California leads the nation in many categories with the state claiming first place trophies for highest pension debt and largest budget debt. California’s debt problems, however, may only get worse as Washington’s “cliff” trickles down to the Golden State.
Pension promises that cannot be fulfilled, expensive union contracts and unsustainable government growth have stretched many California municipalities to the breaking point.
When the debt becomes too much, many of California’s municipalities turn to borrowing, transferring, delaying and underfunding government programs. This strategy serves only as a Band-Aid for the short term and will lead to more grave fiscal woes in the long term.
Cities and other municipalities falling on hard financial times is nothing new, but it is not often that any such entity files for bankruptcy as a way of addressing its massive debts. Out of nearly 89,500 municipalities in the country, there were just 239 municipal bankruptcy filings between 1980 and 2010.
Recently, though, a slew of recent high profile municipal bankruptcies in California, including in San Bernardino, Mammoth Lakes and Stockton, have increased the visibility of municipal bankruptcies.
To explain the complexity of the highly intricate bankruptcy process, State Budget Solutions, a non-partisan advocate for state budget reform, released “Municipal Bankruptcy: An Overview For Local Officials.” It helps state and local officials understand both the process and the implications of municipal bankruptcy.
This guide provides as an overview of the basics of municipal bankruptcy, and boils down the municipal bankruptcy process so that officials and citizens have a framework within which to discuss whether bankruptcy is a viable option for their municipality. It outlines who is involved in the process, which states permit municipal bankruptcy, when a municipality may be considered insolvent, the potential costs and benefits of the process, and more.
While not legal advice, “Municipal Bankruptcy: An Overview For Local Officials” can assist elected officials as they wrestle with difficult decisions, including massive tax increases, deleterious services cuts and state bailouts. It provides an introductory, yet thorough, understanding of the complicated Chapter 9 filing process.
Due to the recent California bankruptcies, the Golden State has become a focal point of municipal bankruptcy. As a result, California courts are addressing some of the unanswered questions regarding pension funds and their status as creditors. Additionally, Vallejo, California, serves as an example of a city that has emerged from bankruptcy. As other California cities face dire fiscal situations, their leaders and citizens alike will consider the municipal bankruptcy process and they must therefore be aware of its ramifications.
Unless government officials learn to exercise budget control, more and more municipalities may face the prospect of bankruptcy. An important dialogue must occur in this country between lawmakers, employees and citizens about options that are available to municipalities to both continue to pay their bills and continue to provide essential services to citizens.