Why your city is bankrupt

Would you believe a story about municipal finance can be deeply disturbing? This one is – it’s the story of why Lafayette, Louisiana has no money and yours doesn’t either.  In short: the built infrastructure is so extensive that maintenance and upkeep have outstripped the tax base of the city.  The key passage (emphasis added):

All of the programs and incentives put in place by the federal and state governments to induce higher levels of growth by building more infrastructure has made the city of Lafayette functionally insolvent. Lafayette has collectively made more promises than it can keep and it’s not even close. If they operated on accrual accounting — where you account for your long term liabilities — instead of a cash basis — where you don’t — they would have been bankrupt decades ago. This is a pattern we see in every city we’ve examined. It is a byproduct of the American pattern of development we adopted everywhere after World War II.

As the authors point out, this is a merely human weakness due to temporal discounting – people are bad at accounting for the present value of future cash flows, whether the flows are income or expenses.    It also does a great job illustrating a key principle of institutional design – rules should be designed to beat human failings.

The idea that principals (e.g. local governments) are poorly incentivized to set their own decision rules is one of the better arguments against American-style federalism.  Governance arguments about federalism are rare, but much more convincing than traditionalist or consequentialist arguments.

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