San Bernardino, California, a city of 210,00o, has begun the process of declaring bankruptcy. It will soon join Stockton and Vallejo. Stockton is a city of 300,000.
A smaller city, Mammoth Lakes, has also filed. Mammoth debt has been shrugged off.
San Bernardino had boomed with the housing bubble. The city spent money like there was no tomorrow. But tomorrow has arrived.
These bankruptcies are showing politicians a convenient way to get rid of existing debt. They will stick it to pensioners. This process has only just begun. Municipal bond investors will soon learn about the nature of risk.
One city councilman put it clearly: “The taxpayers of this city have been duped, hoodwinked and misguided for the past several years.”
The taxpayers of most cities have been equally duped, hoodwinked, and misguided. So have bond investors. Reality is dawning.
The city was informed that in 13 of the past 16 years, the books were cooked. City officials were given false information. They were told the city was in the black. Will wonders never cease! If this sounds like Greece prior to April 2010, that’s because it is.
This practice of using bankruptcy to get out from under will spread. The inability of cities to pay their bills is a factor today. Wait until the next recession hits.
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