Advice to Cities Considering Bankruptcy: 'Don't Do It'

This week, another California city, San Bernardino (population over 200,000), voted to follow the fate of the Sierra Nevada resort town Mammoth Lakes, and Central Valley city Stockton, by filing for bankruptcy. With fast rising labor costs and municipal debt plaguing cities across the state, and country, the slippery slope to bankruptcy may trap other municipalities in the near future, write Phil Willon, Catherine Saillant and Abby Sewell.

"Joe Nation, a Stanford economics professor and co-author of the February report [on rising pension costs], thinks that for at least some cities, insolvency is inevitable unless they can wrest much bigger concessions on salaries and pensions from public employees."

"'I think this is the tip of the iceberg in terms of the problem,' Nation said. 'Stockton was spending $12 [million] or $13 million on pensions 10 years ago. By 2010, it was $30 million and will double again over the next five years, unless something is changed.'"

Writing in The New York Times, Mary Williams Walsh reports that analysts were not, however, predicting a wave of defaults, at least outside of California. "I don't believe that this is the beginning of a tidal wave of insolvency across the country," said Richard P. Larkin, director of credit analysis at the underwriting firm H. J. Sims. "I am worried, however, that this phenomenon may grow in California."

For those cities considering bankruptcy as a viable option, a voice of warning comes from Osby Davis, mayor of Vallejo, the Bay Area city that began the current trend of municipal bankruptcies in May 2008. His advice: don't do it. "It takes an enormous toll on everyone,'' Davis said. "And you have the stigma of being a bankrupt city. How do you come out of being labeled a bankrupt city to one that is a desirable place to live?"