Many people don’t realize that, just like an individual or a company, local municipal and county governments can go bankrupt. When the average investor buys a bond issued by a state, they never imagine that he might not ever get his money back. After all, governments don’t do that, right? Right…?
Nicole Gelinas, a senior fellow at the Manhattan Institute, has written an op-ed piece in Investor’s Business Daily explaining that a number of states and cities, not just the federal government, have serious overspending problems. While the federal government issues Treasury bonds to finance its debt, governments likewise sell state and municipal bonds (or “muni-bonds”). Gelinas explains that if these governments show signs that they cannot fulfill these debt obligations, the consequences could be dire:
“As municipal debt grows, the risk mounts that someday it will be politically, economically and financially worthwhile for borrowers to escape it. When that happens, the protections that lenders supposedly enjoy will be meaningless. Lenders shouldn’t take solace in states’ inability to access bankruptcy codes: A state could certainly stop making payments on its debt without going into bankruptcy.”
So how do cities avert bankruptcy? Businessweek reports that reducing government spending is the key to averting this crisis, and securing states’ and municipalities’ ability to fulfill obligations:
“State and local governments are likely to avoid bankruptcy through spending cuts, even as their financial stress mounts, according to panelists at a Securities Industry and Financial Markets Association seminar. … For states and cities, lower spending and fear of damaging their credit will make bankruptcy filings unlikely, speakers said today on the panel in New York.”
As we reported earlier, Los Angeles is one such city struggling with a very large burden of debt. Indeed, the state of California is being referred to as America’s Greece – except that California’s troubles could be worse for the U.S. than Greece’s trouble is for Europe.
When will policy makers finally address this problem? Average Americans seem to understand the problem of excess spending – why don’t our elected officials?
