San Bernadino is on the road to becoming the third city in California officially declaring bankruptcy. Before making this decision, San Bernadino cut many social services to balance its budget. These austerity measures’ failure to solve budget problems lead many people to wonder if cutting spending actually works. Will bankruptcy spread to the federal government or to other municipalities if austerity programs are continued?
California is famous for predicting American economic trends, but the American people need not worry about the federal government going bankrupt or bankruptcy spreading throughout other municipalities. California is one of the few states to allow municipalities to declare bankruptcy and U.S. government bonds are bought by American citizens mostly, not corporate funding that caused bankruptcy in California.
Cities, such as Vallejo, Stockton, and San Bernadino, went bankrupt because they could not come to agreements with the corporation that provides public servants’ retirement packages. In California, a corporation called California Public Employees’ Retirement System (CalPERS) makes agreements between public employees and retirement insurance package agencies. The government, then, agrees to pay CalPERS a portion of the public employees’ retirement package.
Bankruptcy is essentially a process to help debtors and creditors compromise through legal channels. A judge is brought in to give legal orders on how much a debtor must pay. It is just supposed to build trust between debtors and creditors so that they can come to realistic agreements on how much debt can be paid. It does not cancel debts or relieve the responsibility of the debtors.
The public is unlikely to panic because Moody – the official rating agency – will not downgrade U.S. treasuries for political reasons. Without a creditor to demand payment like CalPERS, the U.S. is unlikely to face bankruptcy.
Cities may not go bankrupt, but these economic problems could be a sign of increasing poverty in American cities. More and more cities require state governments to bail them out because the recession has prevented them from garnering enough money to operate a city. And without a growing economy to bring in income, a trend towards poverty stricken cities could continue to rise.