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American cities are dropping like flies

November 29, 2012
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By Shanna Pearson, Pacific Standard

Stockton, California is just the latest to file for bankruptcy. Why can't local governments catch a break?

Cities are dropping like flies. In the last several months, a string of municipal governments in states from Alabama to Rhode Island have filed for bankruptcy. Even more are likely to follow within the next year as cities reel from an end to federal stimulus dollars.

What’s going on with local governments? Their troubles stem from multiple sources, but the critical factor is, yes, after all this time, still the housing bust. City finances are almost exclusively tied to property tax revenue—indeed, most locales have no other funding source. Despite all the focus on mismanagement and bloated pensions, few cities would be in these severe dire straits had housing prices not fallen by roughly 41 percent or even greater, in some places.

Stockton, California, the largest city (population: 291,707) to go bankrupt so far, has been referred to as “ground zero” for the local-government financial crisis. Like the rest of the more than 87,000 local governments in the U.S., Stockton is struggling to meet ever-growing obligations in health, security, and infrastructure, as the responsibility for many services has shifted from federal to state, and state to local. In some small but vital ways, however, Stockton is luckier than many of the other places facing severe fiscal shortfalls.

A few years ago, Stockton’s future looked bright. As commuters from the San Francisco Bay Area bought homes in less-expensive Stockton, the population boomed and new businesses blossomed. Home prices tripled from 1990 to 2007, reaching a median of more than $400,000. The city was able to use rising tax revenues to leverage investments in long-ignored and dilapidated areas; infrastructure was built to attract still more businesses; and the city undertook a huge environmental cleanup of the port.

Today, the story is very different.

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