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.