Business owners in towns losing the battle between lower tax revenues and higher pension-related healthcare costs are reportedly pointing to bankruptcy as the way to resolve the issue. Most municipal bond investors are crossing their fingers that a wave of bankruptcies does not develop.
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The push toward bankruptcy for towns has been growing to the point where it compares to homeowners walking away from their debt obligations and mailing their house keys to the bank. As more towns look to bankruptcy to solve their fiscal woes, the stigma lessens.
But there may be much longer term repercussions long after any stigma has been forgotten. Cities and towns that file bankruptcy may cut themselves off from the ability to issue bonds in the future. This means that funding for city projects could be difficult.
Like Greece and other European countries, towns need access to credit markets. And unlike houses or businesses that fail, the bricks from town hall are unlikely to go up for auction.
Even if towns who file for bankruptcy can access the markets
for funding, that funding will cost more and will push up other taxes. Although bankruptcy may be seen as a quick fix, its longer term consequences may be more costly than towns and the businesses within them currently realize.