Friday, December 15, 2017

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Two cities down to their bottom dollars

This week, two large cities dealt with the consequences of fiscal irresponsibility. On Monday, Scranton, PA joined the state capital of Harrisburg in the list of municipalities that have run out of money to meet their commitments. The city has a budget deficit of $17 million, leaving the Mayor Chris Doherty without enough money to pay his employees.

He made an executive decision to slash all city employees’ compensation to reflect minimum wage in the paychecks they received this week because the city now has just $5,000 in the bank. Full payroll costs the city about $1 million, he said.

On Tuesday, the City Council in San Bernardino, CA gave approval for the city to file for bankruptcy. Investigation is underway in San Bernardino to determine whether fraud was involved in the budgets of the previous 13 years that reported surpluses when in fact there were deficits each year.

In both cases, cities have gone the extreme route of nearly spending their last dollars before making abrupt and drastic decisions. While no public investigation for criminal activity is underway in Scranton, Gary Lewis, an accounting consultant closely tracking the city’s financial crisis questions whether recent federal grants to Scranton have been managed appropriately.

It appears inevitable that Scranton will follow San Bernardino into bankruptcy filings, as it’s likely impossible to raise taxes sufficiently to cover the city’s current deficits and past debts. While these two cities have few options remaining, other cities should learn from these practices to avoid the costly and painful bankruptcy process.

This difficult situation could be avoided with increased transparency in budgets and with accrual budgeting. This budgeting process requires that cities set aside money for expenses as they agree to pay for them rather than when the bills are due. Following this process would prevent policymakers from spending money in the present that will have negative consequences down the road.