Detroit’s recent bankruptcy declaration has highlighted the looming financial crisis facing many cities across the country. Detroit was not the first and certainly will not be the last city to go bankrupt, and some states will likely face financial problems due to commitments to employees and underfunded pension systems.

Recent news stories detail life in Detroit with few city services: street lights are dark, garbage doesn’t get picked up, and calls to police and firefighters go unanswered for an hour or more. And the Detroit public school system is an abject failure. Inadequate public services have driven Detroit’s population decline for the past thirty years. The city’s budget was $2.6 billion this last year, so money is available to fund city services. Instead the available money has been spent on generous benefits for city workers and an endless stream of redevelopment projects.

This is a future that awaits many cities in the U.S. and Alabama if we do not act now. Economists are notoriously bad at predictions, but I feel fairly confident about this one. Cities and states have become distressingly dependent on Federal dollars for many traditional functions, from building sidewalks to hiring police officers and teachers. Grants or transfers from Washington fund over 15% of state and local government spending nationally.

The Federal government faces a fiscal abyss in the coming decades. Our aging population ensures that Social Security and Medicare will comprise a larger share of Federal spending. The national debt is over $17 trillion and interest on the debt is currently 6% of Federal spending, despite all time low interest rates. Interest rates will surely rise at some point, with debt service automatically and steeply increasing as a consequence.

What can the Federal government cut to offset entitlements and interest on the debt? Defense spending is the largest target but always difficult to reduce, and besides we have already closed most of the unnecessary bases. Threats to our national security are beyond control of Congress and drive much defense spending. Washington politicians cannot simply wave a magic wand to make the world a safer place so they can cut defense spending to pay for entitlement programs.

Transfers to state and local governments seem likely losers in Washington’s coming game of fiscal musical chairs. Congress could make a fairly strong argument to the American people that they can no longer afford to keep states and cities on the Federal dole.

Cities like Detroit and states like California have struggled unsuccessfully to get control over their finances and pay for essential services. Alabama faces a similar future if we cannot get spending under control. And the evidence suggests that we have a spending problem. A recent study by the Alabama Policy Institute found that Birmingham spends about $200 million a year more than other comparably sized U.S. cities. From a political perspective reducing spending is often harder than preventing it in the first place. Preventing growth in unnecessary spending now will be a more palatable option than waiting to cut spending when Federal transfers run out.

States which spend and regulate less than their neighbors have grown faster over the past twenty years. This process will only accelerate in the future: while residents and businesses have moved to other states to pay less in taxes, they will likely stampede to states and cities still providing basic services. Cities able to keep the street lights on, the potholes patched, and trash picked up will (sadly perhaps) be poised for growth.

This otherwise bleak outlook offers a silver lining. Cash-strapped state and city governments often privatize programs they can no longer maintain, as an act of desperation as opposed to political principle. Many government services (like trash collection, prisons, and firefighting) have been successfully privatized by states and cities over the past forty years, typically resulting in better service at a lower cost. Privatization offers Alabama a way to prepare for the coming fiscal storm.

 

Daniel Sutter is the Charles G. Koch Professor of Economics with the Manuel H. Johnson Center for Political Economy at Troy University. Respond to him at dsutter@troy.edu and like the Johnson Center on Facebook.