Bankruptcy was once a last-ditch act reserved for companies and individuals. Declaring that creditors could not be paid carried a stigma that no one wanted to be associated with. And rarely would a municipality file for Chapter 9, the city version of Chapter 11. How times have changed.
Since 1981, 42 U.S. cities and towns have filed for bankruptcy. The pace has picked up with 10 in the last four years and many others teetering on the brink of insolvency. Recent cities taking the plunge include Mammoth Lakes and Stockton in California, and Central Falls, R.I.
The biggest issue is pension obligations to city workers coupled with a lack of revenue. The boom times of the 1980s and ’90s spurred the awarding of generous benefits to employees.
The Golden State has been hardest hit. The state’s budget woes have toppled governors and forced four cities since 2008 to declare bankruptcy, with more on the brink.
When cities go bankrupt, citizens find basic services slashed, fire and police protection cut to the bare minimum and taxes increased.
Maybe it didn’t help when Meredith Whitney famously declared on “60 Minutes” that there would be a wave of hundreds of billions of dollars in municipal defaults. Whitney may have been wrong about the scale of the problem, or maybe just the timing, but medium-size cities across the country are in serious financial difficulty.
So far, the muni bond market has weathered the storm, but as Ron DeLegge wrote on AdvisorOne, there is much danger for huge cities like Chicago and San Jose that just might be “too big to save.”
Adding to the worries, Moody’s issued a note of concern late last month about the seeming willingness of cities to declare bankruptcy rather than pay their debts. Some big cities are among the places in financial jeopardy.
Here is our look at 6 Cities on the Edge of a Fiscal Cliff.