Huge Deficit Stuns Cincinnati; California Faces Cash Crisis

The economy is taking its toll on cities and the situation is going to get worse. Please consider Huge deficit stuns Cincinnati officials.

A struggling economy and a forecast of income tax revenues that was far off the mark has Cincinnati City Council staring at a $40 million budget deficit through 2010 - sparking talk of layoffs and cuts in service in the year to come.

Council's finance committee received a report from the city's finance department Monday saying the city was already $7.7 million behind its revenue forecast by the end of April. And, if the trend continues, the city could face a deficit of about $40 million through next year.

"Hell would have to freeze over for us to get out of this," said Council member Leslie Ghiz. "There will be layoffs. There will be cuts. And it will be painful."

For the short term, City Manager Milton Dohoney has called for a five percent cut in 2009 spending from all city departments; and ordered department heads to submit plans to him by the end of the week on how they will do that.

But some council members - who will ultimately decide what is cut and what is not - are balking at the suggestion that police and fire services take a five percent cut.

"As far as I am concerned, we're not even going to talk about cuts to police and fire," Ghiz said. "The cuts will have to come from somewhere else."

The city administration had expected to collect nearly $82.6 million in income taxes through April, but the actual receipts were about $76.5 million. Admission tax revenue - the money the city gets from the sale of tickets to entertainment and sporting events - is down as well; and the city took a $1.3 million hit when the state of Ohio reduced the amount of money municipalities get from the state's Local Government Fund.

Council member Chris Bortz said he never believed the forecasts of an increase in income tax revenues and said the current budget shortfall is "the result of out-of-control spending by this council. It has to stop, now."

Cincinnati needs to face reality. Without the article saying so, it is relatively safe to assume that pension promises to city workers is a portion of the problem. The rest of the problem is runaway spending by the city council. Yes, there needs to be layoffs, and services need to be privatized or better yet eliminated.

Tax Increases Not The Answer

One thing that California shows us on Tuesday is taxpayers are in no mood for increased taxes to cover the shortfalls as noted in Hooray For California, Propositions 1A-1E Go Down In Flames.

Tough choices now await California. I proposed the following:

M1 - Cut legislative pay by 20%
M2 - Legalize Marijuana
M3 - Free all the prisoners on minor drug offenses
M4 - Privatize services starting with the prison system
M5 - Eliminate defined benefit pension plans for all new state employees

And that is just a small down payment for what is needed, not just in California, but nationwide.

Cash Crisis In California

California delayed addressing is problems in February by postponing refund checks. No such delay tactics are available now as California Confronts New Cash Crisis.

California may run out of cash by July, the second time this year the most-populous U.S. state confronts a fiscal crisis.

Voters yesterday added $6 billion to a budget deficit when they defeated five measures backed by Governor Arnold Schwarzenegger, a Republican, and the Democrat-led Legislature. The governor said lawmakers will be forced to cut deeper into spending on everything from schools to jails as the state prepares to borrow record sums from investors.

The rejected package was intended to shore up the finances of a government that the governor and state treasurer say has $21 billion less than needed to pay its bills over the next 13 months.

“The voters have spoken and they are telling us that government should do the best it can with the money it has,” said Senate President Pro Tem Darrell Steinberg, a Democrat from Sacramento. “We will immediately and responsibly get to work to balance the budget.”

Fights over California’s annual spending plan may occur because it takes a two-thirds vote to pass one.

“I respect the will of the people who are frustrated with the dysfunction in our budget system,” Schwarzenegger said in a statement from Washington, where he had previously scheduled meetings with Obama administration officials.

According to the state Legislative Analyst’s Office, the state may run through its cash as soon as July. That would force the state controller to shut off some payments, as he did in February, unless California can raise money from Wall Street. The Legislative Analyst’s Office estimates the state may need to borrow as much as $23 billion of one or two-year notes, absent further spending cuts.

California would have little trouble raising money from investors, said John Flahive, who oversees more than $20 billion in municipal debt at BNY Mellon Wealth Management in Boston. However, he estimated that the state may pay as much as 3 percent on the notes, more than three times what it would pay if it might sell into money market funds.

Borrowing More Money Is Idiotic

California and many cities face the same structural defects: Overpromises on pensions, union wages, and bloated budgets. Floating bonds does not address any of these structural difficulties, nor would Federal handouts.

It is time for legislators to fix the problems, not postpone them only to watch them sprout like dandelions. The day of reckoning for decades of wasteful spending practices has arrived for California. Other cities and states will follow.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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