Cities Going Broke Across America

January 27, 2014

More cities across the country are likely to declare bankruptcy, says Wayne Winegarden, a senior fellow at the Pacific Research Institute.

Municipal debt has traditionally been regarded as very safe for investors, but that trend could be changing. As debt and pension liabilities pile up in city after city, more municipalities are likely to become insolvent.

Most municipalities face financial crises not due to one unlucky event but due to a pattern of financial mismanagement and negligence, and a poor, antigrowth environment. An example is Vallejo, California, which declared bankruptcy in 2008:

  • Police and firefighter salaries and pensions in Vallejo accounted for 74 percent of the city's budget.
  • Police captains were receiving $306,000 in pay and benefits annually, and firefighters earned an average of $171,000.
  • Both groups were guaranteed lifetime health benefits after only five years.
  • In 2007, 292 of the city's employees were making $100,000.
  • The city also failed to make any changes to its expenditures, despite its decreasing revenue after an economically significant Naval Base closed in 1996.
  • With a $16.6 million shortfall, the city filed for bankruptcy.

Unfortunately, after declaring bankruptcy, Vallejo did nothing to address the problems with its pension system. As a result, pension costs are rising at an unsustainable rate and the city remains unstable.

As Vallejo's experience proves, bankruptcy does not solve any city's problems: it is only a tool to begin addressing the root of the financial distress. Because the city did not address the root causes of its financial distress after going bankrupt, it remains in a perilous position.

Filing for bankruptcy also brings costs. Not only are borrowing costs higher and a city's credit rating lower, but businesses have less of an incentive to do business in a bankrupt municipality. As people and businesses leave, the city loses its tax base and the economic environment becomes even weaker.

Unless cities are determined to institute real reforms after declaring bankruptcy, filing bankruptcy will not fix their fiscal woes.

Source: Wayne H. Winegarden, "Going Broke One City at a Time: Municipal Bankruptcies in America," Pacific Research Institute, January 2014.

 

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