Municipal bankruptcy is all the rage?

Cities throwing in the towel on fiscal issues

by Brian Leubitz

The budget issues in cities across the state are trying at best. With state cutbacks and lower than expected growth in sales tax revenue, many are facing severe budget issues.  So…

Facing the same financial stressors that pushed San Bernardino toward bankruptcy, cities across California are slashing day-to-day services and taking other drastic actions to skirt a similar fiscal collapse.

For some, it may not be enough.

San Bernardino on Tuesday became the third California city to seek bankruptcy protection in the last month and, while no one expects the state to be consumed by municipal insolvencies, other cities teeter on the abyss.(LATimes)

Now, decreasing the pressure to pay back bond holders in a time of crisis might be the best course for some of these cities. However, the other side of this issue is that benefits that were agreed to many years ago in a negotiation process are now being reversed. Typically, the cities negotiate  in order to reduce the fiscal strain at some point in the process, but when it comes to bankruptcy, all bets are off. And in many cases, this is putting some real stress on retirees.

“I am already taking generic meds for cholesterol and triglycerides against my doctor’s advice, I can’t afford the $70 co-pay. My wife cries all the time. She don’t understand how when they promise you all this stuff, then they can] just take it away,” he said in court documents.([LA Times)

The stigma of muni bankruptcies may be decreasing but the impacts are still substantial.  At this point, let’s hope that we can move forward through the traditional budgeting process for a while to come.

7 thoughts on “Municipal bankruptcy is all the rage?”

  1. Many years ago my aunt bought some California municipal bonds.  She was not very wealthy and the interest payments were an important part of her retirement income.

    Would you say that her retirement security was a greater or lower priority than public employees?  Or is it about the same.  

  2. There are plenty of questionable California tax-free bonds, regardless of pension issues. Some of the worst zombie bonds are those that fund the failed San Joaquin Hills toll road and similar privatized ventures. The San Joaquin Toll agency continues as a Ponzi scheme, continually increasing their debt without paying down existing principal.

    Stockton’s bankruptcy was triggered when they tried to stiff bond holders and then completely lost access to credit markets.

  3. See, I commented about this a month or so ago on this board. Just write off all the debt and start over. We don’t have a debt problem, not when we can just chapter 9 it all away.

    Then we can start over. Everything fresh & progressive.

  4. I presume this is a snark.  California without an ability to use debt for any reason is a state I don’t really want to live in.  There would be no more major public works projects, no bridges, no ports, no airports, no water pollution control.  And no major upgrades to any existing facility.  Bonds are an important way to finance public works.  If we just chapter 9 it all away, no one in their right mind would ever buy a bond again.

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