What It Means When Cities Go Bankrupt

Presented By Nick Bautista

With the recent news of Detroit filing for Chapter 9 bankruptcy and more closer to home the California cities of Stockton, San Bernardino, and Mammoth Lakes, the question remains, what does it means for a city to file for bankruptcy?

The law is pretty clear on what bankruptcy is and sets forth 4 eligibility requirements for filing for Chapter 9 which are found on the courts website. http://www.uscourts.gov/FederalCourts/Bankruptcy/BankruptcyBasics/Chapter9.aspx.

All bankruptcies are different, and as such it is hard to compare bankruptcies to one another.

 But, basically it comes down to the city not being able to pay the debt that the municipalities have agreed to.

On the one hand it seems odd that cities file for bankruptcy when they will always be able to tax their citizens. Cities get funding from taxing our properties and sales tax on goods. Problems though arise when all those revenue streams dry up as they did in 2008. Property values dropped and people needed to save more, both of these things negatively affecting city revenue.

So what happens to the citizens in the city? Well, most of the cuts that come out of bankruptcy are to government and public workers. A lot of the reason these cities are bankrupt is due to pensions that cannot be sustained due to their high payout assumptions and returns needed to meet those payouts. With interest rates so low, the projections made aren’t sustainable. So, the first thing to get cut is pension benefits or public worker hours.

In terms of people who live in the city life goes on. They don’t really notice dramatic changes, although change is likely to happen. In short Bankruptcy is never good, but then again, it brings on the option of the city to start anew and hopefully become better for it.