surprise to see the dominoes beginning to fall for local government."
The elephant in the room, of course, is California's unfunded pension obligations, which total about $500 billion, according to studies by Stanford University, Northwestern University and the University of Chicago. According to a February report from Stanford, pension spending grew more than 11 percent per year in California's biggest cities and counties between 1999 and 2010, twice the rate of growth of public safety, social services, parks and other programs. San Bernardino's pension burden had doubled in just five years, and Stockton's payments, which had more than doubled in 10 years, are on track to double again in just five years, according to the report.
Pension debts cannot be erased or reduced through Chapter 9. Taxpayers are on the hook for those promises.
These problems aren't limited to California. Earlier this month, Scranton, Pa., cut its employee salaries to minimum wage to balance its budget. The state of Michigan has taken over the finances of four cities, and three others, including Detroit, operate under consent agreements.
All this serves as yet another reminder to the Nevada Legislature that the state must get in front of this problem and not wait until it becomes impossible to address. Already, Nevada municipalities provide some of the highest public-sector salaries and benefits in the country, and the state's unfunded pension obligations are between $10 billion and $40 billion, depending on the accounting standards used.
It's brutally unfair to squeeze important services because the public must pay for salaries and retirement benefits that aren't available in the private sector. Governments everywhere must significantly reform pensions for new hires, or a lot more cities and counties will be headed to court.