Business

Many Cities Hold Off Declaring Bankruptcy

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More than 500,000 American families have declared bankruptcy this year. So have airlines, car companies and other business. There are reports that the Pennsylvania capital Harrisburg is close to bankruptcy. David Wessel of The Wall Street Journal talks to Ari Shapiro about why it's less common for cities to declare bankruptcy.

ARI SHAPIRO, host:

Perhaps your local library has recently cut its hours. Or the police and fire department has had to lay off workers. This is all part of the financial crisis that is facing cities and towns across the country. But while airlines, car companies and more than a million and a half American families have declared bankruptcy this year, it's less common for cities to declare bankruptcy.

Wall Street Journal economics editor David Wessel joins us now to explain why.

Good morning, David.

Mr. DAVID WESSEL (Wall Street Journal): Good morning, Ari.

SHAPIRO: Okay. Well, weve recently heard that the capital of Pennsylvania, Harrisburg, is close to bankruptcy, and other cities as well. Does that mean that they will eventually enter bankruptcy?

Mr. WESSEL: Probably not. Harrisburg - actually the city council met last night. It's still trying to find a way to avoid filing for bankruptcy. Central Falls, Rhode Island, which came very close - got taken over by the state in a receivership; Jefferson County, Alabama, which has had this morass of sewer system, debt problem, a receiver was appointed by the court.

It turns out that bankruptcy, Chapter 9 of the bankruptcy code - the one that cities can take - isn't quite as an attractive an option for debt-burdened municipalities as it is for consumers or businesses. The law doesnt solve their problems, and it's also so rarely used that the case law is unclear. Fewer that 250 of the 89,000 local governments, most of them very, very small, have filed for bankruptcy since 1980. So it's unlikely we're going to see a wave of these, although they're in the headlines constantly.

SHAPIRO: Okay. So if bankruptcy can't solve a city's financial problems, what is a solution? Is there, in fact, a problem?

Mr. WESSEL: Yeah. Well, there is definitely a problem. It's just that bankruptcy doesnt seem the way out. So in a sense, the bigger problem is there is no clear way out for cities which have made promises essentially they can't keep. State and local governments have well over $2.4 trillion worth of debt, 35 percent more than they did five years ago when the economy was a lot healthier. And they have promised more than $3 trillion worth of health and pension benefits to their workers, and they havent set aside nearly enough money to back up these promises.

So this happens from time to time that they have trouble meeting their obligations when the economy tanks, their revenues go down. This time the economy isn't coming back very fast. Sales tax revenue, income tax revenue are not coming back very fast, and they're still confronted with all these promises they made before. Even though there's been a lot of tax increases by legislatures and city councils, state and local tax revenues were in the second quarter - were only 1.7 percent higher than a year ago, this despite the fact that the recession is probably over, and so they're caught in this vice of having income that doesnt go up fast enough to take care of the promises they make.

SHAPIRO: What does that mean for me if I live in one of these cities that's close to bankruptcy that's made more promises than it can keep?

Mr. WESSEL: It means two things: higher taxes and worse services. There is just only two things you can do and in many municipalities and states across the country, they're in trouble. They're getting both of these things. There were more tax increases at the state level in the last fiscal year than there have been in the last 20 years.

SHAPIRO: And what does it mean for the investors who the cities owe money to?

Mr. WESSEL: Well, for now, most of them - all of them have been paid back with a very few exceptions, and the experts in municipal finance, the rating agencies and the bankruptcy lawyers, say that it's unlikely that there'll be a wave of defaults - that cities and towns and states almost always find a way to pay off the debt holders. Of course, that's the kind of assurance we had before the financial crisis, and so there's good reason to worry that somewhere along the line some cities or towns will actually not be able to pay their bills, pay their bondholders 100 cents on the dollar. But for now, it's important to note, nearly all of them have been paid back.

SHAPIRO: Well, just briefly, any chance of a bailout for cities from states of the federal government?

Mr. WESSEL: Well, that would certainly make a lot of local officials happy. I think for now there's bailout fatigue, the states have their own problems, and it's unlikely to me that Washington will come to the rescue of a bunch of state and local governments that have acted - have mismanaged their affairs, to tax other taxpayers, or borrow lots of money to pay their obligation.

SHAPIRO: All right. Thanks...

Mr. WESSEL: So not for a while.

SHAPIRO: That's David Wessel of the Wall Street Journal and a frequent guest on MORNING EDITION.

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