American Cities Go Bankrupt

http://www.bbc.co.uk/news/world-us-canada-18693650

I notice there aren't any threads about this but this is the second California city to file for bankruptcy.

I'm... generally unclear what that even means since these are government entities and what this means for Americans.

Basically, Mammoth Lakes has filed for bankruptcy. Just earlier, Stockton, also in California filed for bankruptcy. They are all facing major budget shortfalls and have no way of recovering from the situation. They are promising that emergency services will still be operational during the proceedings.

edited 3rd Jul '12 1:46:57 PM by breadloaf

Partly because of the recession, and partly because of poor choices, my state is having some very heavy financial problems at the moment.

California is well known for its taxes in America, I'm just curious as to where the money is going. Everyone has massive deficits but at least many of the other states have the excuse of low taxation. Is it something like what Ontario is facing, a major collapse of industry of some sort that is killing revenues (Ontario faced a 80% drop in corporate tax revenue)?

EDIT:

Yes and as pointed out below, how the heck does a city go "bankrupt"? That concept doesn't even make sense to me.

edited 3rd Jul '12 2:15:45 PM by breadloaf

Wha...?

How do cities... go... bankrupt?

Surely the State Government or the Central Government can bail them out?

Dude, it's ridiculously easy. The same as how a business or a person goes bankrupt. You spend more than you actually have. You get by on IO Us until one day folks call in their markers.

Difference is, unlike whole nations, a state can't simply (temporarily) solve their problem via inflation.

No, actually, I totally don't understand what you are trying to say because it's not a business. At all.

It gets tax dollars. It spends tax dollars. Unless a city is taking out its debt with private creditors it makes no sense to me. Then again, a city taking out loans from private creditors already doesn't make sense to me.

The article states they made a deal with a corporation (which I guess is something that cities can do) and then tried to get out of it and got swamped with court costs for some reason. Seems like city officials didn't really think that through when going to court.

Basically, California's been known for being bankrupt financially. Their tax code seems to be a nightmare, and is in need of some massive reform.

A city goes bankrupt when its primary basic necessities cannot be afforded on the budget.

California is big, it's got a lot of areas that are so sparsely populated that they don't make enough money to break even on their municipal or county budget, and thus get funds from the state. Other areas are so densely populated and destitute that social services take a pretty big chunk out of revenue. The State of California also has lots and lots of state funded programs, from the Conservation Corps to Grizzly Youth Academy to the California Military Department(who used to sign my checks before budget cuts came along)

We also have a huge part of our budget that goes to Cal Fire, the second largest fire department in the United States, because of our massive firefighting effort. Our legislature also throws away money like it's cool on stupid ass pet projects regularly.

I don't get how a city being bankrupt is so odd. The city spends more than it takes in through taxes creating a loss. Multiple this by a couple decades and eventually you're in the red and people stop giving you loans. It's exactly the same thing that happens to people, just replace the word taxes with income/salary.

I suppose the idea seems rather insane to me because city councils here are literally centrally-controlled, down to their final penny (blame consecutive governments since Thatcher who liked to centralise governance).

So, cities here can't go into the red without a big stamp of approval from the Dept for Local Government.

I presume that cities in the US are akin to autonomous areas, correct?

That is such a weird thought...

Mind you, a bank bailout is weirder, and that happens.

I suppose for those of us not American, government budgets don't work like that. You can face a balance of payments crisis with foreigners but actually going bankrupt makes basically like zero sense because our systems are physically designed to make that impossible. I'm just a bit confused as to who thought it would even be a good idea to have government be like a business because going bankrupt totally and utterly screws everything.

California has what over 30 million people, I'm not sure on the tax revenues per capita and what spending per capita is but just seems like a horrid nightmare. Cities going bankrupt is like the "end times" in Canada because that would mean our entire government has gone and collapsed into oblivion and Canadian dollars don't work anymore.

EDIT: Additionally, our cities can't actually go into the red here. The province is required to back it up and the province takes out bonds when it goes into the red, which means that it just goes into major inflation and never goes bankrupt.

edited 3rd Jul '12 2:41:34 PM by breadloaf

Anyone who lives near detroit knows this is nothing new.

Stockton was a rather poor city to begin with. I grew up near there.

And Mammoth is an obvious victim for something like that, the ski season is pretty much their entire budget. I go up that way a few times a year for hiking and camping, and Lakes is rather run down, although the countryside is still as pristine and beautiful as ever. That whole area is very hit or miss based on tourism.

Inhopelessguy: So in essence the government has to shut down if it runs out of revenue?

Yeah, that's not how things work. Budgets can be passed without all the costs covered under taxes. It doesn't really make sense and it's a stupid idea but that's the way it works.

edit: I'd just like to note that I live nowhere near California but the same thing is happening in a city in my area. I don't live in the city so I'm not affected but they just got a denial notice for loan they needed to make up for their budget shortfall. They also received the same thing from a couple other banks. In essence they just ran out of money.

edited 3rd Jul '12 2:44:44 PM by Kostya

@ Kos. Not exactly. This only applies to England, btw (I'm not going to explain how this related to Britain as a whole).

The Council receives money from Council Tax, fines, parking tickets, etc. Generally, this isn't enough to cover the functions of the Council. The central government gives a Local Government Grant to the council to make up for the budget shortfall.

However, in England, Councils have very little power, no matter how large a budget.

For example, the City of Birmingham is the largest municipality in the EU with a €200 bn, but most of that is dictated by an official in the central government.

Therefore, any council - whether city or county (yes, we have a distinction between urban and rural council areas) - cannot go into the red because there is no provision for it to do so. Councils are not autonomous regions, so to speak.

@ Kostya

No... the main point is that the only creditors a municipality can get money to make up for budget shortfalls is from a government of a higher level, not private creditors. Therefore there is no way you can file for bankruptcy. There's no private creditors to pay back.

Also, that too. Councils cannot perform public-private partnerships without the blessing of central government. And the central government covers those losses anyway.

In America, localities are chartered by their state, and it is traditional to give them extensive leeway in terms of how they collect and spend revenue. Most cities and counties fund themselves based on property taxes, and are not required to report their budgets to the state government. So there is actually very little oversight. This normally works ok, because cities are required to get themselves audited every so often, and of course voters keep track of how their taxes are spent. Still, it is entirely possible for a city to acquire financial obligations that it is later unable to pay- and this has become a problem recently due to the skyrocketing costs of government employee healthcare and pension systems. You see, many cities apparently agreed to pay a fixed set of costs to current and retired employees, while of course revenue depends on the economy. And we just had a housing bubble burst in 2008. So property taxes going down + healthcare and pension costs going up = a shortfall in revenue.

Technically, all that "bankruptcy" means when applied to a city is that the state takes over spending and revenue authority. That's happening right now, in the case of my hometown, Detroit. The state Governor has threatened to appoint an emergency manager, who would essentially take over from the City Council, if the Council and the Mayor cant come up with a plan to balance the books within a certain timeframe. This has been a huge political controversy.

Just to give you an idea of how bad it can get- Detroit, a city with a declining population of just over 600K, has a budget of about 2 billion dollars. It's about 200 million short in revenue this year. It's actually in debt by much more than that, something like 10 billion over the next 10 years, due to future financial obligations that we know about but which Detroit has no way of paying for (this is mostly, but not entirely, due to retired employee pensions). Apparently they may be another 2 billion or so of debts out there, but no one knows for certain, because individual city departments (like Public Works or the Police dept) signed contracts with business to provide certain goods and services, but no one kept a central account of it all. We find out about new depts when a contractor shows up with a signed contract from 10 years ago (I'm not making this up). Detroit has suffered from decades of incompetent management, and is now paying the price. So now it faces bankruptcy.

That seems like kludge of really bad decisions combined with little oversight and an environment ripe for abuse.

While I don't think it's entirely wrong to have local budgets rather than state/provincial budgets dictate spending, I do think it's sorta messed up that cities don't have equal per capita spending on social services. How would you prevent ghettoization? Wait, I'm guessing you don't :S

The problem is a culture in the US that emphasizes self-reliance over collective problem solving. Really, all taxes should be collected by the Federal Government and then dispersed to localities strictly on a per-capita basis, no strings attached. But that would be politically impossible here. And really, this level of incompetence is actually quite rare in the US generally. The vast majority of localities budget themselves responsibly. But in a country as big as ours is...

Not to mention Detroit is in a somewhat unique position, since a huge chunk of the city is geared toward an industry that's had a couple really nasty downturns around 2009.

edited 6th Jul '12 12:57:01 PM by Pykrete

Yeah but that's bound to happen, especially since America is so large (I mean the regional economic downturn rather than the mismanagement). While the mismanagement is hard to resolve, the per capita spending is not. Even Canada suffers this problem (especially with aboriginal communities receiving less than 1/3 of the per capita spending a normal citizen receives) but generally everyone should receive the same social services as everyone else so long as they are a legal resident.

As for mismanagement, that would likely have to be locally managed in the vast majority of cases with just a normal audit every so often. There's probably a perception that audits are meant to penalize people for poor behaviour but it's more important that audits show what works and what doesn't between cities so they can share policies.

In any case, so when these cities aren't able to meet their financial obligations does the state step in to pay up to keep services going and then just lock down further non-essential spending in a city for a year or something?

edited 6th Jul '12 1:23:05 PM by breadloaf

Um, no, not a fan of the communist approach. It's not fair that a municipality that does know how to balance its books should have it's tax revenue redistributed to those that can't.

Communist? Wtf? :P

Leaving terminology aside, this isn't about "ability to manage funds". If one town has oil money and another just has normal mixed economy, someone is experiencing a windfall gain and it should be used to fund the growth of industries to ensure everything runs smoothly when the oil runs out.

Mismanagement of funds is dealt with through oversight and auditing.