Recovery USA? Fewer towns are going bankrupt

July 13, 2012

California's fiscal woes grabbed headlines this week when San Bernardino became the third town in the state to file for bankruptcy less than a month. But each town got mired in debt for distinctly different reasons — the foreclosure crisis, a 1997 development project gone awry, and a fight over public pensions — and their problems don't seem to be heralding a fiscal apocalypse for local governments across the nation.

In fact, U.S. towns and cities are defaulting at the slowest rate in in three years, says Frank Shaforth, director of George Mason University's state and local government leadership center, pointing to new data this week from Municipal Market Advisers.


(Grant Hindsley/Associated Press)

Over the past year, 100 municipal issuers defaulted nationwide — the fewest "in a 12-month period since Municipal Market Advisers began collecting the data in 2009," Shaforth notes.

It's partly because local governments are slowly recovering some of the revenue they lost during the recession, when the foreclosure crisis and plummeting retail sales hurt property and sales tax collection. State and local governments have used temporary tax increases to help close their budget gaps, as well as slashing spending on public-sector employees.

But there have been particular constraints in California that have made it harder for local governments to dig themselves out of debt. A 1978 state proposition makes it extremely difficult to raise property taxes, and the strength of its collecting bargaining laws makes its difficult to renegotiate pensions for unionized public employees, explains Shaforth. The state was also hit particularly hard by the foreclosure crisis. So while the fiscal pressures that California towns are facing aren't unique, such factors could help explain why municipal bankruptcies are rising in the state at the same time they're down nationwide.

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Sarah Kliff · July 13, 2012