December 28, 2010

Bankruptcy and Pension Review, Eileen Norcross and Matthew Mitchell

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Cities Near Bankruptcy Need Serious Pension Review
December 28, 2010

Hamtramck, a small city in Michigan struggling under debt and desperate to declare bankruptcy, is just one of hundreds of cities across the country facing fiscal trouble due to pension problems.  Eileen Norcross believes these issues need to be addressed with serious reviews of pension contracts, rather than temporary fixes like redistricting.

"Changing the geographic boundaries doesn't change the underlying problems," said Norcross.  "It's all a ticking time bomb.  Localities are going to realize that they now have to put more and more of their revenues to pay out their pensions and health benefits, and they don't want to raise property taxes to do it."
Norcross says that for struggling cities like Hamtramck, the best option may be for the state to let them declare bankruptcy, allowing cities the chance to restructure under-funded pension contracts.

"Bankruptcy lets cities open their contracts and put everything on the table," said Norcross.  "Consolidating doesn't necessarily save money - it might buy some time. The rest of the options are passing the buck."

Bankrupt States: Result of State and Local Government Bubble
January 13, 2011

With Illinois legislators voting on an income tax increase of 67 percent, the Mercatus Center’s Matt Mitchell warns that unless policy changes are made, this could be the new reality for states across the country.

“Illinois has a lot of the same problems that everyone else does, they’re just a decade ahead,” said Mitchell. 

Mitchell compares what we’re seeing in the states to the 2008 housing bubble.

“Like the housing sector earlier this decade, the state and local government sector has essentially been in a bubble: spending has been growing at an unsustainable pace," said Mitchell. "And when something can't go on forever, it won't.” 

“The past year in Illinois, including this tax hike, is an illustration of the bad things that result from bubbles,” said Mitchell.  “Illinois refused to pay government vendors, they furloughed employees, made some painful spending cuts, and now tax increases.” 

Rather than waiting until it gets to a situation as dire as the one facing Illinois, Mitchell says it would be better for other states to take heed and start making adjustments to their spending levels now.