After Detroit, More Cities May Face Bankruptcy

Wednesday, 24 Jul 2013 04:23 PM

By Andrea Billups

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As the shock of Detroit's bankruptcy filing wears off and the real business of deciding who gets paid in a Chapter 9 filing, concerns turn to cities and states facing similar fiscal crises.

The most recent Moody's Investor Services' report cited four cities under credit downgrade review, including Santa Fe, N.M., Cincinnati, Portland, Ore., and Minneapolis.

And a recent Wall Street Journal editorial cited Oakland and Philadelphia, along with Chicago, as having severe financial problems.

"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," said the editorial, which likened Oakland to a West Coast version of Detroit.

Stephen Moore, senior economics writer for The Wall Street Journal editorial board, says Detroit may be just the first domino to fall among major U.S. cities.

"You've probably got 10 or 15 major cities that are in severe economic distress right now because of the cascade of liberal policies that have been put in place," Moore told Newsmax TV.

In Illinois, Chicago Mayor and Obama confidant Rahm Emanuel is now dealing with the state's pension fallout first hand. Last week, its credit rating was downgraded by Moody's for having a $19 billion underfunded pension system.

Emanuel, who blamed inaction in state government on pension reforms for the credit downgrade, must now make hard choices including having to lay off more than 2,100 school employees. Among those layoffs are 4 percent of the city's teacher workforce, an unpopular move and one certain to set off a union fight.

After Detroit's filing, along with high-profile bankruptcies in California's San Bernadino County and city of Stockton, other cities that overspent before the recession hit are facing similar problems.

"Government has been giving away lavish pension and retirement benefits, giving their employees all kinds of protection that people in the private sector do not get," said Heartland Institute analyst Steve Stanek. "Yet it is the people in the private sector who generate … tax revenues for these people that provide benefits that most taxpayers would only dream of having. This has got to stop."

Stanek said cities have grown their government workforces, many abetted by the power of unions.

"We've seen years and years where government was growing faster than price and wage inflation, faster than GDP, faster than population and faster than tax revenue. If they were keeping spending in line with tax revenues they would not have huge amounts of debt," Stanek added.

A Pew Charitable Trust study released earlier this year looking at 61 cities described a "widening gap" in city shortfalls to fund pension and healthcare benefits for retirees.

After the nation's last recession ended, these cities in the study "emerged with a gap of more than $217 billion between what they had promised their workers in pensions and retiree health care and what they had saved to pay that bill," Pew found.

"As of fiscal year 2009, the cities in this report had promised at least $118 billion more than they had in hand to cover retiree healthcare benefits," the Pew report said, noting "wide disparities" seen between cities and states.

Collectively, Pew said, the cities studied had enough funds on hand to cover 74 percent of pension liabilities, but just 6 percent of their healthcare liabilities.

But even as numerous cities remain on notice, some analysts are predicting no large groundswell of bankruptcies nationwide.

"We view Detroit's default and subsequent bankruptcy filing as idiosyncratic, and not as a symptom of a wider issue in the municipal market," said Standard & Poor's credit analyst Jane Hudson Ridley, in a statement. "Although we have seen isolated pockets of distress across the country, we do not view bankruptcy filings or defaults as a trend."

Municipal bankruptcy filings are relatively rare, according to the National League of Cities (NLC). From 1970 to 2009, there were 54 municipality bankruptcy filings nationwide and only four of those were cities, the NLC said.

The website Governing.com noted that "the majority of filings have not been submitted by bankrupt cities, but rather lesser-known utility authorities and other narrowly defined special districts throughout the country."

Clarence Anthony, the NLC's executive director, said that research has found that "cities nationally are better off financially than they were just several years ago. Detroit should not be seen as emblematic of cities or as a harbinger of what's to come."

Many municipalities who are in dire fiscal straits seek other remedies to help them improve, he said.

"Outside of bankruptcy, they renegotiate contracts, draw on rainy day funds, form public private partnerships, and reduce health care and pension benefits," Anthony said.

Stanek, who edits Heartland's Budget & Tax News publication, says he agrees that Detroit may mean nothing directly for other states or cities, but he does find one common denominator in the crises.

"I think every place has certain factors that are unique. But I think there is a broad theme that does apply in most of the country and that would be crony government and criminal government that is beholden to special interests that feed at the public trough," he said.

"In Illinois, literally half the governors since the 1960s have gone to federal prison. Four of the last 8 have gone to federal prison," Stanek said. "Illinois is a state that is a fiscal disaster. They have huge unfunded pensions and an unpaid bill and it's because they have been run by criminals. When they have not been run by criminals, they have been run by incompetents. This is the end result."

Stanek said, "And now in Detroit and some of these other places, the consequences of these decisions are becoming very apparent."

Detroit's present and America's future are drawing comparisons from unlikely sources.

One of Michigan's most famous native sons took to the Internet with a warning last week when the state's biggest city filed for bankruptcy protection.

"Detroit (1701-2013). Don't cry for us, America. You're next," wrote progressive filmmaker Michael Moore on Twitter.


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