Some cities are mulling bankruptcy filings as an escape from their huge fiscal woes, but Fitch Ratings company says that’s a mistake.
Mere talk of a Chapter 9 filing will cause the agency to look at whether the city’s credit rating will be downgraded, Fitch said in a recent report obtained by Bloomberg.
Ballooning costs for municipal workers, including pensions and healthcare, has sent many cities into massive debt. And that has led them to consider bankruptcy.
Vallejo, Calif., was able to obtain bankruptcy protection in May 2008. And since then, other California towns, Detroit’s schools and Harrisburg, Pa., have raised the possibility of going Chapter 9, Bloomberg reports.
That hasn’t made Fitch happy.
“The more bankruptcy is publicly discussed as an option for financial relief, the more its tarnish wears off, increasing the likelihood of its actual use,” it said.
A bankruptcy plan might allow municipalities to curb their payments to bond holders.
“Any plan is going to impair all classes of creditors, including bondholders,” John Knox, a lawyer at Orrick, Herrington & Sutcliffe, which represents Vallejo, told Bloomberg.
States are as bad off as their cities. The states combined have a $1 trillion funding shortfall for employee retirement benefits, according to a new study from the Pew Center on the States.
"If they don't do anything, eventually they will have an unmanageable crisis on their hands," Susan Urahn, the center's managing director told Associated Press.
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