Why U.S. cities are going bankrupt
July 20th, 2012
11:45 AM ET

Why U.S. cities are going bankrupt

By Fareed Zakaria

I was struck last week to hear that the city of San Bernardino, California is declaring bankruptcy. It follows similar moves in the past month by Mammoth Lakes and Stockton, also in California. Before them it was Harrisburg, Pennsylvania, Jefferson County, Alabama, Central Falls, Rhode Island – the list continues.

What in the world is going on? Companies go bankrupt all the time – but what happens when a city goes under?

In reality, the two aren’t that different. Companies file for what’s known as “Chapter 11” – a provision which enables them to renegotiate deals, to downsize, to fire people. But filing Chapter 11 also gives them the option of liquidating – or breaking up. That would be essentially impossible for a city – it also happens to be unconstitutional. So cities go for “Chapter 9,” which covers municipalities: that’s cities, but also towns, villages, taxing districts and utilities.

641 cases of municipal bankruptcy have been filed since Chapter 9 was created. Most have been smaller cases involving utilities. But when an entire city goes bankrupt, things are much more complicated. It affects public sector jobs and vital services like fire and police departments.

Now, naturally, we assume all bankruptcies are a bad thing. They're humiliating, they impact business, they’re difficult to recover from. The situation is far from ideal. But it’s actually not without its benefits.

Take for example San Bernardino. It was running a $45 million deficit (on a $130 million budget.) But its creditors – workers and retirees – were unwilling to help out. The best the unions were able to do was to offer what they thought was a major concession: allowing newly-hired public safety workers to retire with 90 percent of their salary at the age of 55 – instead of 50, which had been the earlier deal!

That won't work in a chapter 9 bankruptcy. An independent judge brings all parties to a table where an agreement has to be reached – no matter how painful. And, we need some of those painful decisions – not just at the federal level, but at local and state levels as well. At its heart, the bankruptcies you keep hearing about these days aren’t about taxes being too low or spending on city services being too high – they're about pensions.

California's pension-related costs rose 20-fold in the decade since 1999. This frightening trend is true almost everywhere in America. And it’s simply not sustainable. A recent Pew research survey found that the gap between state assets and their obligations for public sector retirement benefits is $1.38 trillion. It rose by 9 percent in 2010 alone – and it will likely keep rising until these obligations are renegotiated.

The truth is America is sacrificing its future to pay for its past. To keep up with burgeoning pensions, states and cities are slashing services. It's also feeding into the unemployment problem. State and local governments have 445,000 fewer workers today than in 2007. Even if you exclude teachers from that number, we have 231,000 fewer workers.

For decades now, local governments have doled out patronage by increasing pension benefits – these costs impact the budget years later, when the officials who gave the benefits are safely retired themselves. We're now having to reckon with those choices.

I'm not saying bankruptcies are a good thing. But they are a mechanism that allows us to admit an emergency and renegotiate the deals that are, well, bankrupting the country.

Watch "Fareed Zakaria GPS" Sunday at 10 a.m. and 1 p.m. ET

soundoff (398 Responses)
  1. Simply put...

    Because the US is being systematically demolished by foreign banksters, with the help of US politicians.

    July 29, 2012 at 2:47 pm | Reply
  2. John Hillman

    No one in the private sector gets a 90% pension. No one in the private sector gets the pension set on a single year. No one in the private sector gets to "save" leave in order to "spike" the last year. The "spiking" alone gets many far more than the average of their salary in their last 3 to 5 years on the job.

    The GREED of the UNIONS has reared its ugly head finally. Unions made the transition from "what do our members DESERVE?" to "how GREEDY can we be?"

    August 2, 2012 at 7:06 am | Reply
  3. Wake Up

    Madoffs ponzi has nothing on what the unions have been pulling for years. It's sad it takes bankruptcy for the unions to be put back in check. The insane pensions and benefits paid out got way out of hand.

    The union employees who work for me just found out their pensions will be .30 on the dollar and the retirement age was pushed back 10 years. This story is coming to a pension fund near you soon. In the mean time your union officials will continue to take 6 figure salarys.

    Unions ruined many companies and now they are doing the same to cities.

    August 3, 2012 at 3:05 am | Reply
  4. C.D.

    Why is it that we in this country are always so willing to blame the common man, but not the corporation? Surely, it must be the workers' fault, right? We're so greedy, trying to scratch and claw for every extra penny the great and generous masters are willing to let fall from their coffers! How gracious they are! How unfair of us to expect them to provide for us from their meager billions! Wake up, America. The corporation is not your friend.

    August 28, 2012 at 3:35 pm | Reply
  5. Sasha Barenson

    We are now $ 5 trillion dollars more in debt than we were when Obama took office . Five trillion more and
    projected to go up up and up . So stop blaming it all on President Bush . Obama spend $ 1 trillion dollars
    on Stimulus Projects ( which produced almost NO jobs in the private sector ) and another $ 1 trillion
    dollars in Omnibus Spending projects . This money also provides more voters for him . You don't put out
    a fire by pouring more gasoline on it ! We cannot sustain this debt .

    November 4, 2012 at 8:41 am | Reply
  6. Fed up with the good old boy system

    I am looking at a town budget that is a fabrication and it is going to pass since the Mayor has three of the council members to vote with him. This leaves one council member with honor and sense but no way to turn the tide against this sham. 800 households in debt for 7 million dollars and the Mayor is still spending. No way they can meet their bills and the auditor has told them that much. Sad to say nothing can be done except vote them out and last election it was a paid vote which was the first time I had ever seen that happen. So I can give up trying to convince people to listen or fight with just a few others. Needless to say the Mayor has thrown everything at us but the K9 dog.
    Small town politics at its worse.

    November 6, 2012 at 5:53 pm | Reply
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  9. chris

    If u go back in the history of the world we r repeating it right now ,Rome good example .Frankly we r at the top of the pyramid at this point and unfortunately I don't think it can be stopped no matter who's falt it is .the blame should go around to almost everyone .flaw in mankinds charactor . When it crashes and it will soon enough History will repeat itself again ,just a more level playing field

    April 2, 2013 at 8:22 am | Reply
  10. Steve

    This all started happening with Ws tax cuts to the rich. He simply cut too far. He took the top 1% tax rate to 35%. That rate reduced revenues down to the lowest levels since 1960. So money that had been going to city and state levels was gone. The city of Harrisberg PA is now selling off 8000 pieces of Civil War antiques to stay a float. Tahoe City in California had young girls standing in the mdidle of main street collecting donations for the 4th of July's fire work show. This has nothing to do with gov pensions getting to big. I'm a state worker. I'll be working until I'm 62 to collect 78% of my pay (I'll have worked 32 yrs.) State workers may have a better then average retirement formula but remember, we get paid less then the public sector. The state retirement system (PERS) makes 8% on a huge pile of money. It's freaking bigger then social security. It has enough money to pay off his current and future penions. Cities are going broke because of reduction in tax revenues. You can blame W.

    July 8, 2013 at 5:23 pm | Reply
    • John Canadian Doe

      I heard that you live in America... then why would you need a retirement fund anyway?
      America is about the franchise business model which offers no retirement fund anyway.

      America is about the freedom to hang out at real american stores like Wal-Mart
      which values low prices, disposable items of bad to average quality and and lower wages.

      America is about the freedom to go to Mc Donald's which offers low prices, food that makes you sick (fat) and low wages...

      and no employer funded retirement benefits..

      March 15, 2015 at 3:49 am | Reply
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