What Happens When Cities Go Broke?

In a new article on Forbes.com, author Jonas Elmerraji examines the possibility of a city or municipalities filing for bankruptcy. It may seem strange, but just two years ago Vallejo, CA filed for bankruptcy. With the economy stalling, we may just see more cities looking toward bankruptcy to restructure debts and obtain more attractive financing.

Forbes.com reports:

In today's shaky economic environment, bankruptcy has become a dreaded--yet not all that uncommon--phenomenon. But what happens when it's not a person or company going broke, but an entire city? With added emphasis on government finances in 2010, it's a question that more and more citizens are beginning to ask themselves.

Municipal and state bonds are investments that touch a huge percentage of the investing public. And as we're seeing right now in Europe, there's no limit to the size to which government budget problems can grow.

Here's a look at what it means for a city--or a county or state--to go bankrupt, including the fallout for its citizens and stakeholders.

New Kid on the Block

Bankrupt cities are a relatively new phenomenon. Until the 1930s, it was legally impossible for U.S. cities to declare bankruptcy due to the absence of any municipal bankruptcy legislation. That changed in 1934 when the Bankruptcy Act was modified to include municipalities, a change made in response to the growing number of insolvent towns in the U.S. during the Great Depression.

After a number of evolutions and changes, the rule emerged as today's Chapter 9 of the U.S. Bankruptcy Code. Chapter 9 bankruptcies are available exclusively to municipalities. But there are some significant differences between a city's Chapter 9 bankruptcy and the much more common personal and business bankruptcies that take place on a daily basis.

Chapter 9 bankruptcies aren't designed to extinguish excessive debts. Instead, their purpose is to aid in reorganization by allowing a city to break untenable contracts and obtain more attractive financing. That's a good thing for a city's bond holders, who would typically see their assets at risk in a corporate bankruptcy.

Read more here

22 Cities In Danger of a Double-Dip Recession

Some experts have warned of the potential for a double-dip recession nation wide, while others are still pointing to signs of recovery. However, no one can argue that there are dozens of cities in serious danger of slipping back into a recession. CNN Money put together a list of 22 cities that are at risk, I have included a section of their article below.

A new report from Moody's Economy.com singled out 22 cities that are at risk of slipping back into a recession in as early as three months. To come to this conclusion, the economists considered dwindling progress in employment, housing starts, home prices and industrial production.

The at-risk cities are spread across the country, though more than half of the cities are in the South, and five are concentrated in the Midwest.

"With chances of a national double-dip recession now estimated at about one in four, several metro areas will probably experience their own downturns in the first half of 2011," said economist Andrew Gledhill, author of the report.

Private sector hiring has been tapering off in recent months compared to the start of the year, triggering Moody's to boost its forecast for a national double-dip from a 20% chance to 25% chance.

Read more here

America Goes Dark

In a new opinion piece for the New York Times, author Paul Krugman explains some of the drastic measures being taken to save money. Cities like Colorado Springs have gained nation media attention in their attempt to reduce expenses by turning off a third of their streetlights. I have included a snippet of Krugman’s piece below, but you can find the full text at NYTimes.com.

Meanwhile, a country that once amazed the world with its visionary investments in transportation, from the Erie Canal to the Interstate Highway System, is now in the process of unpaving itself: in a number of states, local governments are breaking up roads they can no longer afford to maintain, and returning them to gravel.

And a nation that once prized education — that was among the first to provide basic schooling to all its children — is now cutting back. Teachers are being laid off; programs are being canceled; in Hawaii, the school year itself is being drastically shortened. And all signs point to even more cuts ahead.

We’re told that we have no choice, that basic government functions — essential services that have been provided for generations — are no longer affordable. And it’s true that state and local governments, hit hard by the recession, are cash-strapped. But they wouldn’t be quite as cash-strapped if their politicians were willing to consider at least some tax increases.

And the federal government, which can sell inflation-protected long-term bonds at an interest rate of only 1.04 percent, isn’t cash-strapped at all. It could and should be offering aid to local governments, to protect the future of our infrastructure and our children.

But Washington is providing only a trickle of help, and even that grudgingly. We must place priority on reducing the deficit, say Republicans and “centrist” Democrats. And then, virtually in the next breath, they declare that we must preserve tax cuts for the very affluent, at a budget cost of $700 billion over the next decade.

Continue reading at NYTimes.com…

Top Credit Score Misconceptions

Many Americans are mystified when it comes to their credit score. Do you sometimes wonder who’s really keeping track and what is it exactly that affects your score? There are many misconceptions when it comes to what really affects our credit scores. I thought I’d share an article from BudgetsAreSexy.com. This article lists and debunks the top credit score myths and misconceptions. Such as:

• When I get married, we get a joint credit score: Not so. Each person has their own credit score ’til death do you part—from your credit score that is. However, when you open accounts jointly, that information will be reflected on each of your credit reports, for better or for worse.
• My job/income impacts my credit score: Sorry, but making six figures, winning the lottery, or inheriting a fortune will not give you a good credit score. Your net worth and income are not factored into your score.
• Paying off credit card debt will boost my credit score 50 points: Depending on how much credit card debt you had, you may see some increase. However, credit card utilization is an important component of your credit score and those with the highest credit scores have about 10% utilization. This means if you are using your card (and of course paying off the balances on time) you should see an increase in your credit score.
• Being an authorized user on a credit card will impact my credit score: Co-signing for a credit card can have an effect on your credit score, but unfortunately just being an authorized user won’t change your credit score one point.
• I only have one credit score: There are different credit score providers and each credit bureau provides their own credit score. However, these companies all use the same criteria to judge your credit worthiness and the scores basically fall within the same range of each other (good, ok, or poor).
• Checking my credit score will lower my credit score: False. When you check your credit score at sites such as Credit Karma, it’s a soft pull so it won’t lower your credit score at all. Only hard inquiries by lenders impact your credit.

Want to read more? Click here.

Cities Brace for a Prolonged Bout of Declining Tax Revenues

A new study released today by the American League of Cities shows that local tax revenues are decreasing for the first time in 7 years. As if it was not bad enough, the same study also predicts that revenue will continue to decrease for up to two more years. Check out the following story below on the recent findings courtesy of the Wall Street Journal:

Weak growth in property taxes, reflecting soft housing prices, did not counterbalance sharp declines in other sources of income, including sales taxes, income taxes and state aid, according to a survey of 379 league member cities.

Overall city revenues declined by 0.4%, even as expenses rose 2.5%, and city officials expect steep drops in tax collections in the next two years, making for the worst outlook in the 24 years the group has been surveying its members. Western cities were particularly downbeat.

The gloomy mood "is indicative of the depths of the downturn, that they have the worst ahead of them, and the fact that the recession is universally hitting their revenue sources," said Chris Hoene, research director for the league.

Because employee wages, health care and pensions are a major component of municipal budgets, two-thirds of the cities reported hiring freezes or layoffs. Almost as many cities said they were postponing big construction projects.