`Short-Term Maneuvers' Save Public Jobs, Risk Bond Defaults

Photographer: Armando Arorizo/Bloomberg

States and cities haven’t cut jobs with the same vigor as companies even as they face deficits. Close

States and cities haven’t cut jobs with the same vigor as companies even as they face deficits.

Photographer: Armando Arorizo/Bloomberg

States and cities haven’t cut jobs with the same vigor as companies even as they face deficits.

Los Angeles City Councilman Jose Huizar had $10 million to spend on a parking garage for his district. Fellow lawmakers voted instead to use the money for expenses such as payroll.

“Ten million is 150 city workers, 100 police officers,” Bernard Parks, chairman of the council’s budget and finance committee and a former Los Angeles police chief, said at an April 29 meeting. “If we can find $10 million and not give 150 pink slips, that is the best use of the money.”

States and cities haven’t cut jobs with the same vigor as companies even with deficits projected by the Center on Budget and Policy Priorities and the National League of Cities to reach $200 billion in the year beginning July 1. That’s raised investor concerns about more public debt defaults, which totaled $6.3 billion in 2009 and $8.2 billion in 2008, the most in 30 years, says Distressed Debt Securities, a Miami Lakes, Florida, newsletter.

“There are a lot of municipalities that really need to make deep cuts and not just continue short-term maneuvers,” said Ashton Goodfield, a fund manager and head of municipal-bond trading at DWS Investments in Boston, which holds $29 billion of public debt. “This is the time to do it.”

Services Sacrificed

Cities and states have sacrificed services during the longest recession since the 1930s as voter and union opposition and federal stimulus money steered them from labor cuts like those at companies. Public employment fell 1.2 percent, or by 231,000 jobs as of May, since peaking in August 2008, U.S. Labor Department figures show. That’s less than at private employers, which trimmed payrolls 6.9 percent, or nearly 8 million jobs, since a high in December 2007.

Arizona lawmakers in March shelved Governor Jan Brewer’s plan to eliminate 980 jobs by shifting juvenile inmates to county jails. Instead, the state sold public buildings, shut highway rest stops and raised taxes to help close a $1.5 billion deficit.

“Lack of sufficient budget action” is what Standard & Poor’s cited in December when it cut the state’s debt rating one level to AA-, its fourth-highest.

New York City Mayor Michael Bloomberg eliminated two years of pay raises for school employees to save 4,419 teacher jobs he proposed eliminating in his May 6 budget.

“Laying off thousands of teachers is simply not the answer,” said the mayor, founder and majority owner of Bloomberg LP, parent of Bloomberg News.

New Target

In New Jersey, union opposition and a “no layoff” pledge by his predecessor forced Governor Chris Christie, a Republican who took office in January, to scale back comments made during the campaign that the state could eliminate “thousands” of workers. His target now: 1,300.

With the state facing a $10.7 billion deficit, “I simply don’t understand how everyone can’t step up to the plate and be willing to sacrifice,” he said in an April 30 interview.

One reason is the clout of organized labor. The union- membership rate for public employees is five times greater than in private industry, according to the Labor Department, at 37 percent of the workforce in 2009 versus 7.2 percent. The highest concentration is among local teachers, police and fire fighters.

Public employers pay more as a result. State and local government workers got an average of $39.81 an hour in wages and benefits in March, the Bureau of Labor Statistics said yesterday. That’s about $12 more than the $27.73 hourly compensation for private employees, it said.

Giving Up Raises

Cheryl Parisi, chairwoman of the Coalition of Los Angeles City Unions, said her 22,000 members are aware of sacrifices they must make. They gave up two years of pay raises and agreed to help fund early retirements for 2,400 employees, she said.

“We understood the longer term,” she said in an interview.

Even with recent reductions, public payrolls increased one-third faster than in private industry in the decade before the recession began in December 2007. State and local government employment has risen to 15.3 percent of the workforce today from 13.8 percent in December 1997, Labor Department figures show.

Elected officials who make cuts can face public wrath. Maria Theresa Viramontes, a council member in the San Francisco suburb of Richmond, said she and colleagues wore bullet-proof vests after they slashed the city’s payroll in half to 700 workers starting in 2003 to deal with a revenue slump after the dot-com bust.

Public Pariah

“I would not eat in any restaurants in town,” Viramontes told a May 3 panel at the University of Southern California in Los Angeles. “Everywhere I went I heard, ‘You laid off my grandson.’”

Failing to lower spending while borrowing more could increase defaults, particularly among smaller issuers, said Jon Schotz, a partner at Saybrook Capital in Santa Monica, California, who manages $500 million of municipal bonds. Public debt sales will rise 14 percent this year to $561 billion, says a survey by the Securities Industry and Financial Markets Association, a trade group.

“We’re getting pretty serious in terms of the size of the deficits,” Schotz said in a telephone interview. “I’m not sure how long you can keep mortgaging everything.”

Public employment declined more in past recessions. State and local governments cut 376,000 workers, or 2.8 percent, between November 1980 and July 1982, according to Labor Department data.

Federal Help

This time, payrolls have been propped up by federal stimulus spending under the $787 billion American Recovery and Reinvestment Act of 2009. The program sent $100 billion to public schools alone, said Sandra Abrevaya, a U.S. Education Department spokeswoman.

“Many of the states that achieved a balanced budget in the spring of 2009 did so not by cutting expenses as far as they needed, but by applying ARRA funding,” said an October report from Deloitte LLP, a consulting and accounting firm.

States and cities may be forced to make deeper cuts once the stimulus money expires. Seventy percent of the funds will be distributed by October, said Cheryl Arvidson, a spokeswoman at the Recovery Accountability and Transparency Board, which monitors the program’s spending.

“The federal government cannot plug the holes forever,” Veronique de Rugy, a senior research fellow at the Mercatus Center at George Mason University in Fairfax, Virginia, said in a telephone interview.

More Trims

The current recession is so long and deep that cities and states facing their third year of declining tax revenue will have to trim payrolls more, said Peter Hayes, who supervises $106 billion of municipal bonds at New York-based Blackrock Inc., the world’s largest money manager.

“In the private sector they have to react immediately to downturns,” he said in an interview. “The public sector is much different. Typically they wait, and usually revenues come back.”

Christopher Hoene, research director at the National League of Cities in Washington, expects 200,000 local government workers to lose their jobs in the next year as municipalities move beyond hiring freezes, temporary furloughs and pay reductions.

“We still have at least another year of hardship ahead,” Hoene said.

Most Ever

Los Angeles, which almost ran out of cash in April when its water and power department withheld payments to the city in a dispute over electricity rates, will have eliminated 2,905 of 35,800 workers by the end of June, said Mayor Antonio Villaraigosa.

“This is by far more than we’ve ever done,” he said in an interview. “Even in the Depression, they ended up taking a cut in salary.”

After the reductions, the nation’s second-largest city by population will still have deficits for the next four years, said an April report from the City Administrative Officer. By then, the cost of employee pensions could rise to $1.3 billion annually from $277 million in 2000. The mayor said he’ll ask voters to decide on cutting benefits for future firefighters and police.

“The biggest obstacle,” said Villaraigosa, a former labor organizer, “is getting union leaders to understand that the business model isn’t sustainable.”

To contact the reporters on this story: Christopher Palmeri in Los Angeles at cpalmeri1@bloomberg.net Terrence Dopp in Trenton at tdopp@bloomberg.net

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