by Dan Berman, Advisor One:
With Moody’s recent warnings and downgrades, these municipalities may follow the likes of Stockton and Central Falls into bankruptcy
Bankruptcy was once a last-ditch act reserved for companies and individuals. Declaring that creditors could not be paid carried a stigma that no one wanted to be associated with. And rarely would a municipality file for Chapter 9, the city version of Chapter 11. How times have changed.
Since 1981, 42 U.S. cities and towns have filed for bankruptcy. The pace has picked up with 10 in the last four years and many others teetering on the brink of insolvency. Recent cities taking the plunge include Mammoth Lakes and Stockton in California, and Central Falls, R.I.
The biggest issue is pension obligations to city workers coupled with a lack of revenue. The boom times of the 1980s and ’90s spurred the awarding of generous benefits to employees.
The Golden State has been hardest hit. The state’s budget woes have toppled governors and forced four cities since 2008 to declare bankruptcy, with more on the brink.
When cities go bankrupt, citizens find basic services slashed, fire and police protection cut to the bare minimum and taxes increased.