I ask not just because their national debt is rapidly approaching $16 trillion and if Obama wins in November he will almost certainly rack it up even higher, perhaps taking them over $20 trillion, but because bankruptcy might sneak up on them from below. The number of cities choosing this way out of their financial (and mostly self-inflicted, dilemmas is mounting almost at a daily rate. At the beginning of this month Stockton in California declared itself broke. Usually, of course, if a municipality goes broke it is the suppliers of goods and services who take the hit, but these days, such has been the all-pervading influence of the public service unions it is their members who are close to feeling extreme pain. For a start, large numbers of policemen, firemen and teachers will be laid off. There is even a chance that retirees enjoying their generous pensions could see these entitlements cut although Reuters suggests that such an outcome is fraught with legal difficulties:
One big step Stockton is not expected to take is to attempt to dodge its pension obligations to city employees. If it did, the city would have to confront the powerful California Public Employees' Retirement System (Calpers), which handles pension plans for many California cities and counties. Calpers and unions around the country have made it clear they see a pension as an iron-clad right, one that's legally protected even in a bankruptcy. Whether pensions are contract rights, which can be changed, or property rights, which are protected under the U.S. Constitution, has never been tested in court.
Where cities go today entire States might go tomorrow. Rhode Island is considered to be hovering close to the edge. According to Fitch as reported by Business Week in March this year, Illinois, Connecticut and Hawaii are in deep trouble if you take into account their pension liabilities. If the States begin to put up the shutters how long before Washington follows suit?
Jest askin'!
"Where cities go today entire States might go tomorrow." Nope, States can't go bankrupt. But then they don't need to since they enjoy sovereign immunity. In other words, they can just default. (Americans are all indoctrinated to believe that the USA has never defaulted, but she did at the behest of FDR, and the spineless Supreme Court let him off with it.)
Posted by: dearieme | Friday, 20 July 2012 at 15:45
Sorry, DM, I was confusing 'bankruptcy' with 'defaulting' probabaly because the result is similar in that some poor sucker gets screwed!
Posted by: David Duff | Friday, 20 July 2012 at 17:28
Regardless of what you call it, several states are indeed on their way to bankruptcy/default. Illinois is in a huge mess, and California isn't far behind. These wounds are totally self-inflicted.
The real challenge will be preventing Washington from trying to "bail them out". It's already happened; Obama's "stimulus" was in large part a bailout of the states, via taking over some of their expenses temporarily (3 years). That's now over, so some have tried to get federal help again. So far, that's been blocked.
It really is a case of buyer beware; anyone mind-numbingly stupid enough to buy bonds issued by states that are in a fiscal mess is asking to be ripped off. However, there are a lot of unwilling people who would be hurt as well.
Still, I favor letting the states feel their pain in full: no bailouts or help. Without real pain, they'll never learn.
Incidentally, California is running massive deficits, so what did they do last week? Sign into law the 68 billion high speed rail boondoggle from Los Angeles to San Francisco. That is a total waste of money. (for those unfamiliar with California geography,the train basically has to go hundreds of miles further than a straight-line course in order to have the flat terrain it needs to run at high speed). However, even if it was a good idea, doing it when swamped with deficits is stupidity of the highest order.
The state of Illinois is the worst at the moment though... its deficit is more than half of its budget. My guess is that they will be the first to feel a real crunch.
Posted by: Arizona CJ | Saturday, 21 July 2012 at 05:45
Thanks, CJ, and I'm glad you raised the subject of the high speed train in California - I was trying to work out how to get it into my post but time ran out. And soon, the money will run out, too.
Here, too, we face austere times and what does our beloved government come up with - yes - a high speed train!
Posted by: David Duff | Saturday, 21 July 2012 at 08:27