U.S. BUDGET CRISES THREATEN SOCIAL FABRIC / THE FINANCIAL TIMES ( RECOMMENDED READING )

US state budget crises threaten social fabric

By Matthew Garrahan in Los Angeles

Published: June 27 2010 19:13

The small southern California city of Maywood has hit on a unique solution to its budget crisis. Crushed by the recession and falling tax revenues, the city is disbanding its police force and firing all public sector employees.

Maywood has opted for an extreme solution, by contracting out all public services, including the most basic, to save cash. But it is not alone.

States around the US are cutting costs wherever possible as they prepare budgets for the fiscal year that starts this week for most of them. Their combined deficit is projected to reach $112bn by June 2011.

Local government activities, such as funding police, school buildings, fire departments, parks and social programmes, are in the line of fire.

“We are where the rubber meets the road,” said Sam Olivito of the California Contract Cities Association, which represents cities that outsource public services. “Local government is the fabric of our nation – it’s what keeps everything working properly.”

The biggest state deficit is in California, which has a $19bn hole in its finances. A series of contentious spending cuts is being debated in the state.

But for Maywood time has run out: the city’s insurance costs spiked because of long-running problems associated with its police department, while revenue from property and sales taxes declined. When city officials failed to respond to conditions imposed by its insurers, coverage was withdrawn.

Despite its problems, Maywood’s experience could be repeated elsewhere. “A lot of cities and municipalities are struggling to make ends meet,” said Mark Baldassare, president of the Public Policy Institute of California. “Local governments are so constrained by their budgets – they can’t raise taxes and they have rising pension obligations.”

While Californian cities and municipalities grapple with a drop in income – sales and property taxes have fallen by as much as 40 per cent, according to Mr Olivito – the state is considering a range of revenue-raising measures to tackle its deficit.

These include the legalisation of marijuana, which will be put to voters in November’s mid-term elections, and the possible introduction of digital car license plates, which will be capable of carrying moving advertisements.

But none of these initiatives will solve the short-term fiscal woes facing cities like Maywood. “There’s a real danger of a social fabric breaking down . . . all cities are trying to deal with the  same thing,” said Mr Olivito.

There has been a sharp increase in the number of cities considering contracting out public services, he adds. “We’ve had 10 or 12 cities contact us recently. There have been three of four in Los Angeles County alone.” Outsourcing saves money because cities no longer have to finance the capital costs.

But it can change the dynamic of cities, Mr Baldassare points out, partly because local communities no longer have a direct link with the providers of those services. “Do people want public services that are accountable to them? How do you maintain a local community?”

Copyright The Financial Times Limited 2010.