The nation’s cities are weak links in the U.S. economy and, if they collapse in large numbers, it could knock the country’s recovery off course. Cuts at the federal level are being pushed down to the states, which in turn are passing the problems to their cities.
The strains are especially great in California, which was at the epicenter of the housing market meltdown and the deep recession that followed. Even before revenue slowed, the state was facing unique constraints on public finances because its laws make it difficult to raise taxes.
The dire conditions, however, have made California a laboratory for how to run cities in an age of austerity.
Declaring bankruptcy used to be a last resort for cities, not only because it would cripple their ability to borrow for years to come but because of the blow to their reputation. But that attitude has started to change as more cities have found themselves facing fiscal catastrophe; bankruptcy offers an opportunity to start over with a clean slate.
At least three California cities — Stockton, Mammoth Lakes and Montebello — have declared that they are exploring the option. And at least 100 of the state’s 482 cities are on track to face a similar predicament by the end of the year, according to Barbara O’Connor, a professor at California State University at Sacramento.
Chris McKenzie, executive director of the League of California Cities, said that “no one expected the downturn to last this long,” adding: “After years of struggling to keep things together as best they could, cities are getting closer and closer to the edge.”
Economists warn that a number of large bankruptcies of cities, concentrated over a short period of time, could have a devastating effect on the national economy. Banking analyst Meredith Whitney in 2010 ominously predicted hundreds of billions of dollars in municipal bond defaults. While defaults on that scale haven’t happened — and Whitney’s critics came out in droves to attest to the health of the municipal bond market — the specter of such a crisis hasn’t disappeared.
City’s cash runs out
Vallejo, about 35 miles northeast of San Francisco, became the poster child for the failures of municipal budgeting in 2008 when its cash reserves dwindled to zero and it was unable to pay its bills amid falling property tax revenue and the soaring cost of employee compensation and pensions.