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Three California Cities Bankrupt: ‘This Is The Tip of the Iceberg,’ Says Fmr. Statesman

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San Bernardino, Calif., is the latest municipality to seek bankruptcy protection for its $45 million budget shortfall, following Mammoth Lakes and Stockton, which was the largest U.S city to ever go bust. Bankruptcy filings by these three California cities have raised questions about the scope of budget issues on the local level and whether there will be more.

"This is the tip of the iceberg for different reasons in different places," says Richard Brodsky, senior fellow at Demos.org and former 14-term New York State assemblyman. "The dynamic, the way it plays out, is going to be different and troubling wherever it occurs."

In recent history, bankruptcies have hit cities across the country, from Alabama to Pennsylvania and Rhode Island.

Brodsky notes that mismanagement did not cause the budget shortfall. "We went fifty years without any municipal bankruptcies in the United States, and now we are going to get dozens of them," he tells The Daily Ticker in the accompanying interview. "The governing class did not get stupid fast."

It was years of declining property values after the housing bubble burst that has left many cities strapped for cash, he says. If property values fall, so do revenues collected from property taxes. Additionally, while people do love their services, there's been a growing distaste for increasing tax revenues to pay for those benefits.

Desperate Times Call for Drastic Measures

This week Scranton took strident measures to cope with its empty coffers, since Pennsylvania prohibits its cities from filing bankruptcy. The Mayor cut all public workers' pay to minimum wage after failed attempts to increase property taxes by 80 percent. A Judge has since told him he cannot breach the compensation contracts.

And last month the city of North Las Vegas declared a state emergency over its fiscal problem. It's the first time ever a state of emergency has been issued over budgetary matters.

Meredith Whitney predicted a mass wave of bankruptcies on 60 Minutes in 2010; this never did come to fruition. Brodsky does believe there will be many more municipal defaults. But Bloomberg reports that municipal bankruptcies have reached the slowest pace in the past three years and The New York Times ran an article Friday also downplaying the spate of defaults.

As of now, the municipal bond market has not shirked at the defaults. Municipal mutual funds have seen a $15.7 billion influx year-to-date, the largest since 2009. And bond yields continue to drop. But that could change.

"What bankruptcy really does is it goes beyond the usual suspects. Usually [cities] nail the taxpayer and they nail the public employee," he says. "What bankruptcy will do is bring the banks, the lenders, the bondholders into the mix."

After passing a law last year, Rhode Island is the only state to put bondholders above other creditors. Brodsky does not believe this type of legislation will spread because it is not a politically sound idea; citizens will demand all parties take a haircut.

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