Rearranging the Chairs on the Deck of the Titanic

News that Governor Arnold Schwarzenegger proposes to fund a portion of California’s $21 billion budget deficit by exercising a little-known 2004 state law that allows Sacramento to demand loans of up to 8 percent of the property tax revenues collected by cities, counties and special taxing districts raises the specter that more local governments will go the way of Vallejo, the town just north of San Francisco that declared bankruptcy last year.

Having, like General Motors, locked themselves into labor contracts providing generous pension and healthcare benefits for municipal employees and seeing their tax revenues dry up as the recession presses on, mayors and other local officials are in the midst of their own budget crises, which only will worsen if they are forced to loan money to a profligate state government whose creditworthiness already is in jeopardy – and whose ability to repay those loans is open to serious question.

But wait! Foreseeing that the governor’s plan is likely to push many local governments over the edge, a bill being considered by the state legislature would make it much more difficult for cities to follow Vallejo’s lead. Supported by an organization known as California Professional Firefighters, the legislation requires cities considering filing for Chapter 9 protection to first obtain the blessing of a new four-person state bankruptcy commission, whose membership will be comprised entirely, as you might have guessed, not of experts in public finance but of state legislators.

Sacramento to Rio Vista: Don’t dare try to avoid “loaning” us money by going belly up and breaking sacred union contracts!

Rio Vista has another card up its sleeve, however. It, as are bankrupt Vallejo and several other small towns around the nation, including Mountain View, Colorado, and Mesa, Washington, is thinking about “de-incorporating”, that is, dissolving its municipal government altogether and throwing itself on the mercy of county taxpayers, who thereby would become responsible for sharing the cost of sewerage, police and fire protection and other public services formerly paid for by city residents.

De-incorporation, which would benefit Rio Vista but harm everyone paying county taxes, is equivalent to rearranging the chairs on the deck of the Titanic after it had struck the iceberg. Unlike a declaration of bankruptcy, de-incorporation would not permit Rio Vista or any other municipality to get out from under existing contractual obligations.

Except for scale, there is no essential difference between municipal de-incorporation and Governor Schwarzenegger’s demand that California’s sub-governments help pay Sacramento’s bills. He can blame mayors for any tax increases required to pay the piper and the mayors of Rio Vista and Vallejo can blame their county officials.

The fundamental problem here is that governments at every level overspent when economic times were good. Now that the recession has brought the chickens home to roost, all are engaged in desperate attempts to shift the burden of paying for past extravagances onto others’ shoulders. A more principled response – although not one which should be expected from self-serving politicians – would be to cut government down to a size that taxpayers can afford and to supply the public goods and services for which they are willing to pay.

William F. Shughart II is Research Fellow and Senior Fellow at the Independent Institute, the J. Fish Smith Professor in Public Choice at Utah State University, past President of the Southern Economic Association, and editor of the Independent book, Taxing Choice: The Predatory Politics of Fiscal Discrimination.
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