Tags: Ravitch | Tsunami | Municipal | Bankruptcies

Richard Ravitch: Expect a Tsunami of Municipal Bankruptcies

By    |   Monday, 26 May 2014 09:16 PM

More cities will go bankrupt like Detroit, predicts a government expert.

Rising pension-fund and health-care costs are putting enormous pressure on state and local governments, Richard Ravitch, who is advising Detroit's bankruptcy judge, tells CNBC. Plus, the federal government, attempting balance its own budget, has cut its funding to cities.

Politicians prefer not to raise taxes or cut services, so have repeatedly issued bonds to borrow, kicking the tough decisions down the road.

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"The problem is they've been kicking the can down the road too long," Ravitch, a former New York state lieutenant governor, tells CNBC. "It's a lousy option. Their grandchildren are going to be paying for the dinner that they're eating tonight. That is not a sustainable option."

Several cities are already in bankruptcy, and many more are under massive financial difficulties, cutting infrastructure and investments and borrowing as long as they can.

Cities have failed to learn the lesson from New York City's brush with bankruptcy in 1975, he says.

In a recent op-ed for The Wall Street Journal, Ravitch writes that New York City began following generally accepted accounting principles, a move that instilled fiscal responsibility and prevented smoke-and-mirror accounting tricks.

"Sadly, no other local government chose to follow the example of New York City, a choice that has led to chronic shortfalls," he writes.

A study he completed with former Federal Reserve Chairman Paul Volcker determined that states' fiscal problems are caused by revenue and spending imbalances, not the 2008 financial collapse. Plus, the problem is getting worse.

States are borrowing to finance operating budgets, chronically underfunding contributions to employee pension funds, and selling assets for temporary revenue boosts.

"What this means is we can expect to see more Detroits," he writes, noting the city filed the country's largest municipal bankruptcy.

Forbes contributor Bill Frezza also sees a coming tsunami of municipal bankruptcies.

California's state and municipal governments are burdened by an estimated half a trillion dollars of unfunded public pension liabilities, he says.

Stockton, San Bernardino and Vallejo have already faced bankruptcies.

"That first wave of municipal bankruptcies demonstrated that the odds of the state’s public pensions paying out at full value are virtually zero," Frezza writes. "The donnybrook that breaks out when the rest go sour is going to be a monster-movie scale spectacle."

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More cities will go bankrupt like Detroit, predicts a government expert. Rising pension-fund and health-care costs are putting enormous pressure on state and local governments, Richard Ravitch, who is advising Detroit's bankruptcy judge, tells CNBC. Plus, the federal...
Ravitch, Tsunami, Municipal, Bankruptcies
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2014-16-26
Monday, 26 May 2014 09:16 PM
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