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Blind, broke, and bedlam: Differentiating fiscal stress from bankruptcy in California

PFM, Vol. 14 No. 3, (2014)

Municipal bankruptcy has historically been an extremely rare event. However, with the onset of the global financial crisis in 2007, many cities in the United States were under fiscal stress, coinciding with an uptick in the number of bankruptcies. This study leverages the proximity and similarity of three Chapter 9 filings in the State of California – the Cities of San Bernardino, Stockton, and Vallejo – to assess the relationship between fiscal stress and bankruptcy. In particular, it explores whether these three cities were explicitly under more fiscal stress than other, comparable cities in California. Using two models for fiscal health, the study finds that while the bankrupt cities were clearly under duress, the existing models of fiscal health did not indicate that the stress experienced by the bankrupt cities was demonstrably more extreme than the conditions faced by numerous other cities. The study concludes that models of fiscal health are unable to account for political or managerial choices that may be driving decisions to file for bankruptcy protection. In addition, the study suggests that the existing models do not account for certain factors that may drive the bankruptcy decision including issues relating to unfunded liabilities to pensions and other post-employment benefits.

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