Municipal Bankruptcy

I found this article particularly interesting- now that we have all read the Bankruptcy book.  Chapter 9 bankruptcy deals specifically with municipalities that file for bankruptcy.  Since 2008, 13 municipalities have filed for bankruptcy, four of which are in California.

When looking at the map in the article it is interesting to see how different states handle these kinds of problems.  For example, two states—Iowa and Georgia--- prohibit municipal bankruptcy.  State decisions in this matter are particularly important as well, because without state permission the federal government won’t grant a bankruptcy petition.  Since such action would violate the Tenth Amendment. It was particularly interesting to see that even the restrictions didn’t stop municipalities from filing.  For example, CA is a state which “conditionally accepts municipal bankruptcy”.  But out of the 13 municipalities that have filed, 9 have this “conditional” status.

The video at the end of the article is what I really found surprising.  The video essentially goes through the specific problems that Vallejo, CA has faced.  Vallejo filed bankruptcy in 2008, and is headed down a path that may require them to file again.  The problem is the high cost of pension plans for Vallejo government officials.  In the past fiscal year roughly 26% of Vallejo’s budget went to retiree pension plans.  This is particularly an issue when Vallejo is over $5 million in debt. 

One may think--- why not cut pensions?  The issue is that a CA law prohibits such action.  A Stanford professor later states that he believes this “pension problem” may become a bigger issue for other cities in CA. 

Another issue that I found particularly interesting is the amount that Vallejo pays its government workers.  Vallejo currently pays the 5^th highest wages in the entire state, even though it ranks 49^th in terms of population in CA.  It seems like one option would be to cut the cost of government services.  But, this is something Vallejo is unwilling to do.  Many people showed up in outrage at the idea of cutting health benefits to retired government employees.  Even with the outrage, the Vallejo City Council unanimously approved the move.  For a city council member—what is the right move?  Make cuts to help the budget or pretend that Bankruptcy won’t happen to them again?

 http://www.pbs.org/newshour/updates/municipalities-declared-bankruptcy/