Have you heard? San Francisco’s newly finished 1.7-mile Central Subway project came at a staggering cost of $1.95 billion, translating to over $217,400 for each foot of track—more than $18,000 per inch.
Is spending $18,000 for just one inch an acceptable investment?
Currently, the Central Subway serves fewer than 3,000 riders per day, making up about 0.37 percent of San Francisco’s total population. For those few commuters, it may seem worth it, but for the majority, it feels like an egregious waste of taxpayer money.
This trend of fiscal irresponsibility is hardly surprising. With over a decade of artificially low interest rates from the Federal Reserve, countless reckless municipal projects have emerged. When borrowing costs are low, inefficiency and waste become the norm.
Politicians are, of course, captivated by massive spending projects. They’re often seen as bold and ambitious, providing ample opportunities for incumbents to secure votes.
Take Los Angeles, for instance, where it costs $837,000 to construct one housing unit for a homeless individual. This reflects not only mismanagement within LA’s homeless services but also perpetuates a cycle that drains resources from working taxpayers for the benefit of politicians and their allies.
Yet California cities aren’t alone in misallocating funds. In Pawtucket, Rhode Island, a whopping $124 million is being spent to build a minor-league soccer stadium, with $60 million coming from state tax relief, federal aid, and public debt.
While construction is in progress, rising interest rates are making it challenging for the developer to secure the remaining financing—potentially leaving taxpayers even more exposed.
But there’s more…
Pension Fund Mismanagement
These rising tax burdens arrive at a particularly inconvenient moment. The Fed’s previous reliance on ultra-low interest rates encouraged local governments to invest in unnecessary projects, while simultaneously inviting pension fund managers to make equally risky decisions in search of higher returns.
This pattern mirrors the disastrous choices made by institutions like Silicon Valley Bank. With rising interest rates, the value of assets held in pension funds has declined. This dual challenge of increased taxes and significant pension funding shortfalls is putting substantial pressure on local governments and the taxpayers who fund them.
The Wall Street Journal recently highlighted alarming trends:
“Traditionally, fixed-income assets such as government bonds constituted about half of pension fund portfolios, but this figure has now dropped to around 20%. In an effort to achieve targeted returns of 7%-8%, pension funds have increasingly favored higher-yield stocks and alternative investments, which are heavily leveraged.”
“These alternative assets now represent approximately 30% of pension fund investments and are suffering under rising interest rates. Increasing defaults on office buildings and plummeting property values are exacerbating funding gaps for pensions, straining local financial resources for retirement obligations.”
The same article also exposed severe mismanagement issues in Chicago. Did you know that 80% of the city’s property tax revenue is funneled directly into public pensions?
Despite this, Chicago’s four pension systems are estimated to have only 25% of the necessary funds to meet liabilities for current workers and retirees.
Declining Urban Conditions
As a consequence of such hefty pension demands, other public services in Chicago suffer from severe neglect. This leads to the unsettling conclusion that cities like Chicago, among others, have become virtually unlivable.
According to a Municipal Market Analytics report based on Bloomberg data, over 100 municipalities and governmental bodies borrowed to fund their pension liabilities in 2021—double the highest previous record.
Ultimately, it is the state and local taxpayers who underwrite these pension funds—acting as the silent ATM. When pension fund returns lag, municipalities are typically forced to cover the gap by either slashing other services or increasing taxes.
Indeed, the financial strain of meeting pension obligations is a significant burden on local and state governance. While bankrupt cities can escape some obligations, states cannot do so by federal law.
This means that taxpayers will continuously shoulder increasing financial responsibilities to address pension deficits. In Illinois, a notable 25% of general tax revenues are currently allocated to this purpose.
It is, to put it mildly, outrageous to expect private sector employees with no pension to underwrite the pensions of public sector workers. The reality is that many public employees have been promised an unattainable retirement. These extravagant commitments must be re-evaluated.
The consequences of these financial decisions are visible in nearly every major American city. Continual reallocation of resources away from essential services leads to urban decay and declines in living conditions.
Bondage Is Cruel
Last year, we made our great escape from Long Beach, CA—truly, a place that had become unbearable. Our only regret is that we didn’t leave earlier.
For nearly two decades, we lived near an intellectual liberal who had retired from city employment over 25 years ago. He often lamented the poor state of streets and sidewalks, as well as the rising homeless encampments and the presence of mentally unwell individuals and drug addicts wandering through disrepair.
However, it never occurred to him that the funds allocated to his retirement could perhaps be better spent maintaining basic city services. The generous entitlements promised decades ago are now inflicting harm on the very environment in which he lives.
Of course, the subject of government-funded retirement is a delicate one. Just recently, protests erupted in Paris as pension demonstrators stormed BlackRock’s headquarters. The chaos was ignited by President Emmanuel Macron’s controversial proposal to raise the retirement age from 62 to 64—a change vehemently opposed by the public.
In both France and America, the unrealistic promises of pension systems are bumping against the harsh realities of fiscal responsibility. Ultimately, every unsustainable scheme must reach its inevitable conclusion.
In the U.S., one strategy to maintain this facade is to devalue currency and offload the costs onto taxpayers. This is also a strategic move to secure political support from organized labor.
Recall that several months ago, President Joe Biden announced a $36 billion bailout of the Central States Pension Fund, funded through the American Rescue Plan.
If you’re not among those receiving benefits from the Central States Pension Fund, then you’re essentially a financier of the scheme. How heavy is that responsibility?
With no choice in the matter, you find yourself shackled to an investment with no guaranteed returns.
Indeed, bondage is cruel.
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Sincerely,
MN Gordon
for Economic Prism
