The prospect of cities declaring bankruptcy and defaulting on municipal bond obligations continues to worsen, with Detroit high on the watch list in financial circles.
One of the latest sentinels of the growing national problem is Jamie JP Morgan CEO Jamie Dimon. He expects to see more U.S. municipalities declare bankruptcy, Bloomberg News reports. His concerns echo those of others who have said the next major financial crisis will come from a wave of local government defaults, including famed investor Warren Buffett, who has called the municipal debt situation a "terrible problem."
"If you are an investor in municipals you should be very, very careful," Dimon said, according to Bloomberg. An increase in city defaults would ruin their credit rating make it difficult for other municipalities to continue borrowing money from bond investors.
Local governments have had to deal with painful erosion in tax revenue, which in some cases threatens to ruin budgets. Amid the severe financial downturn of the past three years, cities and states have had to severely cut back their spending, even as the need for their services has grown. While official bankruptcy remains rare, experts say there's trouble brewing.
To avoid such as worst-case scenario, Detroit planning officials have outlined steps that would eliminate key municipal services -- garbage removal, police patrols, road repair, street lights -- in some 20% of the city's 139 square miles. The plan is consistent with Mayor Dave Bing's plan to reconfigure Detroit to reflect it's declines in population and fiscal stability.
Neighboring Hamtramck, meanwhile, is one Michigan city that is quickly running out of services to cut. Michigan currently has 68 cities on its "fiscal watch" or "fiscal stress" lists, meaning these communities are at risk of running out of money -- some perhaps even early this year. Many communities, Hamtramck included, have seen sharp drops in their populations and tax base as laid-off manufacturing workers have moved elsewhere in search of new jobs.
Cities that do head for the red shouldn't count on Lansing for help. The Michigan state budget deficit for fiscal 2012 is forecast to be $1.85 billion, though some analysts suspect it will actually be more than $2.0 billion.
Welcome to office, Governor Snyder.
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