Municipalities and even cities are going broke in the U.S.
It seems mind-boggling that a whole town could go bankrupt, but right now at least nine are facing financial troubles.
There are a number of reasons for this including a shrinking tax base aggravated by the recession and high unemployment.
But central to the problem are also the commitments towns have made to things such as pensions and benefits, and infrastructure liabilities.
Take the case of Strafford County, NH, which spent two-fifths of its budget on a single nursing home. Then there is Harrison, NJ, which built a $200 million sports arena, which is not bringing in money the way it was expected to. And what about Detroit — yes Detroit. In 2009, according to 24/7 Wall Street it brought in revenues of $1,280,791,000, but has a debt of $2,449,480,000. The median household income is $29,447. It has suffered due to the recession more than most U.S. cities with many of its biggest companies, such as General Motors and Chrysler declaring bankruptcy and then getting bailed out.
Central Falls in Rhode Island filed for bankruptcy last year. As part of the process a federal bankruptcy court has approved an agreement that will allow the town of 19,000 to slash pensions of police and fire retirees while paying its bondholders in full, reports the Financial Times.
And before you turn the page, this is not just a U.S. phenomomen. Last summer we read of several Nova Scotia towns on the verge of bankruptcy.
Bridgetown's mayor and council resigned en masse because of financial problems.
Nova Scotia's Municipal Relations ministry undertook a review of the funding relationships between the government and the municipalities as a result.
It seems that many who wade in to the debate take the pension funds to task.
We have heard many times since "the recession" that gold-plated public sector pensions and wages are at least part of the problem and that something needs to be done. There is a sense of unease when we read that the 113 defeated or retired MPs after the 2011 election are estimated to earn $1.1 billion over their lifetimes according to Pension Ponzi authors Bill Tufts and Lee Fairbanks.
Those who work in the federal service for at least 35 years can earn a maximum of 70 per cent of their best five years of earnings. For a senior manadarin now earning say a salary of $195,300 that means a pension indexed to inflation of about $140,00. Pretty good.
But let's keep in mind that the average public service pension earned by the current 238,000 retired members and their survivors was about $25,000 in 2009-10 — that, of course, includes people who only worked for the government for a couple of years. To get this employees pay 5.8 per cent of their salary for salaries up to $48,300 and 8.4 per cent for salaries above that.