The news in California this summer has been about municipal bankruptcies. Stockton, Mammoth Lakes, and San Bernardino all filed Chapter 9 bankruptcy within two weeks of one another. Chapter 9 is not something Americans are familiar with, but in brief it allows state’s subunits to refinance their debts to creditors either through lower interest rates or negotiated principal write-downs. Cities many not liquidate their assets the way individuals filing in Chapter 7 or 13 and private corporations filing in Chapter 11 can because the U.S. Constitution prevents that occurring via the 10th Amendment.
While municipal bankruptcy in California sounds like a disaster, problems might be worse in Nevada, which does not allow municipalities to avail themselves of Chapter 9. In fact, using laws meant for natural disasters, North Las Vegas declared a state of fiscal emergency in mid-July, essentially allowing it to freeze city workers’ wages to cover a $30 million budget shortfall.
North Las Vegas is also, incidentally, terribly overburdened with underwater homes. Here are seven ways municipal fiscal emergency can cause people to file bankruptcy.
(1) The first thing that happens in a municipal fiscal emergency is the government furloughs or lays off city workers. If these people drain down their savings before finding new work, they might have to file bankruptcy themselves.
(2) The reduced city workforce means less consumer spending locally, which means private businesses and individuals also lost revenue.
(3) Privatization: Cities that believe their contracts with unionized municipal workers are interfering with their ability to pay their bills will try to eliminate the unions or work around them by contracting municipal services to private industries that claim to provide the same services at a cheaper price to the city. Laid-off union workers are unlikely to find jobs that are as well paying and might find themselves in bankruptcy themselves. Whether they were overpaid to begin with or the private sector provides equally effective services for cheaper becomes a political issue.
(4) The city might raise property taxes to close budget holes. Property taxes are the most reliable revenue source for municipalities because land can’t move away or be hidden in a tax shelter. Landowners (homeowners and underwater homeowners) in particular bear the increased cost but might be unable to shoulder it, which can send them into bankruptcy.
(5) Reduced city services might reduce the city’s quality of life. If police can’t work overtime without authorization, garbage isn’t collected as frequently, or teachers have to teach larger classes, urban decay can worsen. Coupled with high unemployment, the city can become unattractive to live in, which reduces land values further.
(6) Development halts because the city can’t finance new public works. Potential creditors might see other cities as safer credit risks.
(7) Ultimately, if the city’s fiscal problems worsen its unemployment level, many people might have to file bankruptcy or move away.
A municipal fiscal crisis is a serious problem for Nevadans, and if you believe it has negatively affected your personal financial situation, then talking to an experienced Las Vegas bankruptcy lawyer is a wise move. Be glad that you have more power over your finances than your city does.
For more questions about bankruptcy in Las Vegas, please feel free to contact an experienced Haines & Krieger Las Vegas bankruptcy attorney for a free initial consultation. Call us at 1-702-880-5554 to set up your free consultation.