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Richard Brodsky

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The Great Unraveling: Municipal Bankruptcies?

Posted: 02/29/2012 3:10 pm

The improving economy made it seem like morning in America is here again, but not so. Economic clouds are looming on the horizon yet again. There's a growing likelihood that in 2012, municipalities across America will collapse financially, and there's no safety net available to the governments, public employees, citizens, and now the banks and lenders. This isn't really a surprise, but it's not been front page in the daily analysis of the Great Recession.

Counties, cities, towns, villages, and school districts are the most visible expression of government. Real people interact with cops, teachers, sanitation workers, fire protection workers, and parks employees much more often than they do with federal or state bureaucracies. People need and value these services, but for years the finances of local governments have become increasingly shaky, and all that's been done is to sweep it under the rug. Now, things are ready to hit the fan.

We've seen major layoffs of cops, schools closing during the school year, parks closing and more. The reasons are not hard to figure: No one will raise taxes, fixed costs are rising, urban tax bases are shrinking; there's less state and federal aid and banks have lent for clearly improper purposes. There are no secrets here, but there's been no real attempt to figure it all out either.

But one sector has largely escaped damage: the banks and financial community. Yet the blame for our municipal economic crises is more often placed on elected officials and public employees. Unlike previous crises such as the NYC meltdown in 1975, bankers and lenders have been immune to the political and financial consequences, the one player that seems to emerge unscathed.

That dynamic appears to be coming to an end. For the first time, local elected officials are talking about default or delay on loan payments, and about bankruptcy as a legitimate way out of their fiscal messes. It started with a trickle when Harrisburg, Pa., and Jefferson County, Ala. filed for bankruptcy protection. Now this week, Stockton, Calif., announced it would begin to stop paying on its bonded indebtedness on March 1. Wall Street's beginning to sense a real crisis emerging.

In New York, a new breed of mayor like Syracuse's Stephanie Miner, Yonkers's Mike Spano and Rochester's Tom Richards are pulling no punches. Richards used chilling and powerful language to describe his predicament saying that his city was on the verge of "cultural and social bankruptcy followed by financial bankruptcy." Yikes.

If elected leaders abandon the unspoken compact that left the banks out of the painful solution then, for the first time there will be real political and media scrutiny of the situation. It won't be possible to craft workouts that ask only the taxpayers, the public employees and the citizens who use municipal services to shoulder the burden alone. And when default becomes an option in one place, it will shot through the system everywhere.

Any default/bankruptcy scenario can have dangerous impacts on the domestic and international credit markets. We're not Greece, and we have the moral and economic resources to keep our communities alive. But this is an issue that will be thrust onto the national stage. Right now, none of the candidates wants to talk about it. Within a few weeks we'll all be talking about it.

 

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