City of Baltimore is on a path to financial ruin, report says

FILE: Pedestrians make their way with downtown Baltimore in the background. (AP)

WASHINGTON – The Baltimore city government is on a path to financial ruin and must enact major reforms to stave off bankruptcy, according to a 10-year forecast the city commissioned from an outside firm.

The forecast, obtained by The Associated Press ahead of its release to the public and the City Council on Wednesday, shows that the city will accumulate $745 million in budget deficits over the next decade because of a widening gap between projected revenues and expenditures.

If the city's infrastructure needs and its liability for retiree health care benefits are included, the total shortfall reaches $2 billion over 10 years, the report found. Baltimore's annual operating budget is $2.2 billion.

The report was prepared by Philadelphia-based Public Financial Management Inc., a consulting firm that has prepared similar forecasts for Miami, Philadelphia, Pittsburgh and the District of Columbia. Baltimore's decision to commission the forecast differs from those cities because each of them had already ceded financial oversight to the state, or in the district's case, the federal government.

The forecast will provide the basis for financial reforms that Mayor Stephanie Rawlings-Blake plans to propose next week. The city has dealt with budget deficits for the past several years, closing a $121 million gap in 2010. But those deficits have been addressed with one-time fixes that haven't addressed the long-term structural imbalance.

"When you have budget after budget and you know that there are systemic problems, I felt an obligation to do more than what we have done in the past," Rawlings-Blake told the AP. The forecast, she said, shows that the city needs to address its financial woes "before it's too late, and somebody is coming in and making these choices for us."

That's what happened to the District of Columbia, 38 miles to the south, in 1995 after the city reported a budget deficit of $700 million. Congress created a financial control board that instituted tight spending controls and ultimately took over all hiring and firing in nine city agencies. The spending cuts, combined with a robust regional and national economy, drove the nation's capital back into the black.

Not all municipalities have been so fortunate. In late 2011, Jefferson County, Ala., filed the nation's largest-ever local government bankruptcy, citing $4.15 billion in debt, and last year, Stockton, Calif., became the largest American city to declare bankruptcy.

In Baltimore, the erosion of the tax base is easy to see. The city's population has dropped from a peak of 950,000 in 1950 to 619,000 today, and while the decline has slowed, there have been few signs of the trend reversing. The median income is $40,000, and 22 percent of the city's residents live in poverty, according to Census data. The city also has 16,000 vacant properties.

Baltimore already has the highest property taxes in Maryland -- twice as high as in neighboring Baltimore County. The city's local income taxes are the highest allowed under state law. While the city enacted some new taxes to deal with the 2010 deficit -- including taxes on bottled beverages and higher hotel and parking levies -- city officials say they can't tax their way out of the problem without driving away residents and businesses.

"We've got to go from a vicious cycle to a virtuous cycle. That starts with a good, stable fiscal foundation for the city government," said Andrew Kleine, the city's budget director. "When you've lost so much population and the tax base has shrunk, it's very difficult to deal with."

If the city chose to use its reserve fund to cover the deficits, the fund would be empty in three years, the report found.

"Quite simply, a status quo approach is not financially sustainable," the report says.

In 2010, the mayor's office released a "doomsday" budget that would have meant firing police officers and closing seven fire stations, among other cuts, and some criticized the move as a tactic intended to soften up the City Council to approve tax increases.

But officials say the new forecast doesn't envision a worst-case scenario. It assumes modest economic growth nationwide over the next decade, said Michael Nadol, a management director at PFM and a lead author of the report.

Rawlings-Blake said the report was intended to be an honest assessment.

"It's not like we've had rosy budgets over the past five years, and now we're screaming that the sky is falling," she said.

Rawlings-Blake, a Democrat, became mayor in 2010 after Sheila Dixon resigned as part of a plea deal for stealing gift cards donated to the city for needy residents. She was elected in 2011 and has nearly four years remaining in her term.

Health care benefits for retired city workers will be a major drag on city finances in the future, according to the forecasts. The city still faces increasing pension costs despite a recent restructuring of the pension plans for police officers and firefighters.

Like many cities, Baltimore doesn't factor the escalating future costs of retiree health care into its annual budgets, and if that doesn't change, the city will be on the hook for another $300 million in 10 years, the report found.

While city officials declined to specify how they would address the shortfall, they said some restructuring of the retiree health plan would be necessary.

The forecast cost the city $460,000. PJM won the contract through a competitive bidding process and subcontracted some of the work, including actuarial analysis.

Shayne Kavanagh, a researcher at the Government Finance Officers Association, said the group recommends that city governments engage in long-term financial planning, but few have taken that step.

"Most government budget practices are one-time, year-by-year affairs," Kavanagh said. "What Baltimore's doing is trying to integrate a longer-term perspective."