Friday, August 22, 2008

Every Town Is Bankrupt

East Hampton Reels as Billionaire Town Floats Debt

The Long Island sanctuary for the rich, where lobster salad sells for $85 a pound, has been hit by a double whammy: a tripling in workers' health costs since 2003, which officials failed to anticipate, and a 43 percent drop in revenue from mortgage taxes related to real estate sales in the first half of the year from 2007. Town officials for the first time plan to reduce the deficit by borrowing, after winning state approval for a $15 million bond sale.

East Hampton is self-insured to cover health care for its 448 employees and retirees. Costs associated with the plan increased to $9.2 million this year from $2.9 million in 2003, according to the official statement for bond anticipation notes sold in June, one-year securities that helped finance capital projects and improvements.

The town intends in the next several weeks to borrow $4 million dollars or more with a revenue anticipation note, as it awaits receipt of mortgage taxes already collected by Suffolk County, said board member Pat Mansir.

"It still hasn't been determined exactly how much we might need," Mansir said.

As of July 22, the town's general fund contained only $900, she said. The town received enough revenue in fees during the next four days to meet its more than $1 million bi-weekly payroll, she said.

East Hampton also plans to sell a $10 million, one-year bond anticipation note in August, and then convert the note into a $10 million, 10-year bond issue that may cover some capital spending requirements along with deficit reduction, said board member Peter Hammerle in an interview.

The board will probably use the remaining $5 million of its borrowing authority by issuing a second 10-year bond issue next year to cover a deficit officials expect in 2009, he said.

"We still don't know how much our medical bills will total," Hammerle said.

'Bite the Bullet'

A $10 million issue over 10 years would require a 4 percent increase of East Hampton's property-tax rate, said Town Supervisor William McGintee, a Democrat.

"Once you go down that road you're raising taxes just to pay interest," he said. "I would rather see us bite the bullet now."

So how do healthcare costs triple in five years?

Sure premiums are rising, but not quite nearly that much.

The answer is probably in "retirees". East Hampton probably not only added to its *benefit payroll* because of retiring workers, these 'old coots' benefits probably cost a whole lot more.

The fact is, almost every town in America is paying the indefinite healthcare benefits of its retired municipal workers. It's a liability that they can scarcely afford no matter how much money they set aside for it. Cities and towns have been hit with the "triple whammy" of rapidly rising healthcare costs, longer life expectancy, AND shrinking confiscatory revenue. Innumerable towns will be forced to declare municipal bankruptcy just so they can *renegotiate* benefits with their retired cops, firemen, librarians, and janitors.

It needs to be said that these local governments had no business promising lifetime benefits to their employees in the first place. They had no business promising something they couldn't guarantee.

On a larger level, the States are all pushing for a bigger role for Medicare. They are trying to offload their healthcare liabilities to the Federal government.

In fact, the parallels between Medicare and Fannie Mae are striking.

Just as the blind Medicare expenditures have helped push healthcare costs to the stratosphere - Fannie Mae's movement into holding and (implicitly) guaranteeing mortgages also forced traditional mortgage lenders to lower their standards to compete - sending home prices to the moon.

Medicare helped bankrupt the municipalities and then they turn around and push for a larger State hand in they don't have to make any tough budgetary decisions themselves. Then the States knock on Washington's door...

Likewise, after Fannie Mae drove rates and credit concerns to the floor, taking the mortgage banks down a sewer, now Bank of America Corp, Wells Fargo, Citigroup, JP Morgan Chase, and cohorts are offloading their bad mortgages onto the Feds via Fannie Mae and FHA. More accurately, they are offloading their junk onto taxpayers and future generations.

Big Government has grossly distorted the markets for both housing and healthcare. Sure, other options exist for consumers, but both Medicare and Fannie Mae have defined and inflated both cost structures and set standards industrywide. I am not positive, but I believe the term describing this type of *imperfect competition* is monopsony (surely some nerd will try to correct me).

East Hampton's fiscal woes are the perfect launch pad. From this one bankrupt municipality we can easily extrapolate to almost every other town in America.

If you knew anything about East Hampton you'd know that there has been new construction (read: new tax revenue) left and right for the past several years. None of these homes are under a $1 million either, with many multiples of that. Furthermore, on the East End there are scarcely delinquent taxpayers nor has there really been anything other than a recent, slight downtick in the NYC economy. So if a town flush with cash flow can't cover its bills what does this forebode for Camden, NJ or Pontiac, Michigan? For the State of California? This is my Greg Mankiw induction argument once again.

Politicians the world over simply spend every nickel that comes in and then go into hock for quarters and sawbucks.

East Hampton may be running short today, but it was just yesterday they were spending millions moving and restoring barns to *maintain the towns character* and, of course, to house municipal employees in the lavish manner they *deserve*. They've also got a confiscatory 2% transfer tax on all real estate transaction in the Hamptons called the Peconic Bay Community Preservation Fund. Surprisingly, there's not much written on the web on that slush fund. Two-percent is big money when you are talking about the multi-million dollar mansions and estates out East. It is just another example of a minority (those already domiciled in the Hamptons) voting themselves the assets of a majority (anyone who would in the future buy a house out there). I guess if you want to be part of the *scene* you have to ante up!

There's a running joke or catch-phrase in the doom-and-gloom housing bubble blogosphere that, "We're all subprime now." Like all provocative humor, its foundation is the naked truth. This line from the article above...

The town intends in the next several weeks to borrow $4 million dollars or more with a revenue anticipation note, as it awaits receipt of mortgage taxes already collected by Suffolk County, said board member Pat Mansir.

...certainly buffets that jest. Read up on RAL Loans on Wikipedia. These products for the *working poor*, are exploitive, allegedly racist, and got HR Block and Jackson Hewitt in all sorts of trouble.

The companies defended themselves by arguing that refund anticipation loans are legitimate and for *emergencies*.

If we aren't "all subprime", the differences at least seem very blurry these days.

By the way, if East Hampton is spending $9.2 million this year to cover the healthcare of its 443 employees and retiree...

...then it is spending a whopping average of $20,536 per person!!!


Anonymous said...

Pontiac, MI is already bankrupt and I agree that many more cities will follow.

The promises made are not sustainable and will crumble under the weight of falling tax revenue and increased costs.

The party is over and I believe that the majority of pension plans contain the ability to be re-written and revised.

Great blog by the way.

Big Mac from Michigan

CaptiousNut said...

The Big Three better get sick fast if they want a bailout as there won't be enough $$$ympathy to go around.

I visited Michigan once and we got damp, cold, cloudy weather for 4 days straight. I have to say it jibed perfectly with my preconcieved image of the state.

I was trying to tell my bro-in-law how corrupt the Mayor John Street of Philadelphia was. He (of Macomb, MI) laughed and started forwarding me stories on Detroit's mayoral crook.

The lesson is, never try to impress a local political/economic sob story on somebody who lives in Michigan!