The Municipal Defaults & Bankruptcies Begin

Thursday's Wall Street Journal detailed some of the evolving defaults among municipalities, including Harrisburg, Pennsylvania, and Vallejo, California.

The Harrisburg Chapter 9 filing caught my eye because only a few weeks ago, a friend mentioned that some waste treatment facility bonds he owns mysteriously missed their recent interest payments. Sure enough, it was Harrisburg.

I wrote posts here and here recently describing this scenario, as predicted by Meredith Whitney and David Rosenberg. Two passages from those posts were,

"Meredith Whitney predicted that the effects of these problems will hit home next spring, when tax receipts come due, and fail to provide expected revenues for these many struggling governmental entities.

Rosenberg then derided the notion of a recovery when state and local government tax revenues are down 11% from last year, which was, itself, a weak year for tax receipts. He wondered how you could describe the current US economic situation as strong or normal and recovering, when most of the GDP growth is essentially from government spending of borrowed money, and the state and local governments are in extreme shortfall."

And, as if on cue, the Journal article highlighted the now-occurring problems.

At the end of the piece, a Harrisburg government official noted that they can't really raise taxes, or people will simply move to cheaper suburbs surrounding the city.

Funny how both municipalities and cities/counties have this problem. Their runaway spending over the past few decades can't now be fixed by simply raising taxes.

Truly, the more profligate, poorly managed state and local governments are now suffering the consequences of their mistakes.

And that is looking to be a non-trivial add-up in the general analysis of overall US economic health.

And, no, simply sending newly-printed greenbacks from Washington to pay these debts won't make them "go away." It will simply federalize the mismanagement of various states and local municipalities. Something unlikely to be accepted by Congressional members from non-affected parts of the country.