Animal’s Hump Day News

Happy Hump Day!

Guess which American cities are going broke.  Excerpt:

Chicago and New York rank at the bottom of a new analysis of fiscal strength based primarily on data from 2015 financial reports issued by the cities themselves. The analysis includes 116 U.S. cities with populations greater than 200,000. See the full rankings here.

Chicago’s position at the bottom of the ranking is no surprise to anyone who follows municipal finance. The Windy City has become a poster child for financial mismanagement, having suffered a series of ratings downgrades in recent years. Aside from having thin reserves and large volumes of outstanding debt, Chicago is notorious for its underfunded pension plans.

For example, the city’s Municipal Employees’ Annuity and Benefit Fund (MEABF) reported $4.7 billion in assets and $14.7 billion of actuarially accrued liabilities at the end of 2015, representing a funded ratio of just 33 percent. The actuarial calculations rely on a controversial practice of discounting future benefits at a rate of 7.5 percent, which is the assumed return on the fund’s portfolio return. If a more conservative assumption was employed, MEABF’s liabilities would be higher and its funded ratio lower.


While Chicago’s place at the bottom of the list is unsurprising, New York City’s position — just one step above — was unexpected. An extended bull market and soaring real estate prices have pumped money into the Big Apple’s coffers. Total municipal revenues rose from $60 billion in 2009 to $81 billion in 2015. But the city has been spending the money almost as quickly as it has been coming in.

At the end of its 2015 fiscal year, the city’s general fund reserves amounted to just 0.67 percent of expenditures — well below the Government Finance Officers Association recommendation of 16.67 percent (equivalent to two months of spending). A city’s general fund is roughly analogous to an individual’s checking account.

Here’s the common thread at the root of all these municipal bankruptcies:  Public-sector unions.

I have no issue with unions in private business, as long as membership in said unions is strictly voluntary, and as long as unionization in those businesses is by secret ballot.  In these cases, contracts are decided between the union membership and the employer.

Public sector unions are different.  Public sector unions negotiate their contracts with the very politicians whose campaigns they (heavily) fund.  That is a deep and fundamental conflict of interest that cannot be reconciled.  No less than Franklin Roosevelt agreed that this conflict of interest should preclude the legality of public sector unions.

There is no better illustration of such conflict than the cities of Chicago and New York.  Public sector employees typically enjoy benefits far, far above any equivalent worker in the private sector (when was the last time you heard of a private company offering a defined-benefit pension plan?) and pay that is at least on a par, if not above the private sector.

It’s driving our major cities into bankruptcy.