San Bernadino is on the road to becoming the third city in California officially declaring bankruptcy. Before making this decision, San Bernadino cut many social services to balance its budget. These austerity measures’ failure to solve budget problems lead many people to wonder if cutting spending actually works. Will bankruptcy spread to the federal government or to other municipalities if austerity programs are continued?
California is famous for predicting American economic trends, but the American people need not worry about the federal government going bankrupt or bankruptcy spreading throughout other municipalities. California is one of the few states to allow municipalities to declare bankruptcy and U.S. government bonds are bought by American citizens mostly, not corporate funding that caused bankruptcy in California.
Cities, such as Vallejo, Stockton, and San Bernadino, went bankrupt because they could not come to agreements with the corporation that provides public servants’ retirement packages. In California, a corporation called California Public Employees’ Retirement System (CalPERS) makes agreements between public employees and retirement insurance package agencies. The government, then, agrees to pay CalPERS a portion of the public employees’ retirement package.
Bankruptcy arose when the cities could not pay CalPERS, but CalPERS still demanded their payments. The cities had promised to pay more of the employees’ retirement benefits than the cities could afford. Cities did not expect the recession and ended with no money to pay for the retirement packages. This broken promise and CalPERS’ inability to compromise on a release of debt forced three California cities into bankruptcy.
Bankruptcy is essentially a process to help debtors and creditors compromise through legal channels. A judge is brought in to give legal orders on how much a debtor must pay. It is just supposed to build trust between debtors and creditors so that they can come to realistic agreements on how much debt can be paid. It does not cancel debts or relieve the responsibility of the debtors.
But the U.S. government does not have problems making agreements with creditors. Its debt belongs to U.S. citizens, who own treasury bonds, not billion dollar corporations like CalPERS. Although some treasury holders might be corporations, the bulk of treasury holders are personal accounts. As such, the government will not have to pay out these treasury bonds all at once unless the public panics.
The public is unlikely to panic because Moody – the official rating agency – will not downgrade U.S. treasuries for political reasons. Without a creditor to demand payment like CalPERS, the U.S. is unlikely to face bankruptcy.
Bankruptcy is also unlikely to spread to other American municipalities – another economic trend that California could predict, but will not in on this issue. Only a few other states allow local governments to declare bankruptcy.
Cities may not go bankrupt, but these economic problems could be a sign of increasing poverty in American cities. More and more cities require state governments to bail them out because the recession has prevented them from garnering enough money to operate a city. And without a growing economy to bring in income, a trend towards poverty stricken cities could continue to rise.