California Cities Scramble to Avert Insolvency

Author: Josh Adler

This article is about the recent default of municipal bonds. Cities and towns all around the United States have been weighed down by large commitments in pensions and frivolous spending. On March 19^th, Stockton became the largest city to default on its municipal bond loans. This default is important because now investors all around the country are anticipating a large amount of defaults. Municipal governments have been taking drastic cuts to help meet bond demands. The lack of revenues in cities has forced bondholders to take losses outside the bankruptcy process. The default on these bonds is detrimental to cities because it slashes their bond rating and makes it more expensive for cities to borrow money. This borrowed money is used to improve the city and pay for government projects. According to CNBC, Stockton last year had the second highest foreclosure rate of 5.34 percent. Some of the frivolous spending is due to the public employee contracts, the downtown sports arena, and urban revitalization projects. Cities all around the country are now hurting because of the over spending and the commitments made to pensions.

I found this article to be interesting because as the economy starts to improve American citizens forget about the crisis that lurks within the financial condition of municipalities. There are many state and local governments that do not have enough revenue to meet the cost of pensions and other large spending. Harrisburg, PA is another city that defaulted on loans and states such as Illinois, New Jersey, and California are insolvent. I believe the problem is the environment and the way governments do business. It is difficult to force politicians into the same mindset as the private sector. However these municipalities need to cut spending and re-evaluate union contracts. Some ways that local governments are cutting operations expenses is by reducing the police force. According to CNBC Santa Ana saved $10 million a year by closing its fire department and relying on the county fire department. I strongly believe that municipalities need to change their way of business. As the equities market continues to improve and the credit rating of cities decreases it could be a struggle to find outside funding to help improve our cities.

Reuters Link: http://www.cnbc.com/id/46783384