CBO Has Started Weighing The Benefits Of Bankruptcy Or Default For Local Governments

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The Congressional Budget Office has a note out today warning of the fiscal stress faced by local government. The chart on right shows how much revenues are down — with more stress is expected as home prices decline.

The 10-page brief includes a long discussion on bankruptcy versus default. The CBO seems to prefer:

One key advantage of bankruptcy is the “automatic stay,” which is issued by a court and prevents creditors from taking action against the municipality and its officials without approval from the court…

Another important advantage of bankruptcy is that courts can implement a restructuring plan without the consent of every creditor…

The bankruptcy process may also allow a municipal government to reduce its labour costs by facilitating the consent of employee unions to changes in labour contracts….

Formal discussion by the CBO suggests these options could become a reality.

So far states and cities have avoided bankruptcy or default, with Michigan rejecting bankruptcy applications from the City of Hamtramck. But just in Michigan, Gov-elect Rick Snyder says hundreds of cities face bankruptcy soon.

Click here to see charts on the drastic revenue collapse for cities >

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