High-Risk Local Government and Bankruptcy

One recurring theme of my posts is that when governments expand their operations and powers beyond those needed to provide for the equal protection of our individual rights, they generally do a very poor job of providing the given service, they inevitably end up failing to protect our individual rights, and they fail very unequally in protecting our rights as well.  When governments fail, they often put all of that government's operations at risk.  This is the situation in such states as Rhode Island, New York, New Jersey, and California where terrible state debt and massive liabilities clearly exceed the level that taxation can support.  Higher taxes there will simply lead to more economic stagnation and the flight of many capable and often wealthier people from the state with lower tax revenues resulting.  After a point of government ineptitude, there is no way out but to drastically cut even the most legitimate services.

Here is another example of how a local government put its essential services at risk by trying to perform services which should have been left to the private sector.  Responsible local government has no business departing from the few legitimate services such as police protection and the courts, because other activities increase the need for involuntary taxes and also the risk of the failure of the government.  Businesses in the private sector fail more often than not and there is no reason to expect that city, county, and state governments can operate more efficiently than do private sector businesses.  Of course, however badly they operate a business, they can call upon a large tax base to subsidize the poor operation, which will commonly allow a government to avoid acknowledging that they are operating the business they have take on poorly.  This usually leads to further deterioration of the operation of the business with time, since incentives are missing to improve the operation.

The capital city of Pennsylvania, Harrisburg, is considering a Chapter 9 bankruptcy because it lost so much money in one operation it could have left to the private sector that the entire city government is now at risk of collapse.  This case was reported in today's issue of The Wall Street Journal.  Harrisburg incurred a debt of $288 million in an attempt to renovate an incinerator!  It owes $68 million in payments this year on this debt, but its entire annual budget is less than that amount.

Chapter 9 bankruptcy entails:

• A municipal government can reduce its debt even if the chief creditors oppose such a reduction.
• The settlement must have the support of at least one class of impaired creditors.
• An automatic stay of all litigation against the city occurs.
• The city can reject union contracts.
• Bankruptcy prevents judges from forcing asset sales or liquidation of the municipality.
• Pennsylvania's Community and Economic Development Dept. must approve the Chapter 9 bankruptcy and work with the city in the bankruptcy proceedings.
• The city must expect to pay huge fees to lawyers and accountants.
• The outcome of the request for bankruptcy is uncertain.  It could be rejected.
• Assured Guaranty Municipal, which assured the bond payments, will have to make the payments at great loss to it.
• Covanta Energy operates the incinerator and gave the city a loan of $25 million, which the city cannot repay in whole.

City Controller, Daniel C. Miller, favors this Chapter 9 way out of the city's predicament.   The first Pennsylvania municipality to use Chapter 9 bankruptcy was Westfall Township in Pike County.  They faced a legal claim of more than $20 million to a real estate developer.  The settlement was reduced to $6 million over a 20 year repayment period with no interest.  But, its bill from the lawyers and accountants was $600,000.  If its request for bankruptcy had been rejected, the lawyers and accountants fees would have put Westfall Township into even worse shape.

Of course a Chapter 9 bankruptcy may allow the city of Harrisburg to go on.  But, after the loses that creditors and bond guarantors will take, the city will still be in a tough situation.  First, it will still have to pay a substantial amount of money.  Second, it will have impaired its credit for quite some time.  These factors are likely to force a reduction of other services the city has provided its residents.  Some of these impaired services are likely to be its legitimate services.  In addition, the city's irresponsible actions will certainly hurt its creditors and those who invested in them.  Governments have no business causing such harm.

All of this grief could and should have been avoided by simply leaving to the private sector what is the private sector's.  Leave unto Commodore Vanderbilt what is Commodore Vanderbilt's.  Leave unto J. J. Hill what is J. J. Hill's.  Leave unto John D. Rockefeller what is John D. Rockefeller's.  When government leaves unto the private sector all functions which are not legitimate to it, any risk is taken only by those who have chosen to undertake it voluntarily and the legitimate functions of government are not put at risk.