Pessimists need read no further. This post responds to an article in the March 3rd edition of The New York Times, entitled “Broke Town, U.S.A.” The article is thoughtful, well written, and appears to be accurate. It is, however, a narrow view of a broad issue.
Cities across the U.S. are dealing with serious financial challenges, not unlike the problems facing many businesses and individual citizens. The Times article describes how one city, Vallejo, California, has declared bankruptcy and a handful of others are considering the option. Cities with the biggest problems are those that incurred a relatively large amount of general obligation debt prior to what we now call the “Great Recession.” These cities assumed this debt with the belief that their primary revenue sources would be stable into the future and allow them to pay off the amount owed over a long period of time. It is the same kind of reasoning most of used when we decided to purchase our homes using a 30-year fixed rate mortgage as financing. Just as many families who have experienced job loss have defaulted on home loans, some cities that have seen large reductions of sales or property tax revenue could default on general obligation debt. Most will not because cities have other options.
Cities can reduce costs and, in many cases, raise taxes. These options are being exercised by local governments in the U.S. every day. We have very little general obligation debt in Albany; yet we are reducing costs to correspond with the amount of money we receive. The “Broke Town” article rightly points out that the cost of reducing expenses is borne most heavily by average citizens and public employees rather than by those who invest in municipal bonds. The burden on citizens would be even heavier in the long-term, though, if a city chooses to default on debt payments. Albany’s debt is primarily secured by utility payments that typically do not decrease dramatically when the economy is poor. Additionally, our principal creditor is the state of Oregon’s revolving loan fund, a source that has never foreclosed on a loan and one that is unlikely to ever do so.
I believe most cities in the United States are financially healthy despite recent challenges. Our starting point is so high relative to most of the rest of the world that any setback is understandably seen as a serious problem. I disagree with those who seem to revel in disaster that cities, or whatever level of government you choose to name, will never recover from the current hard times. Good health is never a permanent condition. It is, rather, a status that requires foresight, discipline, and effort. U.S. cities, like U.S. citizens, have the resources to turn things around if we have the will to use them appropriately. I believe we do.