Cities Can File Bankruptcy Too

How does a city go bankrupt?

Same way you or I do, spending more than it takes in, over-estimating revenue, under-estimating expenses, or just ignoring reality.

Like the federal government, local governments spend OPM, other people’s money.  Its just that only the Federal government can print money.

We used to be a federation of states, which cannot file bankruptcy.

Local government units are creatures of the state, created by state, not federal, law.  The federal bankruptcy code provides for municipalities to file, but they cannot do that unless the law of their state allows it.

24 states do not allow it, another 13 have restrictions.

It could happen to your city in Michigan.

Michigan cities can, but the state prefers taking over under the Emergency Managers Act, as the state might be required, or prefer, to cover defaults by the cities.  So the state would rather take them over before a default.

Like Chrystal Falls, Rhode Island, which is on the watch list for Bankruptcy, many Michigan cities spent too much on employee benefits like pensions and health care.

Many of my clients were suckered into mortgages they could not afford.  Some ran up credit card debt, as the culture demands.    Then, when hours were cut, or layoffs came, the roof fell in.  But at least they were earning and spending their own money.

You cannot blame government workers for making the best deals they can get, but how about the elected officials, who are the ones who over-estimated revenue, under-estimated pension and health care costs, and, in the bargain, usually made sure they were well compensated for minimal efforts.

And now most of them are out of office when the chickens come home to roost.

In the story by Erica Niedowski linked to above, the city fathers: “face(s) $80 million in unfunded pension and benefits obligations and an estimated $25 million in deficits over the next five years. Officials said it was hard hit by a loss in state aid and the fact that expected collections from the Wyatt Detention Facility never materialized.”

How about saving some money?

Not counting on all the state aid showing up indefinitely?

Too bad the politicians responsible cannot be held accountable, instead of the employees and retirees.

What do you think?

image credit naphour

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