Stockton, Calif., prepares for bankruptcy. Are other US cities at risk?
Stockton, which lost tax revenues from the housing bust and faces high pension costs for retired public workers, serves as a warning. Some US cities face tough choices to avoid bankruptcy.
Stockton got trapped between a housing bust, which depleted its tax revenues, and high costs for such obligations as retiree pensions. It reached a breaking point this week with the failure of last-ditch talks with creditors and labor unions.
The city, which is preparing a bankruptcy filing that could come as early as Wednesday, is a warning signal to America about risks in the realm of municipal finance.
The good news is that, with a few exceptions such as Detroit, other big cities don't face an imminent bankruptcy or financial crisis. And even metro areas that get into financial trouble usually find a way out that falls short of bankruptcy or default on their debts.
But America's road ahead appears likely to include more municipal bankruptcies. And to avoid financial emergencies, many other cities will face a period of tough choices about costs and taxes.
A central problem for cities nationwide is the cost of public-employee pensions and health benefits.
In a 2011 study published in the Milken Institute Review, Joshua Rauh, a finance expert at Northwestern University in Chicago, found that state and local government's have fallen short in their pension funding by somewhere in the neighborhood of $1.3 trillion (an estimate using official government accounting rules) and $3 trillion (using a stricter approach advocated by Mr. Rauh).