City, State bankruptcy; How is this possible?

By jobeard
Oct 12, 2011
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  1. If you didn't catch the domestic news,
    Seeking to stave off a state takeover of its beleaguered budget, the city of Harrisburg, Pa., (also the state capital) filed for a rare Chapter 9 municipal bankruptcy on Wednesday.​

    Read more

    The basic concepts of bankruptcy are easy to understand
    1. creditors are notified of the filing which creates an automatic STAE
    2. the bankruptcy trustee takes control of the assets
    3. exiting contracts are voided (including all labor union agreements)
    4. for businesses, there is typically a restructuring
    5. frequently business units get sold off
    6. and assets get sold
    7. creditors get a low percentage of their outstanding balances as payment-in-full

    This is just the tip of the iceberg, as googling will find several lists of highly probable cities on the verge of also filing.

    But just how does goverment, at any level, do that?
    What assets can a city sell off without major impact to those living there?
    Does the existing administration get fired?
  2. Matthew

    Matthew TechSpot Staff Posts: 6,042   +84 Staff Member

    Not sure I get the question. How do they go bankrupt? Like anyone else: their expenditures exceed their earnings -- or so they say (see the next quote about comprehensive annual financial reports). Among other factors, unemployment is rampant so the tax base is shrinking and with inflation, the cash they *are* getting just doesn't go as far.

    In the case of Harrisburg, this was far from unexpected. They've been on the brink of bankruptcy for some time. In fact, the way I understand it, the city was using that as leverage to negotiate with creditors until the state government threatened to withhold funding unless they waited until after the 2012 elections to file. Guess it didn't work heh.

    Go look up the comprehensive annual financial reports for Harrisburg or any other municipality for that matter. They generally have millions or billions in stocks and other assets that are unaccounted for when balancing the budget. The collective US government (cities, counties, states and their individual municipal corporations) holds an incredible stake in many of the large publicly traded firms.

    Of course, rather than release those assets, they'll just cut public services. For instance, Topeka, Kansas has stopped responding to domestic violence cases to save cash. Other cities are dipping into pension funds.

    That might happen, but it probably won't make much difference because the subsequent administration would be subject to the same overarching monetary policy that's doomed to failure (i.e. a massive debt machine designed to confiscate wealth).

    You got that right.
  3. Matthew

    Matthew TechSpot Staff Posts: 6,042   +84 Staff Member

    Oh how we inch nearer to mass municipal bond failure.

    *Edit*

    Hey, but there's plenty of cash to make sure Al Qaeda isn't hiding in your trunk:

  4. jobeard

    jobeard TS Ambassador Topic Starter Posts: 13,271   +280

    Jefferson County, Ala declares BK

    In choosing municipal bankruptcy as an alternative to protracted negotiations with creditors on $3 billion in sewer debt, Jefferson County, Ala., officials will start a new round of what is likely to be more negotiations with the same creditors about the same issues.

    Chapter 9 of the federal bankruptcy code, which covers municipal bankruptcies, is no panacea. Since governments must continue to function—maintain roads, run the courts and perform other public services—states, counties, cities and other "municipalities" can't be liquidated to pay creditors.

    see the WallStreetJournal article for details


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