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The Cities Are Going Belly Up

We are now entering what could be an era of great municipal bankruptcies. Bloomberg reports that Pennsylvania’s capital city of Harrisburg has just filed for bankruptcy, facing a crushing debt burden and threats of a state takeover of its finances:

The state capital of 49,500 faces a debt burden five times its general-fund budget because of an overhaul and expansion of a trash-to-energy incinerator that doesn’t generate enough revenue.

“This was a last resort,” Schwartz said in an interview after the council voted 4-3 to seek bankruptcy protection. “They’re at their wits end.”

While bankruptcy would mean the loss of state aid under a law passed in June, it’s preferable to a proposed recovery plan, said Councilwoman Susan Brown-Wilson. […]

Harrisburg, the seat of Dauphin County, needs $310 million to make bond payments, restructure debt and repay the county and insurer Assured Guaranty Municipal Corp., which made payments the city skipped on the waste-to-energy facility. Schwartz said he expects Assured Guaranty will reduce the value of its debt.

This may be the first large municipal bankruptcy, but there will likely be many more to come. Especially in Northern rust belt states where the Blue Social Model was heavily entrenched, excessive spending and unnecessary growth in municipal services had increased over the past decade even as the economic base moved away to greener pastures. The region has been hit hard by the loss of industry, but the attempt to replace industrial work with municipal employment was doomed to fail — cities such as Harrisburg have relied on heavy subsidies from the state and federal governments to stay afloat even in fatter years.

Now that the states have their own problems, these cities will be left to fend for themselves. Some may be able to survive by aggressively cutting back on spending and confronting entrenched interests, but many are too far gone even for this. A tidal wave of unfunded pension obligations could force many cities over the edge, leaving bankruptcy as the only option.  The repo man is seizing street lights in Highland Park, Michigan; Central Falls, Rhode Island recently went belly up; for a number of local American governments the wolf is at the door.

This is not just a blue state, rust belt phenomenon; Jefferson County in Alabama is waiting on a special session of the Alabama legislature to help it avoid a Chapter 9 bankruptcy filing.

We will now face a wave of critical re-evaluations of the creditworthiness of American cities, counties, states and towns.  The municipal bond market has been historically a relatively sleepy place, with bondholders assured of safe, tax-protected returns.  Now it is getting livelier, and that means that governments seen as risky will face higher interest rates.  Those higher rates in turn make the cities that have to pay them even worse credit risks; the higher your debt payments the more likely it is that you default.

Look for some of the ugly federal arguments over debt to trickle down to the local level.  The longer it is before we see a return to healthy economic growth, the deeper and more serious the problems in municipal finance will get.

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  • Richard F. Miller

    The Bankruptcy Code was amended in the early ’30s to permit municipal filings.

    What most readers should focus on aren’t municipal but rather state bankruptcies: the Code does not provide for these. Unfortunately, this is where the rubber likely will meet the road. (Got California?)

    During the 1930s, state bankruptcies were unthinkable, mostly due to the wave of state defaults that had been triggered by the Panic of 1837. At that time, states often guaranteed the debts of private industry (by the ’30s, that would have been emerging railroads, inland canal projects, and large land improvement schemes.) The bondholders were mostly Europeans, and it took over a decade for states to be readmitted as borrowers. By that time, some states had amended their constitutions to prohibit state guarantees for private industry. But nearly all states had raised taxes in order to repay their defaulted obligations.

    That may be an option today, and may not be optional in the case of General Obligation bonds where courts have authority to order tax increases for debt service. But the public policy blowbacks would be enormous: bankrupt states, facing higher tax burdens of many orders of magnitude above their peers, would become dysfunctional as competitive economies.

  • Alan Kellogg

    Wait till California goes into receivership.

  • J Pritchard

    I wouldn’t write of Birmingham as being apart from the “blue state, rust belt phenomenon.” While Alabama is assuredly a “red” state when it comes to statewide elections, the city (but not the Metro) of Birmingham has been dominated by the “blue model” Democratic Party–and in Birmingham’s case, that did and does not include moderate Southern Democrats–as surely as Detroit or Chicago, for decades. Birmingham also qualifies for failed-rust-belt status, as its now-mostly-closed steel mills once gave it the nickname “Pittsburgh of the South.” The United Steel Workers still have a presence in the city, aiding the thoroughly corrupt and incompetent local government.

  • Mrs. Davis

    Novato is a better poster child for the blue model as the road to bankruptcy. Harrisburg is simply the story of incompetence in the management of the construction of an incinerator compounded by a city council unwilling to do what needed to be done to resolve the problem years ago.

  • Alex Scipio

    The fact of the matter is that redistribution makes everyone poorer and magnifies all social ills.

    It may make people feel good to take my earned money and give it to those who haven’t earned their own. It may make some feel good to lower my standard of living – and that of my kids – to raise the standard of living of those less intelligent or less motivated than I, but it harms society in the long run – ask the USSR, Greece, California, etc.

    There is no reason for people to starve in America. But there is no reason for the slothful to have an unearned Middle Class lifestyle, either. If they are hungry, we should put flour, sugar, coffee at City Hall and encourage them to come and get what they need.

    But it is past obvious the the Blue Model destroys everything it touches.

    Another point on which it’d be nice to hear Dr Mead’s comment would be this: Blue-State demographics rarely are addressed in entitlement discussions. The fact is that entitlements require intergenerational payments; yet the Blues have fertility below 2.1. They are demanding intergenerational wealth transfers but refuse to populate the next generations to pay for them. Only Red States have fertility such that they will be paying these bills – a truly frere lunch: Take now and repay never. This is about as immoral a demand as can be made of another, and another’s unborn progeny. But the Progs are making it.

  • Luke Lea

    Try to hide your schadenfreude Mead.

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