Thursday, August 2, 2012

Is your city about to file Chapter 9?

Municipal Bankruptcies Map
An overview of the crisis facing cities and towns across America: Chapter 9 has become the last option for those who can't pay their current bills and quickly rising future obligations to receive protection from creditors!

Given the incredible velocity that pension and healthcare liabilities are rising for municipalities along with diminishing tax revenue streams to pay them, cities across the country are finding that they are left little choice but to seek protection from the court.

This is an excerpt from an article at TPC concerning municipal bond investing in January 2011 and since then the situation has only gotten worse:

"As cities and states continue to face a severe economic environment and huge budgetary shortfalls, the evidence of waning investor confidence can be witnessed in the magnitude of outflows from municipal bond funds. While general obligation bonds are more secure than revenue bonds, all sectors are being hit."

Now San Bernardino, California is just the latest municipality to do what needs to be done and has filed  Chapter 9 citing a $46MM shortfall in the budget.

An example of just one the problems facing San Bernardino that similarly faces cities and towns across the country is the fact that since 2006 its pension liabilities have doubled to $25MM and will only go up from there as more workers retire and healthcare costs continue to rise.

From Global Economic Trend Analysis comes this warning about what will likely happen along with a suggestion for city unions:

"A major wave of municipal bankruptcy filings is now underway. Scores of other cities nationwide will eventually do the only thing that makes sense: file for bankruptcy to escape pension promises and union salaries that cannot possibly be met.

In California, Oakland and Los Angeles are among the walking dead.

Unions would be wise to negotiate with cities in advance of bankruptcy filings to protect the most benefits for the most workers. However, the odds of that happening are close to zero."

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