The Coming Crisis in Municipal Bankruptcy

Where’s the next economic crisis?

In the wake of the recent report released by the State Budget Crisis Task Force headed by former Federal Reserve Chairman Paul Volcker and former New York Lt. Gov. Richard Ravitch, Johnson and Ferguson offer insight into California’s extreme budget problems.

This crisis is particularly urgent since it occurs at the level of government where many Americans receive essential services that have a significant influence on their quality of life. Slashing local government budgets in the case of a fiscal shortfall means gutting these essentials, including cutting back on needed police, firefighters, and teachers.

The general cause is clear. “In the aftermath of the financial crisis emanating from Wall Street, the federal financial mess is bleeding over into state budgets in profound ways, adding enormous costs to already overburdened state coffers,” they write. They also note the “broader crisis in finance and healthcare” as contributing to the federal and local budget crises. Financial chicanery surrounding municipal bonds are especially worth notice, as the authors suggest these have padded the pockets of financiers and helped politicians deceive their constituents for years.

California has even greater problems. A dysfunctional political system has prevented an affluent and productive state from getting its fiscal house in order. The state’s institutions must overcome their entrenched special interests in order for California to save itself.

But other states with less immediately onerous issues also should be paying close attention, for they may be next in the U.S. government debt crisis. If our broader economic problems are not dealt with, these other states will soon find themselves in California’s position.

The Volcker-Ravitch report did a service by shining a light on these issues. Now Johnson and Ferguson have brought a megaphone to the key fiscal problems we face at the state and local level. Let’s hope the public is listening. Because if progress isn’t made soon, many Americans will lose basic and essential services as state and municipal governments are forced to cut back. And that would be a real tragedy.

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