City to cops and employees: You're fired

They just won't be staffed by Maywood employees. The city can't have any staff because it can't get liability or worker's compensation insurance for them. Maywood's carrier, the California Joint Powers Insurance Authority, dropped it earlier this month in part because of several police-related claims.

Instead of declaring bankruptcy, Maywood officials decided to outsource all city functions. The Los Angeles County Sheriff's Department will patrol the streets, while the neighboring city of Bell will cover other city functions, such as staffing City Hall.

Maywood already relies on contract workers and outsources many city services. The director of parks and recreation, for instance, is a contractor, and the city's lights, landscaping and street sweeping are handled by private companies. Los Angeles County maintains the library and fire department.

Some of Maywood's 96 employees -- which include 41 police officers -- will also continue as contract workers. Elected officials, such as the city council and the city clerk, will remain on the job in the 1.5-square-mile municipality, which has about 45,000 residents.

"Odds are residents will see the same faces as in years past, just under a different administrative process," said Magdalena Prado, the city's community relations director, who is a contract worker and is keeping her post.

Maywood is billing itself as the first American city to outsource all of its city services. In an odd twist, officials say it can provide even better services because the shift will help it save money and close a $450,000 shortfall in its $10 million general fund budget.

For instance, the contract with the sheriff's department costs about half of the more than $7 million spent annually to maintain the Maywood police department, Prado said. And patrols will be increased.

"Our community will continue to receive quality services," Mayor Ana Rosa Riso said in a statement. "Maywood's streets will continue to be swept, our summer park programs will continue to operate and our waste will be collected and hauled as scheduled."

Stressed cities

A growing number of cities are looking to contract out or share services regionally as the economic downturn takes its toll on municipal budgets.

"Everything is on the table," said Chris Hoene, research director at the National League of Cities. "The fiscal stress cities are feeling mean they are looking for alternative options to deliver services that cost less money."

Some 7 in 10 city officials said they are cutting personnel to balances their budgets, while another 68% are holding off on capital projects, according to a survey the league did in May. More than half of respondents say they will make to further slash city services next year if taxes or fees are not raised.

Not everyone is distressed by Maywood's unusual plan for providing city services. While Jesus Padilla feels sorry for the workers being affected, he thinks things might improve. He's made lots of calls to the county sheriff's department when he worked as a security guard and said officers always responded promptly.

"The council made the best decision it could," said Padilla, a local activist who has lived in Maywood for more than 30 years. "It's going to be good for the city and the citizens." 

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CBO chief: Budget outlook 'daunting'

The gist of his testimony went something like this: The outlook is badunder current law and daunting if many current policies are extended as expected. And even that may understate the fiscal problem the country faces, because it doesn't factor in potential effects of debt on economic growth.

Under the rosiest scenario painted by Elmendorf, the debt held by the public is on track to rise to 80% in 2035 from 62% at the end of this year. At that point, interest payments on that debt would jump to 4% of GDP, up from roughly 1% today. That's the equivalent of a third of all federal revenue.

From there, the increases are stark under an alternative policy scenario, which includes an extension of the 2001 and 2003 tax cuts for most people, permanently protecting the middle class from the Alternative Minimum Tax and a permanent increase in Medicare payments to doctors.

Based on current policies, debt held by the public would hit 185% of GDP in 2035. And interest payments on that debt would jump to nearly 9% of GDP.

Focus on health spending: Spending on health care remains the federal budget's biggest problem, even after accounting for the estimated impact of the health reform law enacted in March.

The health care law "made a dent in the problem but did not significantly reduce the challenge," Elmendorf said. "If all the health law measures are implemented, we end up with slightly lower federal health spending by the end of the 2020s."

Specifically, Elmendorf noted that spending on major mandatory health care programs such as Medicare is on track to double by 2035, up to 10% of GDP from 5% today. That increase is the equivalent of $700 billion this year in additional spending, Elmendorf said.

Add in the less dramatic increase in Social Security spending, and the cost to federal coffers of mandatory entitlement programs will reach 16% of GDP by 2035. That's not very far below what the government has spent on all federal programs and activities on average over the past 40 years.

A few Democratic members of the commission registered their concerns that the CBO's assumptions about the effects of the new law are understating its potential to reduce costs.

0:00/4:52Clinton: U.S. budget is broken

The 18-member fiscal commission, which 12 members of Congress and 6 presidential appointees, will submit a report by Dec. 1 recommending ways to bring down deficits and stabilize the country's long-run debt.

Debt can sap growth: The larger the debt burden grows, the less money there will be for domestic investment. That, in turn, can suppress income growth and economic growth, which then reduces tax revenue.

The only way to bring the federal budget into better balance would be to sharply reduce U.S. spending, drastically increase taxes to rates never before seen in the United States or some less dramatic combination of the two, Elmendorf said.

The challenges are great, and the longer policymakers wait to stabilize the debt, the harder their task, Elmendorf said.

He gave an example: Say Congress started implementing measures next year to bring public debt back to what it was before the financial crisis. They would immediately and permanently need to cut spending by or increase taxes by 5% of GDP. That's $700 billion a year. And if they wait until 2020 they'd need to make changes worth 8% of GDP.

The hearing touched on one of the trickiest fiscal questions facing Congress: When to pivot from economic stimulus to fiscal restraint.

Elmendorf said that most economists believe cutting spending and raising taxes this year or next could slow economic recovery. But he added that "reaching agreement as quickly as possible would support the economic recovery because it would provide some clarity [in policy]."

While deficits can help boost the economy in a recession, over time government debt can drag it down, he said.

"If debt grows unchecked," Elmendorf said, "it means declines in people's standard of living." 

The great spending debateFederal Reserve keeps rates at record lows

Home Prices

Secondly, the improvement came during a time when the federal government was heavily subsidizing home sales through an $8,000 homebuyer's tax credit. That credit is about to expire.

"Other housing data confirm the large impact, and likely near-future pullback, of the federal program," said David Blitzer, a spokesman for Standard and Poor's.

Once the tax credit fully expires, home prices are likely to take a beating, according to Pat Newport, a housing market analyst for IHS Global Insight.

"The housing glut and foreclosures will drive the national Case-Shiller index down another 6% to 8%, with prices bottoming in 2011," he said.

The strongest rebound has been in California, where S&P tracks three major markets. San Francisco prices jumped 2.2% month-over-month and are up 18% year-over-year, more than any other city in the 20-city index.

San Diego prices rose 0.7% compared with March and 11.7% since April 2009. Los Angeles prices rose 7.8% over the past 12 months, and 0.7% in April.

The biggest loser over the past 12 months has been Las Vegas, down 8.5%. Prices rose there 0.3% there month-over-month.

Only two cities saw values fall during the month. Miami prices fell 0.8% for the month, which pushed the city into negative territory for the year at -0.5%. New York dropped 0.3% month-over-month and is off 1% year-over-year.  

Tax credit, low mortgage rates lifted April home salesExisting home sales soar in April

Consumer Confidence

Economists had expected the index to have fallen to 62 in June, according to consensus estimates from Briefing.com.

"Increasing uncertainty and apprehension about the future state of the economy and labor market, no doubt a result of the recent slowdown in job growth, are the primary reasons for the sharp reversal in confidence," Lynn Franco, director of the Conference Board Consumer Research Center, said in a statement.

Consumer confidence had been recovering slowly since the index hit a record low of 25.3 in February 2009, but the gauge is still far from a reading above 90, which indicates the economy is stable, and 100 or above, which indicates strong growth.

The index that measures consumers' present level of confidence fell to 25.5 last month from 29.8 in May. The expectations index, which tracks consumers' expectations over the next few months, fell to 71.2 from 84.6.

0:00/4:02Romer: 'We are adding jobs'

Economists pay close attention to measures of consumer confidence as a proxy for consumer spending, which drives the bulk of the U.S. economy.

"Today's report on confidence provides little reason to expect a meaningful pickup in consumer spending in the near term," said Jim Baird, partner and chief strategist at Plante Moran Financial Advisors. "Consumers are still exceedingly nervous about the jobs market."

The percentage of consumers expecting more jobs in the months ahead fell in June to 16% from 20.2% the month before, according to the report. The percentage of those expecting fewer jobs increased.

"Although the economy is growing, consumers recognize that employers remain hesitant to hire and jobs are still hard to come by," Baird said.

Economists expect the government's monthly jobs report for June to show a decline of 100,000 jobs after temporary Census hiring led to the biggest monthly job gain in ten years during May.

Meanwhile, the government said last week that the economy grew at a slower pace in the first three months of this year than previously estimated.

Gross domestic product, the broadest measure of the nation's economic activity, grew at an annual rate of 2.7% in the first three months of 2010, according to the Commerce Department, down from the previous reading of a 3% rise. 

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Retail Sales

It was first decline since last September, when retail sales fell 2.3%. Economists surveyed by Briefing.com expected sales would increase by 0.2% in May.

Sales excluding autos and auto parts dropped 1.1% last month. Economists had projected sales excluding autos to edge up 0.1% in May.

"The trend as of late has been modest growth, and around the trend of modest growth, you're going to get some ups and downs," said Scott Hoyt, a retail economist with Moody's Economy.com. "That's clearly what we're seeing here."

Sales declines were led by a 9.3% drop in building material and supplies.

But because sales growth in this area was up more than 6% in both March and April, Hoyt said last month's correction was not surprising.

"It was up so much [in March and April] partly related to the appliance incentives administrated by states that were mostly rolled out in March and April and part of it was probably pent up demand after winter weather," he said. "But once you work off that pent up demand, you go back to a normal level."

Sales at gasoline stations also fell significantly in May, dropping 3.3%.

"This has to do with seasonality, since gas prices usually increase at this time of year but were flat or even down last month," said Hoyt. "When there isn't an increase in gas prices, this shows up in retail sales."

Meanwhile, motor vehicle and parts sales dropped 1.7% in May. Hoyt said this was the most surprising part of May's report, since automakers such as Ford (F, Fortune 500) and General Motors posted large May sales increases earlier this month.

Excluding the weakness in these three areas -- building supplies, gasoline stations and motor vehicles -- Hoyt said overall sales would have increased 0.1% in May.

Total retail sales were up 6.9% over the same period last year.

Consumer spending accounts for two-thirds of U.S. economic activity, so related reports such as retail sales are closely watched to gauge whether a recovery is underway.

Despite May's disappointing data, Hoyt said that given the overall trend of growth this year, he expects retail sales to improve in the long run, just not as quickly as earlier this year.

"The pace of consumer spending growth we saw in the first quarter was too fast and couldn't be sustained," he said. "But if you put this [report] in the context of the last few months, where growth was quite strong, and smooth it all out a bit, we are still consistent with the story of modest spending growth, and this is where we should be." 

Tax credit, low mortgage rates lifted April home salesRetail Sales

Open-mike day at debt panel

Reform Social Security. Don't touch Social Security benefits.

Don't act too soon to reduce the deficit. Don't wait too long.

And whatever happens, do no harm to the most vulnerable in society.

That's just a taste of the recommendations presented to President Obama's bipartisan fiscal commission this week during a marathon public listening session focused on how to put the federal budget on a sustainable track and reduce the growth rate in U.S. debt. (Read "CBO chief: Budget outlook 'daunting' ")

In all, 75 speakers representing think tanks, nonpartisan grassroots organizations, trade associations and advocacy groups from the right and left spoke during the seven-hour meeting. A handful of concerned citizenscontributed their two trillion cents, too.

One of the speakers was Carolyn Lukensmeyer, president of the nonpartisan grassroots organization AmericaSpeaks. She relayed preliminary findings from a day-long conference on the federal budget in which 3,500 demographically and politically diverse Americans in cities nationwide met to share ideas on how to rein in debt.

"Americans are ready to make the tough decisions," Lukensmeyer told the commission, noting how every table of participants backed a combination of spending cuts and tax increases, regardless of participants' political leanings.

A majority said they could support at least a 5% cut in health and non-defense spending and up to a 15% reduction in defense spending. They said they could back a carbon tax, a securities transaction tax and higher taxes on corporations as well as individualsmaking more than $1 million.

On Social Security, participants at the AmericaSpeaks event said they could support raising the limit on taxable wages so that the highest income workers pay more into the system. Right now the first $106,800 of wages is subject to the payroll tax. They would also opt to raise the retirement age for full Social Security benefits to 69 by 2025. Currently the full retirement age is on track to rise to 67.

Many other speakers at the event, however, urged commissioners to tread very, very lightly when it comes to the country's most popular entitlement program.

"Social Security did not cause these deficits -- it has a $2.6 trillion surplus and a dedicated source of revenue," said Edward Coyle, executive director of the Alliance for Retired Americans.

0:00/2:29'This debt will eat up jobs'

Indeed, workers and employers over the years have paid more money into the system than the system had to pay out. But the Treasury spent that surplus and in exchange issued interest-bearing non-marketable U.S. bonds to the system.

"Those bonds are not different than any other debt issued by the U.S. government," said Janice Gregory, president of the National Academy of Social Insurance.

Even if Uncle Sam paid those bonds back in full, however, the pay-back would end by 2037, at which point the system would only be able to pay out roughly 75% of the benefits promised.

On other issues, there were many calls to reform the tax system, continue to reduce health care costs, and boost or sustaineconomic growth.

Some, like Chris Edwards of the libertarian Cato Institute, recommended that policymakers seriously consider privatizing some public assets, such as airports.

Those from the business community, including John Castellani, president of the Business Roundtable, urged commissioners to support policies and reforms that attract investment to the United States.

There were also calls for more government efficiency and less waste. Jim Kessler, vice president of policy at Third Way, a think tank for moderate progressives, noted that the public will have a harder time accepting the notion of shared sacrifice if they believe Uncle Sam isn't doing some belt-tightening of his own.

"Washington must lead by example and take the first hit," Kessler said. Among his ideas: Reform the federal pension system, which he said puts $14 taxpayer dollars for every one dollar that employees contribute. He also called for an end to "the ridiculous rifle-shot spending that is rife in appropriations bills and the tax code."

If you want to listen to the meeting, it will be posted on the commission's Web site starting on Friday. 

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Inflation (CPI)

The government report attributed most of the month-to-month decline to the energy index, which fell by 2.9% in May. The gasoline index fell by 5.2% in May, and was down 27% over the year.

"Up to this point, the U.S. economy has been the beneficiary of an 'inflation-less' recovery," said Jim Baird, partner and chief investment strategist for Plante Moran Financial Advisors, in a research note.

"While [some] point to the risk of inflation down the road," he added, "there is still sufficient slack in the economy to keep price levels from moving higher."

Core CPI and inflation: The closely watched core CPI, which excludes volatile food and energy prices, ticked up by 0.1% in May after being unchanged in April. That matched economists' expectations.

It was only the second monthly increase in core CPI so far this year. The rate is down by 0.9% over the previous 12 months.

"The core inflation rate remains uncomfortably low," Baird said. "The economy may be expanding, but at a pace that isn't inspiring."

The core rate is a gauge of inflation. Experts say concerns are sparked only when core CPI rises consistently by 0.2% or more each month.

"Muted inflation, and the risk of deflation, seems likely to provide the Fed continued incentive to maintain its accommodative stance," Baird said. 

Inflation (CPI)Home construction fails to lift recovery