If you’ve been following the financial news you know some cities are having a tough time in California. Stockton and Mammouth Lakes have voted to declare bankruptcy and San Bernardino is considering the option seriously, though they just tabled the final decision for another week.
In San Bernardino’s case, Interim City Manager Andrea Miller said the city is facing a budget shortfall of $45.8 million. It has already stopped paying some vendors, and may not be able to make payroll over the next three months.
In the six decades since Congress created bankruptcy protection for cities, fewer than 500 municipal bankruptcy petitions have been filed nation wide, according to the United States Courts website. And Stockton and San Bernardino are the largest cities to actually declare it. Why the sudden need for bankruptcy protection for some of California’s most well-known cities?
Well just like you, sometimes a city cannot pay it’s debts. The weekly payroll cannot be met and in Mammouth Lake’s case, there was a court judgement of $43 million that it had to deal with. Of course, like you, financial problems are a result of more money going out than is coming in.
It’s A Sign Of The Times
Of course with the economy being so bad, and many people out of work, that means tax revenues are down. No matter what people say there is both a revenue problem AND a spending problem. When a city must go into bankruptcy because it can’t pay it’s employees that perform normal day-to-day functions you know they are dealing with a problem that will require more than just spending cuts in the short run. There’s contracts to deal with and a city has some basic needs to be able to run.
Of course you could argue that the situation is a result of years of deficit spending on the part of many California cities and towns, and tax revenue decreases just brought the problem to a head. That may be true. But whatever happens this will be a warning shot for cities and towns across the country who are in a similar situation. Many economists say that city finances will be the next big problem, after real estate, if the economy doesn’t improve soon. California may just be the tip of the iceburg.
Why Go Into Bankruptcy
What’s the benefit of going into bankruptcy for a city?
Bankruptcy allows a city the opportunity to renegotiate debts with vendors. Now a city’s only bankruptcy option is Chapter 9 Bankruptcy. This type of bankruptcy is only for municipalities and is a type of reorganization and not a liquidation. This would be more like a Chapter 13 Bankruptcy for an individual.
So the city will have the opportunity to negotiate with debtors and get some vendors off their backs for a short time, but the tactic has it’s drawbacks. The cities will take a major debt rating hit and borrowing will be considerably more expensive when they are in bankruptcy. It will be years before the city will be able to get back to a stable financial situation.
Bankruptcy For An Individual
Now Chapter 7 Bankruptcy for an individual is very different than Chapter 9 for a city. An individual can actually get debts to go away forever. However this means they will have to liquidate all assets. Their credit will also take a hit for up to 10 years. But if their situation is so bad then this still may be the best option. Trying to keep up with bills when you really don’t have the ability to pay them is no way to live. Better to get a clean slate and relieve all that stress once and for all.
To learn some of the differences between Chapter 7, 11, and 13 Bankruptcy you can visit this page.