Let’s take a brief break from our run of posts regarding the massive corruption and fraud in government programs along with our political class insanity thread and return to one of the hottest topics we have been covering over the past few years, coverage that has intensified recently: which major city or state government will get to bankruptcy court first? Our primary cities in the race to bankruptcy include New York City, Chicago, Los Angeles, San Francisco, and newcomer, Seattle. The state governments that we think are soon heading into bankruptcy include New York, New Jersey, Illinois, and California with Washington state a newcomer to the race.
The reason for returning to this topic in the midst of our corruption series is because there have been some significant developments in the race to bankruptcy court. However, before reviewing the latest news and seeing which state or city is making the best progress towards government bankruptcy, let’s review how these cities and states got themselves into this financial death spiral position to begin with:
A government entity keeps expanding its budget, eventually putting pressure on the tax revenue stream it receives.
At some point, rather than cut government spending or make its programs more efficient financially, the politicians in charge raise taxes to meet the ever growing government expenditures.
The raising of taxes causes some residents and businesses to leave the city or state for less tax burdensome areas, reducing the tax base and reducing the revenue stream.
Rather than cut expenses and become more efficient to match the reduced tax revenue stream, politicians in the above cities or states raise the tax burden even more.
This causes more residents and businesses to flee the city or state, further reducing the tax base and tax revenue stream.
At some point politicians panic and raise taxes more and start cutting vital government services (e.g. police, fire, education) in order to try and balance government spending against the shrinking tax base and revenue stream.
The reduction in quality of government services in particular and quality of life in general drives more residents and businesses out of the area.
Eventually, the expenses, costs and financial liabilities outstrip the reduced tax stream and bankruptcy occurs.
Okay that’s the process, now lets check the progress some of the above listed government entities are making to achieve this bankruptcy goal against this process:
1)We have spent a lot of time recently discussing the reality that Seattle has leaped into the race to bankruptcy court big time and continues to drive businesses and tax revenue out of the city and the state of Washington. But let’s not forget that Chicago is still a prime candidate to win the bankruptcy race.
Their politicians and the high taxes their politicians have imposed on businesses and residents have driven major companies and their employees out of the state including John Deere, Boeing, and others. We reviewed how the city’s actuaries have actually predicted when Chicago would go bankrupt, pegging that feat at between five and seven years out.
And while Chicago has been imploding, the rest of the state has decided in many counties that they want no part of the city and state any more:
Seven Illinois counties will have voter referendums on the ballot this November on whether its citizens want to get out from under the state and Chicago politicians and form a new state.
But it gets much worse since a whopping 33 other Illinois counties have already approved a ballot referendum to leave the state of Illinois and form a new state.
Thus, about 40% of the state’s counties may favor getting out.
Apparently, the state residents in many areas are tired of the state's high taxes and the focus on Chicago to the detriment of the rest of the state’s cities and residents.
According to Brad Holbrook, a state legislature member: "Billions of dollars have been transferred from citizens, from businesses into state budgets or into the state treasury" which is the reality when under the current governor, J.B. Pritzker, over 60 new taxes have been imposed on state residents since he was elected.
And much like other states that have poached businesses and residents out of Illinois, Chicago, and other state and city bankruptcy candidates, the neighboring state of Indiana's legislature is working on legislation to annex willing Illinois counties.
Not even the Chicago Bears want to stay in the city, likely headed out to Indiana.
The legal obstacles these counties and voters face in trying to leave the state are enormous and almost impossible to overcome. But it is fascinating that even those currently living in the state realize the financial death spiral of both the state and the city of Chicago and want no part of it, much like the residents and businesses who have already fled.
What will be interesting is what do the rest of the state’s residents do when the state capital politicians try to pump more of their tax money into the financial pit of Chicago as the city implodes. They do not want to be in the state now, imagine the frustration and anger when they have to bailout the city.
2)And let’s not let the Seattle upstart in the bankruptcy race cause us to forget how bad things are becoming in New York City. As we outlined in our previous post, New York City has been and continues to hemorrhage high value taxpayers besides tax paying businesses. The city government faces a budget deficit crunch that is being held together with financial tricks. The mayor wants to raise taxes which will drive out more businesses and residents.
One of the many reasons business leaders have given for moving out of a city is that their employees don't feel safe coming to work because of crime, homelessness, and drug addicts. This has been particularly true in other high risk cities such as Los Angeles and Seattle where the streets are now very dangerous for everyone.
And it appears that the streets are getting quite nasty in New York City:
A homeless huge camp has sprung up on Manhattan’s West Side.
Huge meaning it now takes up 12 city blocks.
According to the New York Post, the camp spans from 34th Street to 46th street and includes dozens and dozens of tents and other types of temporary shelters.
Tourists visiting nearby tourist sights are now often confronted with dangerous confrontations with criminals, prostitution, homeless folks, and discarded drug needles.
The camp is close to the USS Intrepid museum and the Jacob Javits Center.
According to a city parks enforcement officer: “We can’t get rid of them. These ones here are stealing everything… And there are escorts in there too. Prostitutes. I see them, they’re right there People stopped parking here. People are scared to park here.”
And under the new mayor, Mamdani, the police and other enforcement departments are not allowed to remove the camp under City Hall orders.
A supervisor at the Javits Center: “The cops and the sanitation guys and the outreach guys, they clean up one spot and after that day, the next day they’re over here. Then they’re over there. They’re kind of just spreading around. It’s just heroin addicts.” These are people who desperately need intervention, not a mayor who considers their misery a monument to his own tolerance.”
Steve Fulop of the nonprofit Partnership of the City of New York: “Most people would agree that leaving people on the street indefinitely isn’t compassion, it’s neglect. We’ve seen in cities like Los Angeles and San Francisco that letting encampments grow unchecked fails the homeless and erodes quality of life for everyone else.”
When your streets are being compared to the streets of Los Angeles and San Francesco, two other major contenders to go bankrupt, you know things are bad. When tourists stop coming to your city because of fear and the local businesses suffer from lack of tourism, the financial death spiral then has another component.
3)Let’s stay in New York City for the next discussion:
Mamdani campaigned on the promise that he would make the city more affordable, especially for housing.
But despite his promise, median apartment monthly rents in both Manhattan and Brooklyn recently hit all-time highs, $5,295 and $4.350 respectively.
It is estimated that about 40% of the city’s rental units are occupied by foreign born residents.
It is unknown what part of the 40% is occupied by legal foreign born residents or are occupied by illegal immigrants.
Radio host Andrew Wilkow has a theory on how these two facts are interrelated: “You declared yourself a sanctuary city. You ‘welcomed’ hundreds of thousands of illegals. Then you had to find places to put them. That put pressure on housing supply. Shortages create price increases. It’s pretty simple.”
In 2003, The Federal Reserve of Philadelphia did a study that concluded that immigration of any sort tends to raise rents.
The study concluded that an immigration increase of 1% to a city’s population was associated with about a 1% rise in rents.
A recent study by the Federal Reserve Bank of Dallas found that a 1% rise in the number of illegal immigrants working in a geographic area was associated with a 1.4% increase in monthly rental rates.
Another reason for New York City residents to continue to leave the city. All time high rental rates, with at least part of the increase driven by the need to house tens of thousands illegal immigrants, a reality that happens when you are a sanctuary city. Given that Mamdani is never going to renounce being a sanctuary city, the rents in Brooklyn and the rest of the city’s five boroughs will continue to increase, making the city even more unaffordable.
Oh, and as a FYI: while city renters are coping with historically high rental rates, the New York City council passed legislation that would give them an 18.2% salary increase. Guess they will not have to suffer as much as their constituents when you can give yourself a pay raise.
4)As we have discussed many times, the state of California is a prime candidate to go bankrupt first in the race to bankruptcy court. The state’s high taxes, over regulation of business, high crime rates, high homelessness rates, and other atrocities have caused many large and small businesses to leave the state along with higher paid and higher taxed residents.
As a result, the tax base has dwindled and the incremental economic growth and taxation that those fleeing companies and folks would have created further erodes the tax base. But a few short years ago, the California government actually was in really good financial shape:
When Gavin Newsom became governor eight years ago, the state government budget actually had a $21.4 billion SURPLUS!
But over his tenure, the state government budget has increased a whopping 40%, to a huge annual budget of $351 billion.
Despite spending hundreds of billions of dollars more than his predecessor, the state is now in terrible economic and quality of life shape, causing state politicians to raise taxes even more which is driving out businesses and residents even more, a prototypical financial death spiral.
And despite great increases in the budget, no significant problem has been resolved with the increased spending, from the stalled high speed rail line failure to the plague of homelessness in the state’ major cities.
John Moorlach, a senior fellow and director at the Center For Public Accountability offered his view and what Newsom has done to butcher the state budget: “Spending went up, and reducing debts was not focused on as strongly as it should have been. The state didn’t attack its unfunded liabilities for retiree medical, nor did it make aggressive increased payments to the pension plan. So, it’s one of these massive, missed opportunities because paying down debt—even though it’s a good, smart thing to do in a household—is not sexy and it’s not fun.”
And now the bill will shortly come due as the tax base erodes and the long- term financial liabilities such as pension liabilities and other costs start coming due.
And his prediction of what is going to happiness is not pretty: “You would think we [i.e. California} should be much higher because of who we are—we’ve got Silicon Valley, and we’ve got six of the top corporations on the stock market. But instead of benefiting from the unique good fortune and being diligent about managing the resources properly for future generations, Gavin Newsom’s just had a fun time just spending it all. So, if we do go into a recession, it will get really ugly.”
Another vote for California being the first state to go bankrupt. At some point those unfunded liabilities will start coming due, piling up. And unless drastic cuts are made to many of the government funded programs Newsom and other state politicians created, the tax revenue burden will have to increase to handle the additional burden of those liabilities.
Those tax increases will drive more businesses out of the state and the financial death spiral outlined above will push California over the finish line in the race to bankruptcy court.
So, we have California spending beyond its means and liabilities, we have New York City getting more expensive to live in and more dangerous to visit, and we have not only businesses, residents and the Chicago Bears wanting out of the city of Chicago and the state of Illinois, but also whole Illinois counties want to leave. The race to bankruptcy is still wide open.
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If you agree that we need to deseat every member of Congress for their lack of success and accomplishment, then please consider going to the following petition link to help the cause:
https://www.change.org/p/deseat-congress-reset-freedom
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