Detroit, the “Motor City,” has been approved for bankruptcy. In making the ruling, Judge Steven W. Rhodes, who sits in the United States Bankruptcy Court for the Eastern District of Michigan, said, “This once proud and prosperous city can’t pay its debts.” He added, “It’s insolvent. It’s eligible for bankruptcy. But it also has an opportunity for a fresh start.” (Source: “Detroit Ruling on Bankruptcy Lifts Pension Protections,” New York Times, December 3, 2013.)
In his ruling, the judge also made it very clear that the pensions of city employees might be at stake. He said, “Pension benefits are a contractual right and are not entitled to any heightened protection in a municipal bankruptcy.” (Source: Ibid.)
Looking at what happened to Detroit, I question if we are going to see a spree of municipal bankruptcies in the U.S. economy.
You see, Detroit was a prime example of a city registering budget deficit after budget deficit, year after year. It borrowed to pay for its expenses. It came to a point where it had to tell its municipal bonds holders, “Sorry, we can’t pay you,” and its pensioners, “Sorry, your pensions are non-existent.”
After the housing bubble burst in 2007, cities across the U.S. economy started to register budget deficits as they continued to spend at the same pace despite the decline in property tax revenue.
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As it stands, across the U.S. economy, there are a significant number of cities that are struggling to control their budget deficits. Mind you, it’s not just smaller counties that are struggling with this problem. Major cities in the U.S. economy, like Chicago, Los Angeles, and Philadelphia, are stuck with budget deficits and pension deficit issues, as well.
At the very core, the ruling that let Detroit enter into bankruptcy has given cities who are struggling with budget deficits, pension deficits, and massive debt loads an easy way out. They can simply follow in Detroit’s footsteps.
I am very worried about this situation, having written about it many times in these pages before. If we do see an influx of cities filing for bankruptcies due to massive budget deficits, there will be a pension crisis in America and a faster-rising national debt, as the U.S. government gives in to the voter pressure of bailing out cities, municipalities, and counties.