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The Leaflet: Many Cities Are Tumbling Into Billion-Dollar Sinkholes

February 1, 2019

Cities all across the country are sinking into a financial morass. Only 12 of the nation's 75 most populous cities had budget surpluses in fiscal year 2017 and collectively are in the hole $330 billion.

Four out of every five of the nation’s most populous cities are financial “sinkholes,” according to the third annual Financial State of the Cities (FSOC) report. The analysis, conducted by Truth in Accounting (TIA), examined the ledger books of 75 cities for fiscal year 2017. The results: 63 cities had budget deficits.

Inevitably, these budget shortfalls will be borne by taxpayers through higher taxes and/or reduced government services. In the report, TIA calculates a city’s taxpayer burden by dividing the amount of outstanding debt by the number of taxpayers.

The top 5 “sunshine” cities, i.e., cities with a taxpayer surplus, are: Irvine, California ($4,400); Charlotte, North Carolina ($3,400); the District of Columbia ($3,300); Lincoln, Nebraska ($2,900); and Fresno, California ($2,500). The bottom 5 sinkhole cities are San Francisco, California (-$22,600); Honolulu, Hawaii (-$23,000); Philadelphia, Pennsylvania (-$27,900); Chicago, Illinois (-$36,000); and New York City (-$64,100).

Every city listed in the report has balanced budget requirements. However, only 12 had budget surpluses in fiscal year 2017. How do cities get away with this? They slyly use accounting gimmicks. These tricks include inflating revenue assumptions, counting borrowed money as income, understating the actual costs of government, and, most commonly, neglecting to record a large portion of employee compensation.

Retirement benefits for employees are the main source of cities’ debt obligations. In total, all 75 cities are in the hole nearly $330 billion, with pension debt accounting for $189.1 billion and other postemployment benefits—mainly retiree healthcare liabilities— encompassing $139.2 billion. By purposely excluding employee compensation, elected officials pull the wool over taxpayers’ eyes, deceiving them beyond belief.

FSOC also lists how long it takes cities to publish their annual financial reports after the end of the fiscal year. Ideally, cities should issue their reports within three months. However, the national average for publishing them is about 169 days. Almost a third of cities took more than 180 days to publish their financial reports. Columbus, Ohio was the timeliest, only taking 88 days to make public its balance sheets.

TIA recommends that elected officials use full accrual calculations and techniques in the budgeting process, determine the real debt of the city (including all postemployment benefits), stop making false claims of balanced budgets, and provide financial reports to taxpayers in a more timely fashion.

It is the responsibility of government officials to be accurate and transparent in public finances. As long as lawmakers fail to honestly report the state of city finances, voters will continue to elect public officials who promise more public services and programs. Unfortunately, this immoral practice only furthers the burden upon current and future taxpayers with crippling debt. 

 

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Author
Arianna Wilkerson worked in government relations at The Heartland Institute from 2017 - 2019.