Municipal Debt Crisis Far from Over

We have seen cities like Detroit and others in California tell their municipal bonds investors, “Sorry, we can’t pay you.” The reason behind this? Their budget deficit was out of control, they reached the breaking point, and they filed for bankruptcy.

But the troubles of municipalities and cities aren’t behind us. In fact, they are marching forward with full force. And it’s not just rural cities and counties that are struggling to fix their budget deficit; major ones are doing the exact same thing. And truth be told, they are failing at it.

Take Fresno, California, for example. In the fiscal year 2014—which began on July 1, 2013 and ends on June 30, 2014—Fresno, one of the largest cities in California, will register a budget deficit of $6.0 million. If the city is unable to reduce its budget deficit in the fiscal year 2014, then its budget deficit can grow to as much as $32.2 million in the next five years. (Source: “FY 2014 Adopted Budget,” City of Fresno, California, May 29, 2013.)

And Fresno has worked very hard to keep its budget deficit under control. In the last four years, the city has decreased its workforce by 1,200 employees (25% of the city’s workforce), reduced or completely eliminated the maintenance and replacement of equipment, and now relies on volunteers for parks maintenance, community centers, and for different functions in the police department. The city has also reduced the number of employees working in public safety. One would assume that after this many cuts, the budget deficit would be controlled; but that’s certainly not the case for Fresno, California.

While this is just one example, the list of cities working to reduce their budget deficit is vast. And I don’t expect them to get out of their misery very quickly. Why? The main source of income for cities is still property taxes…which haven’t recovered.

Many of my readers are not invested in municipal bonds, and I understand that. The purpose of this story is to stress this $3.0-trillion market is under immense pressure. Despite municipalities and cities slashing their costs, they still can’t cover their expenses.

My concern is that struggling cities will ask for government bailouts. We’ve already seen the federal government give money to Detroit. What happens when other cities come calling?

It wasn’t too long ago when the U.S. national debt was $9.0 trillion. Now, our national debt is beyond $17.0 trillion. As the economy slows further, as I’m predicting, the municipal crisis will add considerably more to the national debt we already have.