The State of Illinois just had it’s bond rating downgraded (again) and is looking at a very bleak financial future. Essentially, the state will have to pay a premium to get investors to buy their debt since it is now rating just above junk status. At the same time, Illinois doesn’t have enough tax revenue to pay their current expenditures…much less future commitments.
Its been said that while California is going to Hell in a handbasket, its a helluva handbasket. Another California city that is a financial basket case largely due to municipal debt is San Jose, the center of Silicon Valley
San Jose, CA
About a year ago Fox News aired a special called Cities Going Broke. It describes the municipal debt crisis in places like Stockton, CA and Jefferson County (AL), both in terms of the fiscal and societal impact it has. The common refrain in this special is greed, corruption, and incompetence…which leads to financial ruin. Watch it for yourself, its an informative albeit bleak look at where municipalities are today and how they got there.
What Walter Russell Mead calls the Blue Social Model has been breaking down over the last three decades. The passage of the Affordable Care Act (aka “ObamaCare”) is hastening this decline, which will result in eventual collapse of the social welfare state.
If you live in a small town and think that your local government is immune from the threat of bankruptcy, you may want to rethink that assumption. Municipal debt is a pervasive problem, not just in big cities.
Credit: America The Beautiful
Desert Hot Springs, CA is the latest municipality facing Chapter 9 Bankruptcy due to salary and pension costs. In what is becoming a familiar refrain, the city discovered that it had underestimated its expenditures while overestimating its revenues. The result is a $3 million shortfall that will have to be met early next year. No matter what ends up happening, there will be adjustments that the municipal bond holders, city workers and retirees, and residents will have to make.
The likely outcome is less services at a higher cost. This will mean less police protection, degraded infrastructure, and lower quality of service. Citizens will be compelled to do more as essential services are cut or simply wait longer for things to get done. Hopefully the citizens of Desert Hot Springs are prepared…
By the way, this wouldn’t be the first time the town of 25,000 went into bankruptcy (the first time was in 2001). Expect more small towns like Desert Hot Springs to join Stockton, San Bernardino, and Detroit in bankrupty court in the coming months.