Financial Strains on Cities

Transcript for: 
Financial Strains on Cities

MS. DIANE REHM

10:06:54
Thanks for joining us. I'm Diane Rehm. Many city governments across the country are having to make do with less, a lot less. Last week, the city of Camden, N.J. announced it's laying off half its police and a third of its firefighters. Joining me in the studio to talk about choices ahead for cash-strapped cities, Donald Kettl. He's dean of the University of Maryland School of Public Policy. Good morning to you, sir.

MR. DONALD KETTL

10:07:32
Good morning, Diane.

REHM

10:07:33
Nice to have you here. And, Chris Hoene of the National League of Cities, good morning to you.

MR. CHRIS HOENE

10:07:41
Good morning, Diane.

REHM

10:07:42
We're going to hear from several mayors throughout the hour, and I hope we'll hear from you as well. You, of course, are voters and citizens who are affected by these cuts that we're seeing in cities across the country. You can join us a little later by phone, by e-mail. You can send us a message on Facebook or a tweet. First up, on the line with us from Camden, N.J. is Mayor Dana Redd. Good morning, Mayor Redd.

MAYOR DANA REDD

10:08:25
Good morning, Diane.

REHM

10:08:27
The cuts you made in Camden made national news last week. Tell us what you did and why.

REDD

10:08:38
Well, we're dealing with a budget crisis here in the city of Camden. As we all know, we're in the national recession that's had such a profound impact on states across our nation and, certainly, here in the state of New Jersey. There have been, you know, dramatic cuts from the state level all the way down to our local municipalities. Our current city deficit is $26.5 million. And as you know, as an elected official governed by the provisions of various laws, I'm mandated to present and maintain a balanced budget. Layoffs, certainly, was not something that I looked forward to doing. It was a measure of last resort after negotiations with several of our bargaining units failed to materialize in any meaningful concessions.

REDD

10:09:30
However, my doors are still open to the unions, should they decide on concessions that would allow us to bring back several of their members. On the other side, you know, we've talked about cost-cutting. But, you know, we've also been leaning forward, working towards finding solutions and other revenue-generating items, so that we can enhance revenues coming into our municipal budget. Unfortunately, Camden has less than a billion dollars in ratables, by which we're able to generate local taxes to maintain and to balance our budget.

REHM

10:10:05
I wonder how you're going to manage this. Camden has crime rates that are the second highest in the country. How can you possibly layoff half the police force?

REDD

10:10:22
Well, we started looking at this scenario early last year. You know, you hope for the best, but you prepare for the worst. And, you know, we have, through our chief of police, realigned and deployed the staff to critical functions, making sure there are as many boots on the ground in the platoon that are being operated by our chief of police. In addition, we're installing the eyes in the sky. In fact, they're meeting on moving that forward within the next month or so, which would allow technology to be a part of our comprehensive policing strategy.

REHM

10:11:01
But it is...

REDD

10:11:01
The city of Camden also has a mobile command unit, a ShotSpotter. We're maintaining our safe quarters, and we're also collaborating -- and this is important to note -- with our law enforcement partners that have a presence here in the city of Camden. Whether it's ATF, DEA, FBI, state troopers, they were already a footprint here in the city of Camden. And this gave us an opportunity, even in the midst of this crisis, to strengthen those collaborations to make sure that we're keeping our citizens safe.

REHM

10:11:32
Now, strengthening collaboration is all to the good. However, is it with the police, with the firefighters, a matter of successfully engaging with those unions?

REDD

10:11:49
I think what we have to realize is it's a matter of our ability to pay. We do not have the finances to pay or to sustain the present level of contracts that the city, you know, has to live within. And, again, you know, for those firefighters and those police officers that are still here, they have taken an oath to serve and protect.

REHM

10:12:13
So you're saying that it's up to them either to take a pay cut or stay off the job?

REDD

10:12:23
Well, exactly, Diane. I mean, you know, if I could pay them, we wouldn't be having this conversation. And let me just talk about what our civilian workforce has taken in terms of the pay cut. You know, our civilians have taken mandatory furloughs. And when I talk about the civilians, I'm talking about the other departments that are a part of municipal government, whether it's planning and development, code enforcement, public works, which is very important.

REDD

10:12:48
You know, all of those entities have taken a pay cut, including myself -- you know, all of our elected officials -- because we realize the severity of this crisis. So my ask of the unions, of police and fire was not unreasonable. I think it's realistic, given the times. The ask was to help minimize the number of layoffs to their department if they would meet me halfway and share in the sacrifice.

REHM

10:13:13
So, regardless of who's at fault, are there still compromises that could be made that would at least put some of the police and firefighters back on the job?

REDD

10:13:26
Absolutely, Diane. Absolutely. In fact, I met with two of the bargaining units yesterday. And we are actively engaged in trying to secure a concession so that we can bring their members back. You know, again, the door remains open, and I'm hopeful that we can achieve some concessions that we can get these members back to work.

REHM

10:13:46
But considering the statements of Gov. Christie and the relinquishment of state control with Camden, how much money can you expect from the state going forward?

REDD

10:14:04
Well, I can tell you what we've received from the state because we had really implemented some best practices in terms of, you know, cost-cutting before we even got to police and fire. The state awarded the City of Camden $69 million in transitional aid to localities, and it was a very competitive process, with -- not just urban centers but rural and suburban centers. And that, we know we can count on. We've also gotten $46.7 million from our (word?) and energy tax receipts.

REDD

10:14:36
So all of this has been shared with the unions. It's been a very transparent process by my administration in meeting with the unions over the last year about the economy, about what was coming down the pike. So this should not come as any surprise to the leaders of those bargaining units. They were fully informed as early as last year.

REHM

10:14:58
So, short of bankruptcy, what do you see as the solution for Camden, N.J.?

REDD

10:15:05
The solution is, obviously, we have to give ratables in the city of Camden. Camden is still a prize regardless of this public safety and fiscal crisis that we are confronted with, and let me tell you why it's a prize. It's a prize because of our proximity to Philadelphia. We are in the metropolitan region, located next to the Delaware River where we have two wonderful waterfronts with waterfront attractions. And we have a wonderful working relationship with Mayor Nutter, and that we're promoting two cities -- one waterfront as a tourist destination. We also are a transportation hub. We have the eds and the meds, where our hospitals and our universities have remained as anchor institutions in the City of Camden.

REDD

10:15:47
And besides remaining as anchor institutions, they are now adopting the neighborhood in which they reside and helping us to foster economic development and economic growth in the City of Camden. We have Campbell's Soup, which is our Fortune 500 company that has remained here in the City of Camden as a partner. So we have some positives that are happening in the city. We have some positive developments. We've hit a bump in the road, but I'm confident we're going to get through this.

REHM

10:16:14
Camden, N.J. Mayor Dana Redd, thank you so much for joining us.

REDD

10:16:20
Thank you, Diane.

REHM

10:16:22
And turning to you, Don Kettl, how do Camden, N.J.'s problems reflect what we're seeing around the rest of the country?

KETTL

10:16:32
There are really two big things here, Diane, that Camden really illustrates. One is the fundamental effort to try to restructure the relationship between cities and their unions. We're at the point now where there actually are more members of unions working for government than for the private sector in the country right now. So if you want to try to understand the power of unions, the role of unions, you have to increasingly look to government and an effort to try to restructure both salaries and wages is fundamental to finding a way to try to provide the services that local governments are trying to do.

REHM

10:17:03
And how do you see it, Chris?

HOENE

10:17:05
Well, the situation in Camden is more dire than for many cities around the country, and a lot of that has to do with some longer term economic restructuring that the mayor mentioned in her comments. But a lot of the pressures they're facing are similar around the country, the pressures that Don mentioned on the personnel front. City governments, like any organization, have a lot of their resources are tied up in the people that deliver the services. And so when they go through a recession like we've been and the revenue impact is as deep as it is, they eventually have to make some cuts in personnel. And that's what a lot of cities around the country are facing right now.

REHM

10:17:40
Is there any way to estimate how dire the situation is in cities around the country?

HOENE

10:17:49
Well, we do a survey every year of city finance officers. And what we found for 2010 was that the revenues were down a couple of percentage points. Expenditures were down a couple of percentage points. But it was the first year of that actual decline. Up through '08 and '09, the revenues were still increasing for the most part. A lot of that has to do with the fact that city governments are mostly dependent on property taxes, and it takes a while for housing prices and those changes to be reflected in the revenues that come in. What that means going forward is they've got several tough years ahead of them. However, this lag means that the impact of the housing market hasn't fully hit in some of these communities around the country.

REHM

10:18:28
And state revenues are not going to cities?

KETTL

10:18:34
State revenues are going in large measure to cities. Cities are very dependent on the states, but the states themselves are in a tough shot. They're in a position where their revenues are 12 percent below the recession, so they're struggling to get back.

REHM

10:18:46
Donald Kettl, dean of the School of Public Policy at the University of Maryland. Short break. We'll be right back.

REHM

10:20:03
And welcome back. We are talking about city budgets around the country. We've just heard from the mayor of Camden, N.J., Dana Redd. And, now, joining us from Akron, Ohio, Mayor Don Plusquellic. Good morning to you, Mr. Mayor.

MAYOR DON PLUSQUELLIC

10:20:24
Good morning. I have a little bit of the same thing you have with my voice.

REHM

10:20:27
Well, let's talk about that another time, won't we? I gather things are tough in Akron as well. Tell us just how tough.

PLUSQUELLIC

10:20:39
Well, for the last three years total, we're down 10 1/2 percent. So from the 2007 income tax base that we have, we are not only down in income tax, but in assistance that the state has provided, we're down a total of about 17 percent of local government fund -- that's the second highest category of revenue for most of these local governments in Ohio. And it has been a struggle. We've cut -- 1981, we had 3,400 full-time employees. We're down to 1,829. Our service department, just in the last four years, has seen cuts of about 30 percent. And that's the people that clear the snow off the street, fix the chuckholes, clean up glass in our parks, things that people don't think of as public safety. But when the snow is not removed from the street properly or isn't removed, it does create a safety problem.

REHM

10:21:42
And, I gather, you've also had to resort to layoffs of police and firefighters in the last two years.

PLUSQUELLIC

10:21:51
Well, both, actually. We offered packages for voluntary separation, and we had 123 employees -- most of those long-time employees, very good, solid employees. It was one of the worst things that I've ever had to endure personally and professionally, to watch good people walk out the door. And I wanted to scream, just never mind. Let's somehow wake up out of this nightmare and go back to work. But we needed to offer that, and we needed to let those people go to try to save the jobs of younger people in the system.

PLUSQUELLIC

10:22:24
And yet one -- the fire union decided not to take any of the offers that all the other unions did. In my own cabinet, I've laid off -- not laid off, but let go 40 percent of my cabinet. All of us have taken pay cuts. We've done everything, and we, in 2009, had the firefighters union decide they weren't going to take anything. And so we ended up having to layoff 38 firefighters.

REHM

10:22:53
And what's been the result? Have you seen increase in crime? Have you seen increase in fires that go to the ultimate?

PLUSQUELLIC

10:23:05
Well -- no, I don't think we can say that. We didn't close down any fire stations. We just did it with existing manpower, and the chief was really good at looking at new ways to position people. We didn't fill bureau assignments in the office. And the same thing when we had to lay off police officers, we bounced down, if you will, in our system. If we don't need 40 patrol officers, then we don't need two or three sergeants, and we don't need a lieutenant. So we laid off, and those folks bounced down to lower positions.

PLUSQUELLIC

10:23:39
But we didn't fill a lot of the higher positions as people, through attrition, left. But the crime rate has gone up statistically a little bit here. And many cities are seeing this because of the economy, the economic woes. And, unfortunately, people turn to crime sometimes, to steal things, to rob banks, to do things that people involved in drug trafficking is what most of the murders are all about. It's some drug-related event. But I don't think there's any way to say that that's because we have fewer police on the street. It's a societal problem.

REHM

10:24:20
Hmm. You've been mayor in Akron since 1987, almost 25 years. Is this the worst you've ever seen it?

PLUSQUELLIC

10:24:34
Yeah, absolutely, in my 25 years. I mean, it goes back -- I was a councilman in '81 when the last major downturn occurred, and that was the last time the city had to lay off. And the fact is, when we went through the layoff policy, there was no one working at the city that had knowledge of how that system worked. We have to go through not only civil service procedure, but also the union contract. And so it was made more difficult by the fact that no one that was working in a high-level position to determine and deal with the nuances of our particular situation here -- with our city charter, I should say, and the Civil Service Commission rules and regulations and the union contract -- so we had difficulty.

PLUSQUELLIC

10:25:17
And on the personal level, it -- I said 2009 was the toughest year I've ever had in my life, to see good people leave. We had to lay off police officers -- I'm sorry -- firefighters because their fellow firefighters wouldn't accept some cuts as virtually every other union has. You know, I proposed something here in the ballot last November, and when I talked to the -- to try to help cover costs for police and fire for public safety, when I talked to the teamsters and electrical workers and the plumbers -- and I've got a good relationship with them over the years -- they said, who do they think they are? We have 20 percent unemployment in our construction ranks, and we haven't had a raise in four or five years.

PLUSQUELLIC

10:25:56
So how is it that police and fire, or any other public worker, just believes that we ought to keep paying and they should get more when all the rest of society is suffering? So it was a good feedback from a labor position of the people who make money out there in the private sector that pay our costs, our wages, salaries and benefits, that we ought to be cognizant of that in local government, that we can't just allow things to go on as we did earlier with pay raises and more and more benefits and things that, in tough times, you have to sacrifice.

REHM

10:26:32
So what do you see as the economic outlook for Akron? Could you be facing bankruptcy?

PLUSQUELLIC

10:26:42
No. I don't believe there's any chance of that. And one of the reasons is we have to lay off people if we don't have the revenue if the state cuts back. All that money goes directly into police and fire. So I don't see any -- I mean, I guess, knock on wood here. I mean, things could get dramatically worse, I guess. But I don't know what the economists are saying, particularly today. But we never know exactly what's going to happen. But we are seeing some signs that maybe we've bottomed out.

PLUSQUELLIC

10:27:11
But when you're 10 1/2 percent down from where you were three years ago, it's pretty tough, even with a 1 percent or 1 1/2 percent increase in your income tax revenues, to go back to days when we just automatically gave raises every year because that's what seemed to be the right thing to do. And I don't know, for sure, how other cities are positioned. We believe that we've transitioned out of an older economic base to some high-tech jobs and biomedical industry, certainly, in the polymer industry and the -- so we're very hopeful that when things start to turn around in the country, that we will be part of -- one of the leaders in economic growth, as we had been, actually. I think we led the state for four years in a row.

REHM

10:28:02
Well, Mayor Plusquellic, I, too, am hopeful for you there in Akron, Ohio. And I thank you for joining us this morning.

PLUSQUELLIC

10:28:14
Thank you very much. I appreciate it.

REHM

10:28:16
All right. And turning to you now, Chris, the question of current law, with regard to state and municipal bankruptcies, where do we stand?

HOENE

10:28:31
Well, there isn't really a law in the books that would allow for state bankruptcy. Municipalities can file for bankruptcy under federal law, Chapter 9 bankruptcy. The story really isn't about bankruptcy here, however. Bankruptcy is an overwhelming rarity. It pops up in the lexicon a bit when...

REHM

10:28:51
But isn't Harrisburg already in bankruptcy?

HOENE

10:28:55
Harrisburg has been flirting with bankruptcy, but there are some very idiosyncratic kind of circumstances in Harrisburg that are not typical of the rest of the country. There have only been 600-plus bankruptcies since 1937, and that's with 80,000 potential units of government that could legally use that mechanism. So it's a statistical rarity. It comes up when you see these situations in Camden and Akron. But the real story is about the cuts that the two mayors had just talked about making.

HOENE

10:29:22
And what is the impact on the quality of life of the residents when the services are decreased? And what's the economic impact? A lot of times, we forget that local governments and state governments in these arenas are the third or the fourth largest employers. And so when they start making job cuts, it actually has a real impact on the local economy.

REHM

10:29:41
Here's an e-mail from Joe in Ann Arbor, Mich., for you, Donald Kettl. He says, "Part of the city's problem mirrors that, at state and federal levels, the fact that people want services but are completely disconnected from what it takes to pay for them. In this, they have been betrayed by both parties, one that actively fosters the idea that we pay too much and not too little for what we get, and another without the courage to tell us the truth. We could erase deficits at all levels if only we would decide to pay instead of borrow for what we get."

KETTL

10:30:33
Well, Joe has got an excellent point here 'cause one of the real problems is we just are not very honest with ourselves about the kind of services we expect and how much we're willing to pay. And the problem is that we just don't like to pay the taxes that are going to be required to support the kind of services that we expect. But the real underlying problem here is that we just can't simply, at this point, bring everything back into balance because state and local governments really can't borrow in major ways to try to support their ongoing operations the way the Feds can.

KETTL

10:31:02
And now that we've suffered such an enormous cut in the amount of revenues that state and local governments both have -- again, they're 12 percent below where they were before the recession -- it's going to be very hard for them to recover very quickly. And they're likely to be a drag on the economy and on the level of services as the economy begins to try to get itself back.

REHM

10:31:24
What happens to a city when, as you say, the impact begins to affect the people, the quality of life? What happens? Do they start moving? Do they leave jobs? Or if they've lost jobs, they try to move elsewhere?

HOENE

10:31:44
Well, I think that sometimes that's the case. But we kind of have the opposite effect going on right now in that a lot of what allows people to be mobile in this country is a strong economy that allows people to move between jobs and housing markets that allow people to move around fairly easy in terms of getting access to credit. And, in both instances, those things are fairly stagnant. And so, in many respects, you have the worst-case scenario where folks are losing their jobs in communities, and then they're not able to move into other opportunities elsewhere.

HOENE

10:32:13
Or they're stuck in terms of having a house they can't get rid of or something like that. And so that's what's actually creating some issues around services, quality of life, rising crime rates, et cetera. It's -- the grand solution here has to do with getting back to economic growth, right. The revenues and the expenditure side of this are just offshoots of whether the economy grows or not. So the question for the next five years and 10 years is, where's the growth come from?

REHM

10:32:40
But, in the meantime, what happens to these cities that are teetering on the edge?

KETTL

10:32:46
Well, in the meantime, it's a question of how low can we go. There are these constant cuts in police, fire, sanitation, basic protection. You saw in New York complaints, why don't we get the snow off the streets? Well, we could get the snow off the streets faster if we paid for more people to remove it and bought more equipment to do it with, but we're just not interested in paying the taxes for it. So the challenge is trying to figure out what happens as we continually push problems from the federal level down to the states to the cities. And the cities increasingly become the place where they struggle in trying to figure out how to do the things that, ultimately, we count on government to do for us.

REHM

10:33:20
Donald Kettl, he is dean of the School of Public Policy at the University of Maryland. And you're listening to "The Diane Rehm Show." And joining us now from Harrisburg, Pa., is Linda Thompson -- no. We have on the line with us from Oakland, Calif., Mayor Jean Quan. Good morning to you.

MAYOR JEAN QUAN

10:33:51
Good morning. How are you?

REHM

10:33:52
I'm fine. Thank you. Mayor Quan, state aid, I know, is critical to the city of Oakland. Tell us where that stands now. Are you continuing to get that aid in the amounts you need?

QUAN

10:34:09
I'm sorry. The first part of your question broke up on my line. Which aid?

REHM

10:34:13
State aid.

QUAN

10:34:15
Yes. Well, it's not the issue of state aid. It's an issue of the redevelopment funds. As you may know, cities set aside zones where we take the tax increments, and we use them to pay off improvements in the cities. And our former mayor, Jerry Brown, used a lot of redevelopment funds for downtown revitalization, increasing housing downtown. He had a 10K plan. I think he got to about 6,000 new units downtown. We've renovated the Fox Theater, which is a major landmark, art deco building.

QUAN

10:34:58
Now, as he's governor, Gov. Brown is thinking of eliminating redevelopment, and that's probably the biggest crisis for the cities because much of the building, much of the jobs that had been created (unintelligible) of recession have been because of redevelopment. And I'll be joining the big 10 mayors this week to go talk to the governor and remind him that we need that to keep people working. We need that to economically grow, and it's critical to cities' growth at this time.

REHM

10:35:34
And, of course, what Gov. Jerry Brown is now saying is that he needs that money that was allocated for redevelopment to deal with his own budget shortfall.

QUAN

10:35:51
That's the pull between cities and states. The State of California, instead of balancing its budget in the last few years under Arnold Schwarzenegger, took huge loans. Meanwhile, cities -- we had no choice but to balance our budgets. We've cut, in Oakland, nearly 20 percent of our budget, laid off or reduced 400 jobs, cut every department, and it's been very, very painful. But the state borrowed during that time -- and we could have done that, too -- but the -- as then, when I was a city councilor, we decided not to do that. We thought that the recession was going to be longer than the state thought it was going to be, and that we knew we had to balance our budget.

REHM

10:36:37
Well, now, what about reactions that you may be getting from the people in Oakland? Are they willing to pay higher taxes to continue to receive the services and to continue with redevelopment?

QUAN

10:36:59
I think the issue -- and I think a lot of people understand this development. That's why it's such a critical fight. We have had very generous taxpayers who have paid additional money 'cause of Prop 13 in the State of California, (unintelligible) every tax increase. So they -- there's lot of new dollars for the schools, but California schools at the state level are still now among the lowest in the country. I think we're only above Mississippi. They voted for more money for a combination of police and violence prevention programs, more money for our libraries. Thus, it actually...

REHM

10:37:36
Mayor Quan, I'm afraid we're out of time here. If you can hold on, we'll come back to you after the break.

QUAN

10:37:42
Yes.

REHM

10:40:03
And on the line with us from Oakland, Calif. is Mayor Jean Quan. In just a few moments, we will talk with Mayor Linda Thompson of Harrisburg, Pa. One last question for you, Mayor Quan. We have an e-mail here from Doug who says, "To what extent are we firing current employees to pay for former employees in terms of pensions?"

QUAN

10:40:37
Well, that's a whole dispute in Oakland. And I was about to say, in the last election, the voters were willing to pay $80 more to retain police and violence prevention programs, but weren't willing to pay $360 more to keep police who are not currently paying their pension. We sent a pretty clear message that the California police pension and public safety fund is pretty expensive. And, in our city, a police department doesn't pay into its pension. And we have an old pension plan that comes in the '50s that was never fully financed, that costs the average taxpayer about $500. So the whole issue of to what extent the burden of pension is shared for public safety employees has become a major issue in our city.

REHM

10:41:27
Mayor Jean Quan of Oakland, Calif., thank you so much for joining us.

QUAN

10:41:35
Thank you.

REHM

10:41:36
Chris Hoene, is the pension issue at the top of the list when it comes to dealing with city problems?

HOENE

10:41:45
In a lot of the communities where the situation is most dire, it's one of the two or three items at the top of the list. Now, there are a lot of places around the country that have their pension plans fully funded and are just fine and they're structured correctly. But in some of these places -- California is one of them -- where the situation is pretty dire at the state and local government level, this is a major tension. And it's about whether the pension system is structured correctly to cover its costs in the long term. The opportunity right now and the environment that we're in, financially and economically, is to do some resetting in terms of those plans. And they're long cycles, right? These get paid out over a large number of years, but it's a chance that will bring things back into alignment.

REHM

10:42:24
To what extent do you agree that pensions are a large part of the problem?

KETTL

10:42:30
They are huge part in two ways. One is that they don't really provide for current services. They're really an obligation for the future. And as you look further down the line on what it is that we're going to have to do to keep the cities in shape for the long haul, it's got to be based on trying to get the pensions straightened out. And, as Chris points out, there are some states that are in far more serious shape than others -- Illinois, New Jersey, California. And it's no surprise that many of the mayors we're talking to are from states where the pensions themselves are in such structural problems.

REHM

10:42:57
And joining us now from Harrisburg, Pa., Mayor Linda Thompson. Good morning to you, Mayor Thompson.

MAYOR LINDA THOMPSON

10:43:06
No questions. No.

REHM

10:43:08
Mayor Thompson, are you there?

THOMPSON

10:43:10
Yes. Sorry.

REHM

10:43:13
That's all right. I know that lots of economists are worried that many cities, such as Harrisburg, are facing a debt burden that's too much to handle. Tell us about the situation there.

THOMPSON

10:43:30
Well, our situation is such that -- can I tell you a little bit about Harrisburg first? You know, we are, you know, a mayoral -- a strong mayoral city council form of government, and we're the capital of Pennsylvania. And we have a county-sitting seat, and 49 percent of our property is tax-exempt, which doesn't allow for us to be able to garner that opportunity to generate tax revenues. So there, coming out the gate, we're crippled. Our population is about 49,000.

THOMPSON

10:43:58
And on any given day, we can double that for an in swell. Our current crisis is such that our national economy certainly has negatively affected our various tax and user-fee revenues when the commercial construction and the housing construction economy went topsy-turvy. That affected people's ability to pay their utility bills and also pay for what we have as user fees, particularly for permits when they go about constructing commercial properties and housing properties.

REHM

10:44:31
Now, I understand that the crisis in Harrisburg was precipitated by a malfunctioning municipal incinerator. Is that so?

THOMPSON

10:44:45
Well, there are two factors going on here. The city has had structural budget deficits for years. And, basically, we -- for years, the city government basically had -- was not able to -- the expenditures did not meet the revenue. It was never enough revenue to meet the expenditures. And so they created a need for one-time revenue sources and to provide for short-term fixes that just kept compounding. We are creatures of the state, meaning that the state puts an inordinate amount of unfunded mandates on the City of Harrisburg and other cities in Pennsylvania. And, therefore, you know, it always ends up where we never have enough revenue to meet our expenditures. That's one...

REHM

10:45:25
So explain to me...

THOMPSON

10:45:26
But the other thing is that, several years ago, the former administration entered into a proposal to retrofit an antiquated incinerator. And the purpose for retrofitting it is because we kept getting hit by DEP fines because of toxics going into the air. The system wasn't functioning properly, and so, therefore, the proposal came through to retrofit it a tune of $125 million, with the goal of paying for the old debt and the new debt. Unfortunately, some time -- several years later, the project went awry. The developer supposedly ran out of funds, and there was no performance bond on the project.

THOMPSON

10:46:09
So, again, the city had to go back and borrow more money and just compounded the problem. And, now that I've taken office in 2010, I'm having to deal with the conundrum. And the entire year of 2010, the City of Harrisburg taxpayers are on the hook 100 percent of the bond. And the Harrisburg authority, which is the quasi-government that owns and contracts out for an operator to run the facility, is not able to make the bond payment.

REHM

10:46:36
So what are your options?

THOMPSON

10:46:39
Well, what we're dealing with in terms of our structural deficit, a couple of things. What I've done -- when I took office in 2010, I was saddled with a $9 million deficit. In order to be able to put in some reform, my efforts were to freeze 80 unfunded vacant positions. We cut approximately 13 percent of the city's personnel budget. We cut into our expenditure line at about 12 percent. We certainly deferred capital outlay projects, resulting in a 30 percent savings. And we decreased subsidized grants by 19 percent, and we cut miscellaneous expenditures by 20 percent.

THOMPSON

10:47:16
That was able to give me the purchasing -- the power to reduce that $9 million deficit, but -- and at the same time realizing that the incinerator was such a complex transaction with multiple bonds, multiple bond holders, we went on and decided that it was best to enter into what is called an Act 47 status, where the state provides us an overseer, a coordinator to help us create...

REHM

10:47:43
I see.

THOMPSON

10:47:44
...what is called a recovery plan.

REHM

10:47:46
Well, what -- are you optimistic, Mayor Thompson?

THOMPSON

10:47:51
Oh, absolutely. I took this job knowing that there are better days ahead for the City of Harrisburg, and this problem is solvable.

REHM

10:47:58
I hope so.

THOMPSON

10:47:59
And that's particularly why we decided to seek out for the state help where they provided us with a revenue to pay for a coordinator. And the coordinator's job is to help us create the plan and, ultimately, work with our bond insurers...

REHM

10:48:17
All right.

THOMPSON

10:48:18
...to put in, like I said, a recovery plan. And, again, this is about everyone sharing in the pain, not only just our taxpayers, but our business community and also the bond insurers.

REHM

10:48:27
All right.

THOMPSON

10:48:27
You know, I've said all throughout the year, we have a comptroller and some council members who were hollering bankruptcy. And I believe that that's the last option of resort. I think that we can work our plan and get us on the track of solvency...

REHM

10:48:39
All right.

THOMPSON

10:48:39
...and a recovery plan. And that's precisely what me and my administration have been working hard day in and day out.

REHM

10:48:43
I certainly hope so. Mayor Linda Thompson of Harrisburg, Pa., thanks for joining us.

THOMPSON

10:48:50
Thank you for having us.

REHM

10:48:53
This is -- gosh -- one situation after another, Donald Kettl.

KETTL

10:49:02
We've got a situation here. Harrisburg is probably the poster child of the most serious collection of problems in the entire country, a major project that simply went awry because of problems of management and problems of financing, but layered on top of that, the problems of a city that is in structural problems, where it's just simply spending more money every year than it has money coming in, with the challenges of trying to find a way to get a tax base that works as well. 'Cause one thing that surrounds many of these cities is the fact that we have 19th century tax systems trying to support 21st century governments. And that's a major challenge as many of these communities struggle to work their way out of the recession.

REHM

10:49:39
All right. Let's go to the phones now, 800-433-8850. To Tony in Geneseo, N.Y. Good morning to you.

TONY

10:49:52
Public employees cost less on average in total compensation than private sector employees. And pension agreements made when people signed up for employment were promised to them, they should be respected and kept just like any other contract. I'm a little disturbed about people saying, we need to renegotiate promises after promises were made. People took those jobs at the time when they maybe would have turned down other jobs that paid more because of those pension agreements.

REHM

10:50:24
Chris Hoene.

HOENE

10:50:26
Well, I -- first, Tony is right about the compensation issues in comparison to the private sector. We often see stories suggesting that they're overcompensated. Actually, if you look at education levels and similar types of jobs, you'll see there's usually -- public sector employees are paid less. And part of the benefits packages were about making up for that so that you could attract talent in the local government sector. But on the other side of this, I agree about -- I generally agree about the contracts piece.

HOENE

10:50:53
But if you're 10 1/2 percent down or you're 13 percent down or you're 30 percent down, and you're required by state law to balance the budget, and the -- so the money is not there. You're going to have to make the cuts somewhere, and so all of these things have to be on the table. And that's where some of these mayors -- the situations they're finding themselves in, and there are some other cities around the country as well.

REHM

10:51:13
All right. To Jackson, Mich. Good morning, Joanne.

JOANNE

10:51:18
Good morning. I'm really nervous, so forgive me if I, like...

REHM

10:51:22
That's all right.

JOANNE

10:51:23
...get my -- my brain is muffled. Anyway...

REHM

10:51:23
It's okay, Joanne.

JOANNE

10:51:24
Okay. Well, I live right across the street from a one-engine fire department that is scheduled to close in a couple of months. Two of -- we have three fire departments in Jackson. We are the second highest crime rate in a population of our size. We fought it, fought it, fought it. The fire department and the police department got together and came up with a whole list of items that are not crucial to Jackson's welfare, like the possibility of considering to close two municipal outdoor pools that costs us almost $140,000 a year that are only open for about five-and-a-half months a year, to stop a clock that Jackson is running downtown that costs about $25,000 a year.

JOANNE

10:52:18
Our fire department puts 13 percent of their wage into their pension. They've already volunteered to get -- to decrease their wages. Our fire chief applied for a grant and got it -- $540,000 -- and our city council and mayor refuse to use it. So, though I'm -- of course, and our homeowners insurance is going to go up...

REHM

10:52:47
Sure.

JOANNE

10:52:48
...when our fire departments close, you know. And it's certainly -- I mean, Jackson is the pits right now, but, certainly, businesses are not going to be attracted to this area. And our trains are constantly running. Pray, tell, anybody has a fire on the east side of Jackson.

REHM

10:53:07
Joanne, thanks for you call. Let me just remind you, you're listening to "The Diane Rehm Show," that we've heard from a number of mayors. Now, we hear from citizens as they are affected. What's your reaction, Chris?

HOENE

10:53:27
Well, these are the hard choices that every community in America, in some respects, is facing. And Joanne's comments suggests she is paying very close attention, and that's a very good thing...

REHM

10:53:39
Absolutely.

REHM

10:53:39
...and that she has strong preferences about what services she would like to pay for in her community. And if there's an opportunity or a silver lining in all of this, it's for the local officials and their employees and staff and the residents of these communities to have that conversation in a way they haven't had in a long time, which is, what are the services we prioritize? What do we want? What are we willing to pay for? And how do we make these -- the budgets balance?

REHM

10:54:04
All right. To Arlington, Va. Good morning, Eric.

ERIC

10:54:08
Good morning, Diane. I'd like to know -- since somebody has already asked about why not raise taxes, why do city and state governments feel so bound by this balanced budget law? It's not supposed to be a suicide pact. Why not just either ignore it or overturn it?

REHM

10:54:26
Donald Kettl.

KETTL

10:54:27
There's a simple reason for that, Eric. And the reason is that if we don't balance the budgets, the only alternative is to borrow the money. And if we borrow the money, eventually, you just can't borrow enough to keep things going. You just have more and more and more interest on the debt, and you get squeezed out of everything else. The federal government can print more money and does, but state and local governments can't. And just like all the rest of us, at some point, if you put too much money on your credit card, you just simply don't have any money left for food.

REHM

10:54:51
To Indianapolis. Good morning, David.

DAVID

10:54:55
Good morning.

REHM

10:54:56
Go right ahead, sir.

DAVID

10:54:57
I'd like to make the point that a lot of these pension funds have been in trouble way before this recession ever started, and all of those guys in charge knew all that. I mean, they knew all that, and they just keep kicking the can down the road. And there needs to be some form of accountability, I think, here to all these people who have known this stuff. They're just using the recession as an excuse now in my opinion.

REHM

10:55:18
Donald?

KETTL

10:55:19
It's not really an excuse. It's just something that has been out there ripening.

REHM

10:55:22
It's the reality.

KETTL

10:55:24
But it's a reality that's just inescapable. And so we've come to the point where there are three options, and we know we're not going to go down to them. One is bankruptcy, where we're just not going to be walking away from some of the commitments that have been made, and state and local governments are not going to do that. The other is that -- well, we just hope that the economy will grow and will go back to normal. That's not going to happen either.

KETTL

10:55:41
So we are now at a phase where we're going to have to think in a fundamental kind of way about what the nature of state and local government is going to be, what kind of leadership we're going to have and how we squeeze the productivity out of them to be able to accomplish the things that citizens want. 'Cause allowing fires to burn buildings down and criminals to run loose is not good options if you want to have a good city. But try to figure out how you deal with those problems, given the realities of the 21st century economy and the 21st century tax basis the state and local governments have is a problem.

REHM

10:56:08
Chris, is there an end in sight to all of this? And do you see it anytime soon? Or is it even out of our vision?

HOENE

10:56:21
Well, I think it's -- there are two sets of issues going on. There's a cyclical problem that's related to the recession. And then there are these longer term structural issues about tax bases -- 19th century tax systems, as Don mentioned -- that also need to be resolved. There isn't an end in sight in the sense that, you know, there's some silver bullet, and we find a solution and everything is going to be great in three years or five years. There's a couple of tough years ahead, financially, and then we'll be on some kind of long, slow path to growth. And we need to do a bit of resetting in order to make sure things are in alignment for the -- to make that growth possible.

REHM

10:56:56
Chris Hoene of the National League of Cities, Don Kettl, dean at the School of Public Policy at the University of Maryland. You also heard from the mayors of Camden, N.J., Akron, Ohio, Harrisburg, Pa., and Oakland, Calif. Thanks for listening, all. I'm Diane Rehm.

ANNOUNCER

10:57:22
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