(Bethany Blankley, The Center Square) The majority of the 75 most populous U.S. cities can’t pay their bills and have a combined debt of $266.5 billion, according to new Financial State of the Cities report by Truth in Accounting.
The Chicago-based nonprofit’s seventh annual report evaluated fiscal 2021 data and found that 50 out of 75 cities evaluated – 66% – didn’t have enough money to pay their bills. Their combined debt totals $266.5 billion; combined pension debt totals $109.8 billion; and combined OPEB (other post-employment benefits) debt totals $168.7 billion.
The analysis ranks each city according to its taxpayer burden or taxpayer surplus, identifies them as sinkhole or sunshine cities, and assigns them letter grades. A taxpayer burden is the amount of money each taxpayer would owe if the city were to pay all of its accumulated debt to date. A taxpayer surplus is the amount of money the city has left over after all of its bills are paid, which is divided by the estimated number of taxpaying residents. Sinkhole cities can’t pay their bills; sunshine cities can and have a surplus.
The 10 worst sinkhole cities with the highest taxpayer burden are run by Democrats, with the exception of Miami. New York City ranks the worst, followed by Chicago, Honolulu, Portland, New Orleans and Philadelphia, which all received F grades. St. Louis, Dallas, Pittsburgh, and Miami rounded out the worst 10 cities, all receiving D grades.
Their financial problems “stem mostly from unfunded retirement obligations that have accumulated over the years,” TIA says, compounded by other factors.
In New York City, for example, elected officials’ repeated financial decisions “left the city with a debt burden of $171.5 billion,” translating to a taxpayer burden of $56,900. “New York City’s financial problems stem mostly from unfunded retiree healthcare obligations that have accumulated over the years,” the report states. “While the city’s pension funds appear to be well funded due to the unrealized gains in pension investments, only four cents has been set aside for every dollar of promised retiree health care benefits.”
Chicago’s debt burden of $38.2 billion translates to a taxpayer burden of $41,900. The Wind City’s financial problems stem mostly from year-over-year claims of balanced budgets excluding employee compensation. As a result, these costs were pushed onto future taxpayers in the form of unfunded pensions and other retirement benefits, the report notes. City officials set aside only 25 cents for every dollar of promised pension benefits and no money for promised retiree health care benefits, the analysis found.
Portland’s debt burden of $5.2 billion would have been worse were it not for receiving federal stimulus money and record gains in the investment markets, the analysis found. The city’s taxpayer burden of $23,400 was primarily caused by unfunded retirement obligations that accumulated over the years, the report notes. The city set aside only 44 cents for every dollar of promised pension benefits and 20 cents for every dollar of promised retiree health care benefits, it found. “Not properly funding its pension and retiree health care promises places a burden on future taxpayers and puts pension holders at risk,” the report states.
All 75 cities TIA analyzed have balanced budget requirements designed to “to require financing and spending practices that enable governmental entities to avoid financial difficulty and to live within their means.”
“By definition, if a city has a balanced budget requirement, then spending should not exceed earned revenue brought in during a specific year,” the report states. “Balanced budget requirements are meant to prevent elected officials from shifting the burden of paying for current-year services onto future-year taxpayers.”
TIA says that despite having balanced budget requirements, the cities were in debt because politicians used “accounting tricks” to make them appear balanced. These “tricks” include inflating revenue assumptions, counting borrowed money as income, understating the true costs of government, and delaying the payment of current bills until the start of the next fiscal year so they aren’t included in the calculations, TIA says.
The most common accounting trick officials use, it notes, includes “hiding employee benefits” like healthcare, life insurance, and pensions “from the current budgeting process by not acknowledging they exist” even though they are obligated to pay them as employees earn them. Retirement benefits aren’t paid until employees retire but “they still represent current compensation costs because they were earned and incurred throughout the employees’ tenure,” TIA notes.
Cities are required to pay into the retirement fund to accumulate investment earnings but some elected officials have instead allocated them to other programs, TIA says. Instead of funding promised benefits now, what is owed is charged to future taxpayers, TIA says.
“Shifting these payments to future taxpayers allows the budget to appear balanced while city debt is increasing,” TIA notes. “Governments are able to accumulate debt while claiming balanced budgets because the vast majority of budgets are prepared on the cash-basis. This is an antiquated accounting method that includes cash inflows, including loan proceeds as revenue, and outflows – in other words, only checks written.”
