[Ed note: My Southborough accepts signed letters to the editor submitted by Southborough residents. Letters may be emailed to email@example.com.]
To the Editor:
Detroit’s Lessons for Southborough
At first blush, there is little reason to think that there are useful lessons that our prosperous small New England town can take from the Detroit bankruptcy. However, if you dig deeper I believe there are some lessons and cautions that all residents, town employees and officials can take heed of.
Municipal Bankruptcy is Real – Central Falls, RI., Harrisburg, Pa., Vallejo, Ca. , Jefferson County, Al., Orange County, Ca., Stockton, Ca., San Bernadino, Ca. and others all filed for “Chapter 9”. There were 12 filings in 2012, 13 in 2011, and 4 so far in 2013. Local governments can fail and there are communities in Massachusetts on the watch list.
“Legacy Costs” Drive Bankruptcy – Debt and unfunded Retirement Obilgations are the 2 biggest items in this category. An ugly “death spiral” happens when the current tax base is not able support “Legacy Costs” and current services like Police, Fire, Schools. Southborough has both. We currently are carrying a very heavy debt burden (among the highest in the state) and we have very substantial unfunded pension and retirement obligations. I attended a Selectmen’s meeting where our unfunded pension obligations were estimated at 10’s of millions of dollars.
Moral Hazard – Moral Hazard exists when benefits accrue to a decision maker or investor but the downside risks or costs are born by someone else. It is very easy for both sides of a negotiation to agree to generous retirement benefits when both sides know that they will not have to raise the funds for them in the next budget. In effect we receive the benefits of labor peace with a generous retirement benefits knowing that we will not have to pay for them but rather the property owners in the town in 10 or 20 years will be stuck with the bill.
Growth Matters – One of the easiest ways to keep our “Legacy Costs” at a level where we can honor our obligations to our employees and creditors is to make sure we have an expanding tax base, particularly in the commercial and industrial area. A common theme to nearly all municipal bankruptcies is a stagnant or declining tax base. In our community housing is a net cash users and commercial and industrial property fills the gap. This sector needs to grow to fund our promises. If it shrinks we will be in real financial trouble. We need to make sure that our town is business friendly and at least as important that the Commonwealth is as well.
Debt Will Cost More – Even with our good credit rating, our debt will be more expensive in the future. There are going to be more municipal failures in the coming year. Municipal debt is going to be perceived as riskier in the future than it has been in the past.
Employees Need to Pay Attention – Our town employees have the most to lose (along with our creditors). There is an easy comfort in thinking “I was promised these benefits”. If you believe that ask the retirees at GM and Chrysler and Delphi. The painful fact is that town employees often have longer tenures with the town than the taxpayers of our suburban bedroom community. Those that made the promises may be long gone and those that are charged with paying for them may prefer more police and fire services than paying retirement benefits. Unions have been reluctant to switch from defined benefit to defined contribution plans (similar to a 401k) but the big advantage of these plans is that the employee owns them outright as opposed to holding an IOU from the Town.
Public Officials Need to Pay Attention – Our elected officials and the Town Admin and Superintendent need to be far more circumspect about the retirement benefits offered to our employees. Today it is possible for some Town Employees to retire as early as age 55. This is fiscal insanity where an employee can work for the town for 20-30 years and then expect to collect a paycheck and health insurance for another 20-30 years. I am not knocking our employees but I am saying that this is not a sustainable system. It is also not politically sustainable in a world where I qualify for social security at age 66 ½ and those younger than me will be even older before they retire. One of the keys to keeping our promises to our employees is to keep the costs of those promises affordable and proportionate to the services provided and our ability to pay for them.
We are fortunate to live in a wealthy community with a sold commercial and industrial tax base. However, we need to take heed of the municipal bankruptcies to learn the lessons of poor economic policy. With careful stewardship we can leave our community in solid financial shape for the next generation of residents who will be called on to cash some of the checks we are writing.
Pine Hill Road