Tuesday, February 16, 2010

Cities Forced To Cut Jobs As Unemployment Benefits Run Out For Millions

Moses Kim discusses the potential of a major crisis as millions of unemployed workers are set to run out of benefits in June. Now cities like Los Angeles will be forced to add to the unemployment by cutting workers in response to their budget shortfalls. See the following post from Expected Returns.

From Reuters, LA Budget Crisis Threatens Jobs, Credit Rating:
Los Angeles, the second-largest city in the United States, is confronting a mounting budget deficit that threatens to force thousands of job cuts, deplete its fiscal reserve and further damage its credit rating.

The $212 million budget shortfall, projected to more than double next year, is attributed mainly to plunging tax revenue blamed on the region's sagging economy, falling property values and a 15 percent jobless rate -- one of the highest of any major U.S. city.

"The last time we saw this kind of drop in revenue was the Great Depression," Miguel Santana, the city's chief financial officer, told Reuters. "It speaks to how severe this budget crisis is."
It's interesting that while the airwaves are filled with talks of an economic recovery, states and cities are going bankrupt. This is truly Orwellian if you ask me. Given the size of the public sector in America, there can be no recovery with rising budget deficits and public sector layoffs.

Los Angeles will take a hit in property tax collections as assessments catch up to falling home values, and as the second wave down in residential real estate begins. These crises tend to take on a life of their own, gathering momentum in a dynamic fashion.

Bond Downgrades

The city was downgraded late last year from a top rating of "AAA" to "AA-" as serious budget problems loomed.

One major concern for holders of municipal debt is a plan by the city to use most of its $230 million reserve to close its current budget shortfall, Santana said.

He added the city plans to replenish its reserve in part by leasing out its parking garages to private operators. But analysts said sharp revenue declines leave Los Angeles with relatively few options.

"It's pretty simple. They are going to need to make some serious spending cuts," said Ian Carroll of Standard & Poor's.
Los Angeles bonds are still considered to be of "high credit quality", which is a joke in the league of triple-A rated Mortgage-backed securities before the absolute implosion in real estate.

Municipal bonds, such as general obligation bonds, are backed by revenue derived from taxes. The taxpayer base is obviously dwindling in an environment where unemployment is still rising. The major problem for overburdened states and cities will be the massive exodus of civilians from high tax areas, like California, to low tax areas, like Texas. One of the major catalysts for this exodus will be rising property taxes, which will be levied in response to falling tax receipts.


Villaraigosa said last week he will propose the elimination of 1,200 to 2,000 city government jobs in next year's budget, on top of 1,000 positions the mayor last week ordered to be cut over the next few months.

He hopes to achieve some cuts through attrition and by moving some workers into vacant positions in self-supporting agencies, such as the Department of Water and Power. But Villaraigosa has acknowledged that as many as 350 employees will likely be terminated in the initial round of cuts.
Another round of layoffs are coming to cities across the country. With 5 million Americans set to run out of unemployment benefits in June, we have the makings of a huge crisis. The government must continually extend unemployment benefits in order to prevent a level of social unrest we have not seen in quite some time. Unfortunately, our government is antagonizing the Chinese at the same time we desperately need their funding to keep these programs running. Stupidity at the highest level if you ask me.

With so many negative economic indicators converging, I don't see how any thinking adult can deny that we are in for many more rounds of pain. I can assure you that the same clowns who are claiming that our economy is recovering are the same people who did not see any of this coming in the first place.

This post has been republished from
Moses Kim's blog, Expected Returns.

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