20 Cities That May Face Bankruptcy After Detroit.
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What do most of these ailing cities all have in common? Well, consider that the vast majority are located in states with forced unions, non-right-to-work states.
“Right-to-work laws attract people and businesses,” says labor economist Richard Vedder of Ohio University. “Non-right-to-work states repel them.” His statistics show that cities in states with right-to-work laws have sturdier tax bases and higher employment levels.
Unions control state legislatures and city halls in non-right-to-work states, so it can become politically paralyzing to try to fix the problem of runaway labor costs.
Another common trait of financially troubled cities: years and years of liberal governance.
For at least the last 20 years major U.S. cities have been playgrounds for left-wing experiments — high taxes on the rich; sanctuaries for illegal immigrants; super-minimum wage rules; strict gun-control laws (that actually contribute to high crime rates); regulations and paperwork that make it onerous to open a business or develop on your own property; crony capitalism with contracts going to political donors and friends; and failing schools ruled by teacher unions, with little competition or productivity.
Starting in the 1970s, Detroit became inhospitable if you wanted to raise a family and send your kids to good schools. Criminal predators also made cities like Detroit unlivable for families with children. Businesses that provide jobs often faced citywide income taxes that were layered on top of state income taxes.
“Declining cities are jurisdictions that levy local income taxes,” a Cato Institute report concluded. Detroit levies a 2.5 percent income tax; New York’s is 5 percent.
Another problem has been the decline in family structure that has become acute in so many big cities across the country, from Los Angeles to New York. In many cities, as many as two out of three children are born to a family without a father. As Charles Murray of the American Enterprise Institute has warned, “Single-mother families are a recipe for social chaos.”
They are a major factor in high-poverty levels of many U.S. cities, again with Detroit being exhibit A. Welfare reforms have helped, but much work needs to be done to reinstall a culture of traditional two-parent families in urban areas. This would lead to less crime, fewer school dropouts, more businesses, and more social stabilization.
But for all these problems, cities could see a potential renaissance. More empty-nesters in their 50s and 60s are moving back into central cities like Chicago and Boston, New York and Washington, D.C., because of the cultural amenities — fine restaurants, the theater, sports, fashion, and river or lakeside condominium properties. As baby
boomers retire, cities may see new populations moving in.
But this creates a Catch 22 for American cities trying to recapture their glory days and attract new residents.
Who wants to pay taxes for retired city workers when they don’t provide any services?
These legacy costs are a fiscal millstone. They put cities in a service decline spiral, because current taxes go to retired teachers and other municipal retirees, while city managers and mayors are forced to lay off firefighters, police, and teachers. Detroit has three retired city workers collecting a pension for every two currently working.
The Vallejo, Calif., city manager once told me when that city couldn’t pay its bills several years ago, “You have no idea how bad it is here. We are now paying for three police forces: one that is working and two that are retired.”
Given that payment of the benefits are often legally guaranteed contracts, bankruptcy may be a salvation for some cities. It is a way to hit the reset button and erase those costs so cities can start over.
A good example is Stockton, Calif., which overdeveloped and took on $1 billion in debt during the Golden State housing boom six years ago. When the economy collapsed and housing values plummeted, Stockton couldn’t pay its supersized debts. It declared bankruptcy, but now is starting to rebuild.
According to The Fresno Bee, “Stockton has negotiated voluntary agreements with current workers to eliminate retiree healthcare entirely and is awaiting court approval of a plan to eliminate healthcare benefits for existing retirees as well. City Manager Bob Deis says those reductions will generate $1.6 billion in savings. Three years after it sought bankruptcy protection, Stockton is beginning to right itself. Employee pay and benefits have been downsized, allowing for necessary investments in public safety.”
So can America’s great and iconic cities make a financial and population comeback? The answer is certainly yes, if they can erase from their books the mistakes of 50 years of labor-union political control.
Bankruptcy, strangely enough, may not be the end for cities, but perhaps the dawning of a new urban revival.
Stephen Moore is senior economics writer and member of the editorial board for The Wall Street Journal.
