Cities may start to use bankruptcy as a tool to skirt obligations the way that airlines have for decades and car companies have done more recently. As AMR, the parent of American Airlines, has been able to reset debt obligations, deals with suppliers and union contracts, the same may be part of the restructuring of cities from Stockton to Detroit. Public finances will never be the same, if one or both cities declare Chapter 9.
U.S. Bankruptcy Judge Christopher Klein is set to rule on whether Stockton can use bankruptcy to abandon its obligations to the California Public Employees’ Retirement System, to which its owes $900 million. The long-time covenants between cities and their employees could be broken as they never have been. Municipal jobs, once considered both safe and an excellent means to a good retirement, will be at risk in a growing number of cities that lost tax revenue during the recession, as they continued to spend and borrow money from the capital markets. In a stroke of irony, the investors that supported these cities may take huge losses themselves.
A number of cities might have gone bankrupt in the recent past. That list would include both Flint and Pontiac in Michigan, which were deserted by the auto industry as sales crumbled and plants moved to areas with more modern facilities and further from the UAW headquarters. And there were the jobs that moved to Mexico and other lower wage markets. Both cities were assigned emergency managers by the state of Michigan that were given dictator-like power. Whether the actions were preferable to bankruptcy will be argued for years.
Bankruptcies at airlines and automotive companies at least provide firms that could be profitable a chance to rebalance obligations. AMR and General Motors Co. (NYSE: GM) make money now. The same will not hold true for cities like Detroit and Stockton. Without access to money for infrastructure, police and fire departments, there is no reason for businesses and those residents who can afford to flee to ever come back.
Bankruptcy, which often allows for the resurrection of companies, can do just the opposite for cities. The companies can draw new life; the cities just become toxic.
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