Understanding Bankruptcy, Mar. 9, 2018

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Question: Stockton, Cal. bankrupt; is Philadelphia next?

Cities filing bankruptcy! Chapter 9 bankruptcy, to be exact. Stockton, Cal. set off the wave recently, joined by another half-dozen cities since. How come? Can’t pay the bills, well, duh. Which bills? How about a $900 million shortfall to Calpers, the California State Pension Fund. That for a city with a population of 300,000.

California state law requires that pensions be funded. Stockton slashed its police and fire departments, halted bond payments, cut employee benefits and adopted an emergency spending plan that cut many city services. But the City continues to pay into the State pension.

Many cities, including Philadelphia have been building up long term liabilities, pension and other retiree benefits, with little thought as to how they would be paid. By the time the bill comes due, the politicians are usually gone or retired.

Legally, cities, townships, municipalities, counties, et cetera, are creatures of the state, California, Pennsylvania, whatever. That is, they have only such rights as are granted to them by state law, including the right to exist at all. State politicians usually do not want cities or other entities in their states filing bankruptcy, because they fear it will lower the bond ratings for the state. That is like your FICO score, your credit report.

If you do not pay your bills on time, your credit rating goes down. If cities do the same, their bond rating goes down, and they have to pay higher interest rates to borrow money. Chapter 9 bankruptcy is a repayment plan, cities cannot file Chapter 7 and liquidate themselves.

Stay tuned, I guarantee, more cities will be filing bankruptcy.

Next Week’s Question: Do you ever want to live the lifestyle of the rich and famous?

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