Bankruptcy and debt default are a real possibility for cities around the country that can't pay their bills, largely caused by lavish retirement and health care benefits for employees that taxpayers couldn't afford even in good times.
Los Angeles is headed down that road. Vallejo, Calif., filed for bankruptcy in 2008. Closer to home, Harrisburg, Pa., is exploring the option as a way to restructure bills it can't pay. And last week, Warren Buffet said at a hearing of the U.S. Financial Crisis Inquiry Commission in New York that his Berkshire Hathaway Inc. has been cutting its exposure to municipal debt because he foresees "a terrible problem" with state and local bonds.
Baltimore City is not on the endangered list — yet — but it could be if it does not overhaul the health care and pension system now consuming 19 percent of the operating budget. The amount, $407 million, is almost twice as much as the city will spend on the public school system next year ($207 million).
In dollar terms, taxpayers will spend 138 percent more (from $171 million to $407 million) in the next fiscal year than in 2000 on those costs, while city revenues have increased 47 percent (from $1.5 billion to $2.2 billion) over the same time period. These figures are optimistic because they assume the city will win concessions from fire and police officers and other city employees on their retirement and prescription drug benefits this year.
Without concessions, the city could spend half of its budget on health care and pensions within the next decade. Why would any sane person choose to move here or locate a business in city limits in that scenario? And what investor would buy the city's bonds with that balance sheet? It raises the question of how Standard & Poor's and Moody's Investors Service could have last month affirmed a stable outlook on city debt.
Fire and police unions don't seem to get it, however. They are amassing millions to fight in court any reductions to their benefits. I guess they have no problem forcing the few remaining taxpayers in the city — where many of them don't live — to finance the type of benefits most taxpayers will never receive.
Fire and police officers risk their lives to protect residents, but is it fair for them to retire after 20 years of service with a guarantee of half their final salary for life?
If the unions really wanted to show their concern about the city's ability to fight crime and fires, they would help to ensure that their benefits don't crowd out money for current police and fire departments and decimate other vital city programs. Their offer to pay more than 6 percent of their salary into the pension system is not enough; they also need to work longer for a lifetime of benefits and align those benefits with fiscal reality.
Other city employees are not helping the situation either. They pay nothing toward the premium of their prescription drug plan. They pay nothing for their retirement and can retire after 30 years of working for the city. Contributions toward their retirement will rise $10.1 million next year from the previous fiscal year. And then there are about 200 former city employees receiving millions in benefits without having met their service requirements. Marcus Brown, a former deputy police commissioner in Baltimore City under then-Mayor Martin O'Malley and current police chief of the Maryland Transportation Authority, is one of them.
This is all happening in a city that keeps losing people and businesses that pay taxes. The total number of tax-exempt properties rose by about 4,500 over the past 10 years while the number of taxable properties dropped by about 2,000. Property values have risen in the past decade, providing the city with a reprieve, but the trend should disturb officials since more than one-third of municipal revenue is derived from property taxes.
Restructuring pension and health care benefits are a necessary first step to fulfilling the city's promises to both its employees and to taxpayers — and staying current on its debt payments. But the city will never be on sound financial footing until it starts attracting capital and people to expand the tax base.
As economist Stephen Walters of Loyola University Maryland has shown, lowering the city's exorbitant property tax rate over a set time period, selling useless assets and eliminating subsidies for a select few would achieve that goal. Redistributing wealth is not working for Baltimore. It needs people and businesses that generate money to save it from decades of self-destructive policies designed by people who would not be in office when the bill came due.
Marta H. Mossburg is a senior fellow at the Maryland Public Policy Institute and a fellow at the Franklin Center for Government and Public Integrity. Her column appears regularly in The Baltimore Sun. Her e-mail is martamossburg@gmail.com.