Across the U.S. many cities have become unable to pay off their debts, so they have been trying to declare municipal bankruptcy.
Municipal financial problems are often not caused by one event, but by a mixture of a bad economic environment and bad financial management (or negligence). This leads to an amount of debt that is very difficult to pay and the municipality loses its solvency.
According to the author of Municipal Bankruptcies in America, Wayne H. Winegarden, PhD, most financial insolvencies build up over many years, so they can’t be addressed quickly. In such cases, bankruptcy can help an insolvent municipality solve its financial problems and restore solvency.
Here are the 6 cities in the U.S. that are facing bankruptcy even as we speak!
Stockton and San Bernardino, California
Stockton and San Bernardino in California are fiscally unsound municipalities and their weak macroeconomic environment is what forced them to file for bankruptcy. Since 2000, there has been a significant decline of the state’s share of U.S. personal income. The entire State of California is in a weakened financial situation, and this is what pushed several of its municipalities to file for bankruptcy.
In San Bernardino the fiscal position was unsustainable, and this led to a breaking point during the 2008 recession, when property tax revenues declined, economic activity weakened, and both Stockton and San Bernardino became insolvent due to declining state revenues.
San Bernardino filed for bankruptcy due to a $46 million deficit and no other funding available, while Stockton filed for bankruptcy because of a $26 million budget deficit.
San Jose, California
The “capital of Silicon Valley” filed for bankruptcy due to many economic problems, including the unaffordable pension and retiree health benefits. These issues are actually what can push any municipality into bankruptcy.
The authors of Struggling San Jose Tests a Way to Cut Benefits, Rick Lyman and Marry Williams explain that San Jose has a general budget of around $1.1 billion and it spends one-fifth of it on pensions and retiree health care, but more money is needed, so they have closed libraries and community centers, fired many city workers, reduced salaries, and closed businesses to gather more money. However, this still isn’t enough.
Mayor Chuck Reed devised a pension reform plan to set the city on a better fiscal path, and if it works, this city might not have to face bankruptcy. However, there is a thin line separating progress from complete failure, and there is no telling what will happen.
Detroit filed for bankruptcy in July 18, 2013. This may be the largest municipal bankruptcy of all times, and it was caused by the problems that haven’t been solved for decades. These problems include years of bad financial management, economic decline, massive unfunded pension liabilities and health care promises for the retirees which were unfunded and caused a $6 billion damage!
Detroit’s long-term economic downfall is what caused all other problems in this city. Winegarden illustrates this decline by explaining that there are around 78 thousand unoccupied homes in this city, and of those who occupy 305,000 of the city’s properties, half didn’t pay any tax in 2011.
This economic decline brought damage to the social aspect of living as well, meaning that poverty, unemployment, crime and illiteracy rates have increased, according to the author of the article ‘Motor City’ Detroit files for bankruptcy with 100,000 creditors.
Detroit just couldn’t face all the financial difficulties and filing for bankruptcy was inevitable.
Harrisburg came into a horrible financial situation because of a chain of fiscally irresponsible decisions having to do with a trash incinerator plant, and long-term financial mismanagement.
Due to its structural deficit, this city is unable to pay off the debts and that obviously contributes to the crisis. Harrisburg didn’t officially file for bankruptcy again after it was rejected in 2011, but it may have to if the management reforms suggested in the state mandated recovery plan aren’t successfully implemented.
Jefferson County, Alabama
Jefferson County filed for bankruptcy in 2011 and this was the most costly municipal bankruptcy at the time, in the entire U.S. (now the most expensive one is Detroit’s).
According to data from Jefferson County Alabama Files Biggest Municipal Bankruptcy written by Steven Church and Dawn McCarty, at the time when they filed for bankruptcy, the city was in debt of $3.14 billion related to sewer work, $814 million for school construction, and $305 million in general obligations.
The total debt was $4.2 billion.
Jefferson County’s biggest problem weren’t unfunded pensions, but a mixture of unsound financial management and the inability to fund a sewer repair system. These sewer bonds created high transaction costs for the county as well, which further worsened the county’s financial situation. If this city faces bankruptcy, it may be able to use that time to regain control over its economy.
New York City, New York
It may sound strange, but New York City is in a bad financial situation, even though it is struggling and doing everything in its power to regain fiscal solvency.
Unlike the previously mentioned cities, New York City never declared or filed for bankruptcy. The city’s financial problems are a result of poor financial management and weak economic performance – something that all these cities have in common.
Even though this city has had the help of the federal government who extended their loans, NYC will have to stand on its own two feet or soon it will probably become impossible to regain control over its economy and return to fiscal solvency. If New York City doesn’t shape up and solve some of its financial problems soon, it may face bankruptcy.