What Central Falls and the Debt Deal Mean For Cities
As Congress eyes domestic cuts, the bankrupt Rhode Island municipality shows what happens when a city can't afford to function.
(Governing's Ryan Holeywell discussed municipal bankruptcy and domestic cuts on NPR's 'On Point' this week. Click here to listen.)
Two extraordinary events happened within hours of one another on Monday: Congress approved an agreement that would prevent the country from defaulting on its debt – and in the process set the stage for a decade of deep spending cuts. The same day,
The two events are more related than they seem.
To get it out of the way, let’s be clear:
Others point out that
Unfortunately, the Central Falls bankruptcy will likely give further credence to the municipal doomsayers of the world, led by analyst Meredith Whitney, who famously predicted on 60 Minutes last December that 2011 would feature 50 to 100 sizable municipal bond defaults. Of course, those predictions turned out to be wildly off. There have been just 24 municipal defaults through June totaling $746 million, Bond Buyer reports, and none were state and local general obligation bonds. In fact, the country’s on pace to have fewer municipal defaults this year than it has in each of the last two years.
And municipal bankruptcies are even rarer. Historically, there’s only about eight a year, and even during these times of austerity, bankruptcies aren’t outpacing that clip. But
Unfortunately, the attention paid to municipal bankruptcy obfuscates the real story: the major cuts coming to states and localities at a time when they can afford it least.
The debt ceiling deal cut between Democrats, who were merely trying to avert default, and Republicans, who used the threat of default as a bargaining chip, could result in about $2 trillion in spending cuts over 10 years. About half that total could come from domestic, discretionary spending – the category that includes everything besides entitlement programs and defense.
So why does it matter? About a third of that spending goes directly to states and localities, typically through grants. Sure, state and local leaders are glad the country didn’t default on its debt, since that process likely would have caused a cascade of credit downgrades to state and local issuers. But nobody in state and local government actually expected default to happen. So as pundits in
“A lot of the deficit cuts will directly affect state and local funding,” Hayes says. In fact, those cuts may be so deep that the credit ratings agencies might put some jurisdictions on a “negative watch,” or warning that their credit ratings could be downgraded. Local leaders are scrambling as they try to figure out what, exactly, the cuts will entail. So far, they have little idea. After all, Congress agreed to cut domestic spending to its lowest level in 50 years without first deciding what it would actually cut. But state and local leaders are expecting the federal contributions toward education, community programs, housing, infrastructure, first responders – basically everything that state and local governments do – will take a hit.
Even before the debt agreement was signed, states and localities were on notice. The House Appropriations Committee recently approved a plan to eliminate $1.1 billion for state and local policing programs. House Republicans have signaled they’d like to eliminate the $3.9 billion Community Development Block Grants program, which provides aid directly to localities for programs like low-income housing and community centers. President Obama’s own budget cuts the program by $300 million, which would seem to represent a best-case scenario for localities. The president’s budget cuts or eliminates dozens of other programs geared toward state and local governments, including a 50 percent cut to a program that helps poor people afford heating and air conditioning. The House's highway and transit bill reduces funding by about 28 percent over its predecessor, and that's before even adjusting for inflation. And all these plans were made before the debt ceiling compromise. The list goes on.
Ted Ellis, mayor of
With debt and deficit reduction the issues du jour, targeting programs that aid localities gives federal lawmakers a way to tout their fiscal responsibility credentials without dealing with the implications. Those issues, of course, fall on governors, mayors and county leaders to sort out. “A smart cut is when you eliminate duplication,” says
So what does
Meanwhile, cities are cancelling infrastructure projects, laying off personnel and cutting back on basic services. In
Cities are basically service agencies, and low-income and middle class residents rely on those services. As the Brookings Institute recently wrote about the debt ceiling compromise, “(t)he burden of closing the gap will be placed on poor and middle-class households.” After all, it’s not the wealthy who borrow books from the library and take their kids to the community pool.