Wednesday Oct 31, 201210:47 AM GMT
13 American cities going broke
Sun Oct 28, 2012 2:42AM
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Moody’s rated the debt of 30 cities, towns, villages, counties, and school districts as “speculative grade,” up from 25 last year.


A speculative-grade rating for a local government means, at best, its debt is risky and, at worst, it could end in default. 24/7 Wall St. looked at 13 of the riskiest local governments that may be on the verge of bankruptcy.


In an interview with 24/7 Wall St., Moody’s Managing Director and Chief Credit Officer of U.S. Public Finances, Anne Van Praagh, explained that the number of cities, counties and towns that default on some or all of their debt is growing.


She attributes this to “a significant amount of credit pressure, sluggish economic recovery, and cities not being able to grow out of their problems this time around.” She added that many cities see defaulting as the only way to avoid total economic disaster.


Perhaps the best example of this is Stockton. Earlier this year, the city of Stockton, California, defaulted on its debt and filed for bankruptcy. For analysts at ratings agency Moody’s, it marked a growing trend in local governments. Cities, which have historically been nearly flawless on their obligations, are opting to default on their debt because of financial troubles.


Different circumstances brought each government to this point. However, a few underlying causes are shared. In some cases, governments severely mismanaged their debt: they borrowed based on unrealistic projections of expenses. In other cases, the economic downturn hit particularly hard, weakening revenue. For some local governments, it was a combination of factors.


A weak economy with a fragile or shrinking tax base is one of the worst problems a local government trying to balance its budget can face. In Detroit, the population has fallen by roughly half in the past 50 years, including a 25% drop in the past decade alone. Unemployment is well into the double digits, and per capita income has been steadily declining. All these factors make it extremely difficult to continue raising revenue to service its debt.


Moody’s expects more local governments will be downgraded in the future. In its report, the ratings agency explained, “The credit pressures will continue to exert themselves on virtually the entire local government sector. For municipalities unable to adjust to the new environment, downgrades into speculative grade are unavoidable realities.” Huffington Post




High housing prices in large U.S. cities are decreasing income mobility and ultimately hurting the U.S. economy, according to a new study by Daniel Shoag, associate professor of Public Policy at Harvard's Kennedy School, and his colleague Peter Ganong.


Laborers are being priced out of larger cities like San Francisco, where housing prices are high, and migrating to smaller cities like Phoenix where housing prices are cheaper. This has created a two-tier society: high-skill, high-wage workers living in large, metropolitan cities and low-skill, low-wage workers coalescing in economically depressed regions. This phenomenon slows economic growth, Shoag argues, because one's total income impacts national GDP.


Since 1980 the rate of income convergence has been stagnant. The average income of U.S. workers has remained flat for the past 30 years and the migration of low-skilled workers across states has also slowed significantly. The Daily Ticker



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