Indiana Cities: September Bankruptcies?

May 5, 2010

For the use of the membership only (725 words)
 
A tour of the state with municipal policy experts left me convinced that few if any Indiana cities will institute the necessary budget corrections in time to avoid crises next year.
 
Talks with civic leaders, elected officials and editors in seven Indiana cities suggest that we are more likely to follow the recent example of Harrisburg, Pa. That is, we will still be arguing about minor budget cuts when the gates of Chapter 9 bankruptcy begin to close.
 
And it gets worse. Dr. Eric Schansberg, an adjunct scholar with the Indiana Policy Review Foundation, wrote recently that too many state and local governments will react to these shortfalls by applying tax rates that further diminish economic activity and reduce property values, thereby actually decreasing tax revenues. So instead of solving the problem, “this will increasingly squeeze lawmakers into increasingly unpleasant choices,” Schansberg says..

Dr. Sam Staley, another foundation scholar, believes that many cities are running up against what he calls the “10 Percent Rule.” The concept, although more psychological than fiscal, is worth understanding in the context of Indiana municipal politics.
 
First of all, property-tax caps, generally lower tax revenue and increased costs have brought our cities to a historic point (projected budget shortfalls of 10 percent or more). It is a point where old remedies and fixes no longer work.
 
“The nut of this rule of thumb is that it takes at least a 10 percent change in something to motivate a meaningful change in behavior or direction,” Dr. Staley told the editorial boards of several Indiana newspapers. “By ‘meaningful,’ I mean a change in direction or behavior that is strategic and involves a realignment of priorities or resources.”
 
Staley reminds us that 10 percent is an upper bound. He says that good managers start rethinking priorities at five percent or even lower, especially if the shortfall has continued over time.
 
The concern is that Indiana cities, many of them facing much larger shortfalls, seem content to address their crises with incremental and short-term policy tweaks. Regarding the line items in their budgets, they are not asking the critical question, “Is this something that government should be doing?”
 
Maj. Ryan Cummins, a former finance chairman for the Terre Haute City Council and someone I consider an expert on Indiana municipal budget policy, shares this concern. He predicts that as annual budget discussions pick up this spring and summer some Indiana city councils will realize they face virtual if not actual bankruptcy by their fall budget deadlines.
 
Cummins dismisses as ineffectual the familiar “press-release economics” of cuts in phone use, gasoline and overtime. Even cutting out staff deadwood with the promise of improved departmental efficiency won’t be enough. He believes that Indiana cities must face the fact their budgets are dominated by employee compensation (80 percent in his city). Successful local government, Cummins says, will shed not only jobs but entire departments.

As a councilman and a finance chairman, for example, Cummins questioned whether citizens truly want their government to own cemeteries, swimming pools, parks and golf courses. And do they care whether the emergency personnel who answer their 911 calls are municipal union firefighters or comparably trained and equipped private contractors?

How does such a discussion begin? A good start is the introduction of “core functions” legislation. Such proposals are being considered in several states as a way to organize that discussion around the question of “what, exactly, is the job of city hall?” A necessary condition if the discussion is going to be constructive rather than postured is an honest and independent media.
 
Kim Thatcher, a sponsor in Oregon, began her campaign with nothing more than loose agreement that government “can’t and shouldn’t do everything.”
 
“Our system of budgeting wasn’t working,” she explained recently to the American Legislative Exchange Council. “Instead of agencies pestering lawmakers for more and more money, we first needed to establish what the core functions of government were and then decide how to divvy up the available funds.” Her list of core functions serves as a talking point for an Indiana discussion.
 
Will everyone agree with a given set of core functions arranged in a set priority? Surely not, our group certainly wouldn’t. But a list forces office-holders to justify alternative positions through cost-benefit analysis rather than factional politics. That in itself might introduce the accountability needed to spur city halls to quit doing what doesn’t work and start doing what might work.
 
T. Craig Ladwig is editor of The Indiana Policy Review.
 
NOTES
 
1. In March and April, the author, Dr. Sam Staley and Major Ryan Cummins visited either individually or together seven Indiana cities of every size, including agricultural-based county seats, mid-sized college towns and metropolises. All three men were contributors to the foundation’s journal, “The New Indiana City.”  Ron Reinking, a certified public accountant and another contributor, joined the group for one of the visits.
 
2. Chapter 9, Title 11, United States Code: A Chapter 9 bankruptcy is available only to municipalities. It is a form of forced reorganization rather than a liquidation.



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