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WSJ: Other Cities May Join Detroit in Bankruptcy

By Dan Weil   |   Monday, 22 Jul 2013 03:37 PM

Detroit, which filed for bankruptcy last week, may prove to be an example for other struggling U.S. cities, according to a Wall Street Journal editorial.

"While few municipalities are as economically depressed or dilapidated as Detroit, many have borrowed heavily, raised taxes and hollowed out services to pay retirement and debt obligations," Journal editors write.

"Some like Detroit may soon decide that clipping bondholders and pensioners is a better option than to keep whacking taxpayers."

Oakland is a West Coast version of Detroit, the editorial says. Oakland has the highest crime rate in California and recently dumped more than 100 police personnel to pay for retirement benefits and pension-obligation bonds. The city borrowed an extra $210 million to pay for pensions.

"Philadelphia and Chicago have been less scrupulous about financing pensions and are now having to make balloon payments to prevent their retirement funds from going broke," the editorial states.

Philadelphia now devotes about 20 percent of its budget to pensions to compensate for years of underfunding. "In 1999, it issued $1.3 billion in bonds to invest in the pension fund, but it has paid more in interest than it has earned on its pension investments," Journal editors write.

The City of Brotherly Love recently boosted sales, property, and business taxes. And the city council is mulling placing revenue from a 2009 sales tax increase into pensions, instead of schools, which were the intended recipient, according to The Journal.

"Chicago is also fast approaching a day of reckoning," the editorial says.  Increases in the city's retirement and debt service costs led Moody's Investors Service to downgrade Chicago's credit rating last week.

Those costs now make up about one-third of the city's operating budget, the editorial says. Pension payments will triple in 2015, and could spur a 150 percent jump in property taxes, Mayor Rahm Emanuel has warned.

"One of the benefits of bankruptcy is that it allows debtors to shed liabilities that impede growth and investment," the editorial states. "That benefit must be weighed against the cost of being frozen out of bond markets, which might be a good thing if it prevents more borrowing to finance unsustainable costs."

In Detroit, unions and creditors helped sustain too much borrowing, spending and taxes, the editorial says. "Bankruptcy shows the party is over, as it may also soon be for many other cities."

Newsmax columnist Herman Cain says the federal government could learn a thing or two from Detroit's bankruptcy. "The similarities between the two situations are frightening," he writes.

"The biggest source of Detroit’s debt is retiree benefits, which is also the biggest long-term liability facing the federal government in the form of unfunded obligations for Social Security, Medicare, and Medicaid."

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