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California cities facing major revenue shortfalls, rising pension costs

Vallejo is the poster child for what’s ailing California cities. It filed for bankruptcy in 2008, a victim of the real estate crash, losing a major employer in the process, and facing pension costs it cannot possibly meet.

Its police department was cut by one-third, and no longer has the resources to focus on low-level crimes like prostitution. Nor does the city have any regulations about medical marijuana dispensary. The result, rather obviously, is a huge increase in prostitution and marijuana sales.

“You know the only businesses in town making money? Pot and prostitution — that’s it,” says the operator of a dispensary who says his business is one of the few bringing foot traffic downtown.

Of course, legal marijuana and fewer cops tend to attract prostitutes, drug dealers, and their customers. This is becoming a major problem in the downtown area. Property values have plunged. Residents increasingly feel unsafe.

Neighborhood watch groups are trying to fill the gap as are other organizations. As city governments increasingly hollow out, they will be replaced by resilient communities, citizens banding together to do things. And indeed, in heartening news, it appears the people of Vallejo are doing just that. In the midst of a crisis, they’re saying, ‘We’re not leaving, Vallejo is worth saving.’

John Robb blogs about resilient communities extensively at Global Guerrillas, should you want to know more. At some point, we can no longer rely on the government and have to do things ourselves. That’s the primary point, and this may become less and less theoretical as cities fail to provide expected services. The alternative to such efforts is abandoned no-man’s-land-like parts of Detroit that effectively have no city services or protection.

Things aren’t as dire in other California cities (yet.) But even in Orange County, the home of fiscal conservatism, municipalities are getting devastated by vastly less revenue and the increasing awareness that they can no longer afford the public pension liabilities they’ve taken on.

The Orange County Register details the depth of the problems. In 2009-2010, twenty-three Orange County cities outspent their general fund revenues. This means they have to go into reserves, maybe borrow, and cut services. Many cities have already slashed budgets, but the worst may be yet to come.

The biggest problem for all of them is the cost of public safety, primarily escalating pension and health care liabilities, much of which are unfunded. That means they have no idea where the money will come from. Orange County cities and county agencies have an aggregate total of $8.75 billion in such unfunded liabilities. CalPERS handles most of the pensions and bills the cities for it, some of whom are borrowing to pay for it. Obviously, this is not sustainable or financially sound, even if the interest rates are lower than what CalPERS charges. Further, while cities can choose to pay off all their unfunded liabilities, few do. This means they fall a little further behind each year.

Interestingly, the cities in Orange County that are fiscally sound are those like Laguna Niguel, which outsources practically everything and has little pension debt and six times that debt in reserve. While outsourcing is certainly controversial, it does allow a city to be run on a tight, lean basis, with pension liabilities off-loaded onto someone else.

Like it or not, outsourcing could be a future model for California cities.

(Crossposted from CAIVN)

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