Why the 3 Fundamentals of Governance Are So Important

Bridgeport, Conn., illustrates why governance, debt and demographics are so crucial for a healthy functioning city.
by | November 2013
 

Government finance professionals, especially those working in the municipal bond market, like to talk about “the fundamentals” when discussing the prospects of individual governments or of the market as a whole. But the term is largely undefined. I like to think the fundamentals encompass three elements: governance, debt and demographics. Bridgeport, Conn., is an interesting case to use to explore these crucial elements.

First, governance: Connecticut’s largest city is the only city I’ve ever heard of where public employees are also members of the city council. Although the city charter prohibits members of the city council from holding any nonelected office or appointment paid out of Bridgeport’s treasury, five of its 20 members are city employees; the council president also is the deputy director of the city’s Department of Labor Relations. Bipartisan legislation closing a loophole in state law that allows these people to skirt the charter prohibition was defeated in the legislature’s last session.

Regardless of what’s legal or illegal, however, the weird arrangement in Bridgeport violates the most basic premise of effective governance: the principal-agent relationship. The city council represents the principals, and the city’s employees are the agents, hired to carry out the work of the city. It is the job of the city council to control the purse strings and oversee the work of the agents on behalf of the citizens. But in Bridgeport, elected council members who are city employees are essentially voting on a budget submitted by their boss—the mayor—and it’s asking a lot to expect them to effectively oversee their own work.

Second, debt: Elected officials and the media tend to pay a lot of attention to budgets, but it’s wise to take a look at the audited financial statements as well. The budget is a plan for how the city’s revenue will be spent, but the Comprehensive Annual Financial Report (CAFR) tells how those plans have actually worked out. And while it might be a little daunting at first, becoming familiar with the document will provide useful insights into the organization.

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Bridgeport’s 2012 CAFR shows a city with huge liabilities: $693 million in bond debt, $159 million in current liabilities, $214 million in unfunded pension obligations and a whopping $915 million in unfunded retiree health-care benefits. The city’s total liability, $1.98 billion, is equal to $13,529 per resident. That might not sound so bad when compared to Detroit’s per-capita debt of roughly $25,000. But Detroit is even unique among local governments going through municipal bankruptcies. Per-capita debt in the bankrupt city of Stockton, Calif., for example, is $3,425, while the figure for bankrupt Jefferson County, Ala., stands at $6,373.

Finally, demographics: Bridgeport’s population of 146,425 has been fairly stable for decades, which is a good sign, but its massive debt load is carried by people who themselves are struggling financially. At $18,721, Bridgeport’s per-capita income is barely two-thirds of the national figure of $27,334 and even further behind Connecticut’s $34,849. Furthermore, the city’s unemployment rate is 12.3 percent, compared to the national rate of 7.6 percent in August.

An upgrade of the ratings on Bridgeport’s bonds last month was a hopeful sign, but a look at the fundamentals still shows a city in trouble. There are many reasons for its problems, but it’s hard not to suspect that its out-of-whack governance structure is making it harder for the city to deal with its troubles and could be making them worse. It may be a good time to take a look at the fundamentals for your own city.

Mark Funkhouser  |  Director, GOVERNING Institute
mfunkhouser@governing.com

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