Wednesday, July 4, 2012

Cities Going Bankrupt

Where I live in California, two notable cities of have gone bankrupt the first was Vallejo northeast of San Francisco and Stockton which is not far south of Sacramento, the state's capital. Stockton is the largest U.S. city to go bankrupt so far with 300,000 residents.

The problem is that Californians are possibly too compassionate and tolerant to break union agreements with local unions like police, firemen and teachers. However, promises made to these unions making it almost impossible to fire or let go anyone and impossibly high retirement requirements are more than anything else driving California (and many other cities across the U.S.) into bankruptcy. The Wisconsin way of Scott Walker simply will not fly in states like California for a variety of reasons. So, the other extreme is city bankruptcy which isn't good either.

The reality is that since the average property in California and most western states has dropped in value by 1/2 it makes property taxes which fund police firemen and teachers to be cut in half as well. Since taxes are a 50% or less than normal during times before about 2006 all promises made to police, fire and teachers and other municipal unions cannot be carried out. So, cities one by one will likely go bankrupt.

However, if some way isn't found to keep municipal bonds being repaid to those that loaned the money to municipalities then no one will buy anyone's municipal bonds and this will create a kind of chaos for cities that is presently unimaginable. For, if no one buys municipal bonds from municipalities in California and elsewhere there will be no money for infrastructure building like schools, sewage facilities, water retention facilities like lakes and dams and the building of colleges.

So, city bankruptcy not only could decimate union benefits for police, fire and teachers etc. but it also could decimate infrastructure by drying up investors who would otherwise invest in Tax Free Municipal bonds that build infrastructure to all areas.

No comments: