Expect More Cities to Face Bankruptcy

Expect more U.S. cities to face bankruptcy like Detroit, former New York Lieutenant Gov. Richard Ravitch said Thursday.

“There are many more [cities] that are facing enormous fiscal squeezes… who are cutting education, cutting infrastructure investments and borrowing as long as the bond market permits,” he said.

Ravitch, who is advising Detroit’s bankruptcy judge, wrote about his prediction in an op-ed in the Wall Street Journal last week.

“We can expect to see more Detroits,” he wrote.

Detroit became the nation’s largest city to file for bankruptcy protection last July after being crushed by $18 billion in debt.

Ravitch said retirement obligations and health-care costs that are rising faster than inflation are putting enormous pressure on state budgets. That in turn puts pressure on city budgets. Additionally, there has been a reduction in federal aid to states and cities.

Detroit on the eve of the city’s bankruptcy decision on Dec. 02, 2013.

Since local politicians like to avoid raising taxes and cutting services, they wind up borrowing to balance their budgets.

“If they can borrow and kick the can down the road, they do so. The problem is they’ve been kicking the can down the road for too long,” Ravitch said.

Real estate mogul Don Peebles, a native of Detroit, agreed there are huge financial problems facing the nation’s cities.

Pensions for public workers are a “ticking bomb,” he said. Plus, more than half the residents in some cities are living in poverty, which is putting more pressure on those at the top end of the tax bracket.

“The top bracket of the tax base in urban cities … they tend to now leave for places where there are lower and more friendly taxes,” he said.

However, Peebles doesn’t’ believe there will be “another big Detroit,” which was a one-industry town that saw its population shrink by about half.

The solution is simple, Ravitch said.

“Cities and states have to stop borrowing to balance their expense budgets,” he said. “It’s not sustainable. It is coming to a crashing halt in more and more places.”

If every local jurisdiction would match recurring expenses with recurring revenue, “you wouldn’t have a growth in the number of cities that ultimately are going to face the default on their obligations.”