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Feedback Loops of Doom: Healthcare, Taxes and Municipal Bankruptcy   (December 11, 2007)

Readers Journal Updated!

One of the themes I have endeavored to cover here is the reinforcing nature of various fundamental feedback loops which have longterm negative consequences.

Consider healthcare, local taxes and local government pension and healthcare obligations to retirees. Healthcare costs are skyrocketing far above inflation, wages and tax revenues even as the housing bubble popping and declines in consumer spending shrink local government revenues.

Here are two recent entries on the subject:

Scale Invariance: Is Your Neighborhood Sliding into Recession? (2/6/07)

Public Employee Pension Greed and the Gutting of Downtowns (2/7/07)

The San Francisco Chronicle's John Diaz recently addressed the issue very bluntly: Where politicians fear to tread:

If you want to see a California politician run for cover, ask him or her about the acronym "GASB."

Every school board member, city council member, county supervisor, state legislator and statewide officeholder will know exactly what you are talking about. This is the issue that threatens to overwhelm state and local budgets within a decade.

Yet few politicians dare to talk about "gasbee."

At issue is health benefits for retired public employees. The math is straightforward: Politicians are making promises to today's workers that will require either huge tax increases or draconian cuts to other programs when the employees reach retirement age. Neither the state nor most local governments are putting aside a dime to cover this liability.

San Francisco's annual obligation for retiree health care ($17 million just six years ago) is $115 million and rising exponentially. The city now guarantees lifetime health insurance to its employees, starting at age 50, after just five years of service.
Here are some excerpts from the previous posts which indicate the problem is hardly limited to free-spending San Francisco:

Between 2004 and 2010, the voracious costs of San Diego's municipal pension fund are expected to almost triple -- from $85 million a year to $242 million. That additional $157 million in taxpayer contributions to city retirees is more than enough to wipe out the entire annual budget of the Fire Department.
Smaller cities are not immune, either:

In fiscal year 2005, $15 million of Berkeley’s $115 million general fund will pay for contributions to the California Public Employees System (PERS). Last year, the city spent $8 million on retirement benefits. The year before, the city spent only $2.8 million.
There is a third feedback loop which no one connects to exploding healthcare costs: America's poor diet and sedentary lifestyle. In other words, shouldn't we also be asking what is driving healthcare costs to rise so rapidly? Yes, litigation, new technologies/machines/tests and drugs all cost more, but how come nobody seems to be asking if lifestyle choices might be a driver of costs which are leaping 6.7-fold in a mere six years (San Francisco's costs rising from $17 M to $115 M.)

Perhaps we need to fix the broken healthcare system before the cities and counties and states all go bankrupt trying to pay retiree healthcare costs which double, triple or quadruple every few years:

Here's a chart of global obesity (BMI is not a perfect metric, but this certainly suggests some obvious conclusions)

Some question whether poor diet, excess weight and inactivity actually increase healthcare costs; this chart from the State of Minnesota shows that inactivity does have costs--and we can assume that a diet topheavy with fat and sugar and low in fresh fruits and vegetables isn't improving a person's health, either.

When public healthcare costs are rising 6.7-fold every six years, it's obvious crunchtime lies just ahead. Why won't San Francisco's retiree healthcare costs leap from $115 million per year to $500 million per year in 2011? What's to stop them? All the trends and feedback loops which caused those costs to rocket from $17 million in 2001 to $115 million in 2007 are still in place, and even increasing.

So who's going to pay the $400 million in additional tax revenue the city will need? What if the coming recession is like any other recession, and sales tax revenues fall? Then will the city need $600 million? And who will have that kind of money? Strapped small businesses? Homeowners whose equity declines every year?

It is difficult to see how municipalities can cut costs or raise revenues on this scale. The only option will then be bankruptcy. Yes, cities and counties can go broke, too-- as we shall soon see.

Reader's Journal has been updated. Enjoy Jed H.'s Financial Haiku and diverse comments on the housing bubble, subprime meltdown, gov't bailout, stock manipulation and more.

Here are three new excellent essays which you're sure to enjoy, and new poems from one of our two contributing poets (Verona and Protagoras):

Inflation and Deflation -- A Reader's Perspective (Gary G, 12/10/07)

In Praise of Awk (Protagoras, 12/10/07)

Suburbia, Jobs and Housing (Lloyd L., 12/10/07)

Two Poems: Guilt and Hurt (Verona U., 12/10/07)

Thank you, Charles U., ($10), for your generous contribution to this humble site. I am greatly honored by your readership and support. All contributors are listed below in acknowledgement of my gratitude.

For more on this subject and a wide array of other topics, please visit my weblog.


copyright © 2007 Charles Hugh Smith. All rights reserved in all media.

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