Washington can print money to forestall national collapse. States can leech off that currency stream. But for some cities, that have no such rabbits in their hats, the collapse is happening now.
When selecting a setting for his nbc sitcom The Office, Executive Producer Greg Daniels decided on Scranton, Pennsylvania, in part because the city is typical. The Emmy-winning show wanted to ridicule American corporate life, and needed a typical American city to let the mockery happen in. Scranton embraced The Office, and has enjoyed nationwide recognition as a result of the hit show’s setting. But now, the former coal town is making headlines for a very different reason.
Last Friday, the city of Scranton sent out paychecks to its employees, as it does every two weeks. But these checks were for amounts significantly smaller than usual because Mayor Chris Doherty reduced all city employees’ pay—including his own—to the state minimum wage of $7.25 an hour.
After sending out Friday’s checks, Scranton had only $5,000 left in the bank and still owed its 400 employees almost $1 million.
Scranton’s police unions, firefighters’ union and public works unions have taken the city to court over the reduced pay, but Doherty says he has no other choice because the city is broke. His planned solution is to immediately raise taxes by 29 percent, and by 78 percent over the next three years. But the council wants the city to instead borrow money to solve Scranton’s fiscal woes.
On Monday, Mish’s Global Economic Trend Analysis said, “It should be perfectly obvious to every soul on the planet that Scranton is bankrupt. Tax hikes are not the answer. The solution is filing bankruptcy with the hope of killing public union wages and benefits.”
But like many other states, Pennsylvania has rules in place that prohibit cities from filing bankruptcy without approval from the state. Mish’s final assessment is that “Inept city management, with public union wages and benefits at the heart of it, killed Scranton.” Whether or not Pennsylvania is prepared to admit it, Scranton is bankrupt, and the tensions there are rising.
And Scranton it is not the only U.S. city in such a condition.
San Bernardino is expected to become the third Californian city in two weeks to file for municipal bankruptcy protection as it wrestles with increasing employee costs and declining tax revenues. Last fall, Jefferson County, Alabama, filed the biggest Chapter 9 municipal bankruptcy in American history, leaving county commissioners planning to default on a general obligation bond payment. In late 2011, Harrisburg, Pennsylvania, said it would default on a payment coming due to general obligation bondholders. Stockton, California, was in negotiations earlier this year in hopes of avoiding becoming the biggest American city yet to declare bankruptcy. The most recent reports said it is “very likely” that Stockton will go bankrupt. These are just a few of many examples.
Many municipalities across the nation have found themselves pushed over the brink by the recession and its lingering aftermath. They are in dire financial straits with little hope of recovery. “This is truly a new era for dealing with troubled municipalities,” said Michael Stanton, publisher of The Bond Buyer, a public finance newspaper.
Cities are going belly up while states and the nation hang on, largely because cities cannot rely on the deus ex machina currency printing that the larger entities rely on. Mayor Doherty explained that he does not have the same options as the Fed or even a state government, saying, “I want the employees to get paid. Our people work hard—our police and fire—I just don’t have enough money, and I can’t print it in the basement.”
These cities are the canaries in the toxic coalmine that is the U.S. economy. Smaller and more fragile than states, they are succumbing to their economic ailments in tragic ways. But the canary analogy breaks down at that point because, unlike the coal miner who leaves the mine after watching his canary keel over, state and federal policymakers are not heeding the warning.