Tim Cavanaugh | When Cities Go Bankrupt

I must doff my hat to Charles Gasparino. Early last year, the fiery Fox Business Network correspondent and I were brought together for a few bread-and-circuses TV debates on the topic of municipal bankruptcy. We were both keying off some late-2010 comments that CNBC banking analyst Meredith Whitney made to the effect that the U.S.A. might see “50 to 100” municipal defaults in the near future. I argued that many city governments were indeed headed for insolvency and Gasparino countered that the problem was not as grave as Whitney claimed.

The nearly two years since have proven Gasparino more right than Whitney. According to Governing magazine, there were only 28 public bankruptcies in 2011 and 2012.

But that’s still a substantial increase in defaults. There have been 640 public bankruptcies since 1937 (when federal publicbankruptcy rules were established), a rate of about 8.5 cities, counties and (in most cases) public utility districts going belly-up per year. But even at a new rate of 14 muni defaults per annum, it’s a slow-moving apocalypse at worst.

Or maybe I should say, at best. As I have argued (see “Worse Than the Recession,” October 2012), dragging out the pain of bankruptcies, foreclosures, deflation, and reorganization doesn’t fix or even moderate the problem. It just zombifies things, resulting in a stagnant economy that causes more cumulative pain, over a longer period, than you would have had to endure if you’d taken your lumps all at once.

And make no mistake: Bankruptcy, municipal bankruptcy in particular, is powerful medicine. Bond holders hate it because it requires them to take a hit on what were thought to be ultra-safe investments. Public finance experts hate it because it limits—though it does not totally eliminate—their ability to take on more debt in the future. (Boo hoo!) But here’s the good part: Nobody hates municipal bankruptcy more than government employee unions.


(18853 Posts)