Stockton, California is set to file a Chapter 9 bankruptcy. This may very well be a trend of the future as the recession from the 2008 financial crises continues.
Although they have been relatively rare, governmental entities, such as cities, counties and towns, are able to file for a special type of bankruptcy under Chapter 9 of Title 11 of the United States Bankruptcy code. Cities such as Stockton, CA are faced with a two fold problem. First, their revenues have declined due to the drop in real estate tax receipts. Second, the health care expenses for retirees has increased substantially among other contractually due payments, such as pensions.
Fortunately, Omaha and its nearby communities appear to be fairing much better as is indicated in a recent a 2012 Economic Outlook report issued by the Omaha Chamber of Commerce. According to the report, about 46% of Omaha Chamber members expect stronger growth in Omaha, Nebraska this year.
The apparent economic failure of Stockton should be a wake up call for all, including our federal government. Although many things are economically sustainable during good economic times, we must be vigilant not to lose all common sense with over taxation and over spending. Ultimately, every dollar that a citizen pays in tax is one less dollar that is invested or spent in the private sector economy. Additionally, when governments contractually agree to pay for benefits to retirees or current public sector employees without funding those contracts along the way, disaster is only one recession or downturn away. If Greece wasn’t enough warning alone, certainly Stockton’s expected bankruptcy filing will do.
As any bankruptcy lawyer will be able to tell you, financial disaster usually hits when a combination of events occur unexpectedly. It is not uncommon to see individuals and small business owners overwhelmed by debt, for example, when a serious illness, marital divorce and/or job layoff or contract loss occur within a relatively short time of each other. Similarly, many U.S. cities and foreign countries are currently facing large monthly debt payments and simply do not have the money saved in a separate account to pay for these debts. In essence, the cities and other governments placed a bet that large tax receipts would always be there and that the happy days would never end.
Let’s hope that Stockton’s probable bankruptcy filing, expected to be the largest in U.S. history, is a lesson that our future leaders will heed.
What is Bankruptcy?