2013 AAG paper

How going broke became fiscal fix: American cities in crisis?

Since the 2007 financial crisis, all levels of government have faced growing fiscal strain. At the federal level, a burgeoning deficit has become a much debated political issue. At the state level, stimulus monies have ran dry leaving many governors scrabbling to maintain basic services. And at the municipal level declining tax revenues have combined with a “downloading” of responsibilities from the state and federal level. American municipalities have therefore found themselves at the forefront of fiscal austerity. For some cities the situation appears to have become so dire that they have declared themselves bankrupt. This paper examines how the recent spate of municipal bankruptcies has occurred. It traces out the 1930s Great Depression origins of US bankruptcy legislation and explains how the 2008 bankruptcy filing of Vallejo, CA, radically transformed the intended purpose of this legislation. Rather than reading municipal bankruptcies as an inevitable consequence of economic recession, the paper argues that re-interpreted bankruptcy legislation opened a route for municipalities to roll-out a radical, revanchist form of fiscal restructuring. Where this restructuring has taken place, we have seen municipal bond holders and taxpayers pitted against public sector unions and retirees. For those cities that opt to undertake this class violence, the “rewards” might – tragically – include fiscal stability, declines in union power and an ability to reengage with entrepreneurial urban development schemes.

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