Although President Obama and Congress have assured taxpayers that financial giants will no longer receive bailouts, many economists are worrying that local governments may be in need of federal funds. Cities across the country, including Harrisburg PA, Central Falls RI are facing serious financial troubles.
According to CNN Money, Harrisburg’s city government was scheduled to default on a $3.3 million bond payment. Fortunately Pennsylvania's governor, Ed Rendell, pledged $4.4 million in state funds to help the struggling city.
This gives Harrisburg a chance to fight again another day. But its problems are far from over, and that's bad news for investors in the $2.8 trillion muni-bond market.
States from California to Illinois have been in deep crisis since the recession began, hammered by drastic cuts in tax revenue and inflexible spending demands for things like health care, debt service and pension plans. Forty-eight states grappled with fiscal shortfalls in their 2010 fiscal budgets. Totaling $200 billion, or 30% of state budgets, this fiscal shortfall is the largest gap on record, according to the DC-based Center on Budget and Policy Priorities, which sees at least 46 states facing shortfalls this fiscal year.
Some cities are in even worse shape than Harrisburg. Central Falls, Rhode Island, recently went into receivership when it couldn't pay its bills. San Diego is said to be considering bankruptcy to get out from under its pension obligations. Miami's city council, hoping to avoid Harrisburg's fate, recently used emergency powers to slash city salaries and pensions and is now instituting hefty traffic fines and garbage fees. This year, ratings agencies have cut the debt in several cities -- including Littlefield, Tex., Detroit, Mich. and Bell, Calif. -- to junk.