What happens when a city can't pay it's debts?

[Freejack2]

Schenectady, NY, one of the cities in our area is in deep trouble apparently. From what I hear they are in massive debt and will most likely run out of money in the middle of the year. What happens in this situation? Do the creditors own the city if the city defaults?

 

[Dissipate]

I imagine the city would have to sell its assets in order to cover it. If it issued bonds those bonds are a legally enforceable contract between the city and the bond holder.

 

[Kalvin00]

Our county is out of money (duh, it's California )

They will probably just make major budget cuts. I don't know the answer to your other question.

 

[Ameesh]

check out the history of the city of Irvine in California

 

[Hector13]

Originally posted by: Dissipate
I imagine the city would have to sell its assets in order to cover it. If it issued bonds those bonds are a legally enforceable contract between the city and the bond holder.

actually, I don't think a city would have to sell its assets for general obligation bonds. Basically, they can just default on the bonds (which are only backed buy the full faith and taxing power of the city). This is the same with US treasury bonds.

Of course, the city/government would probably never be able to borrow money again, so this is the last thing they would want to do.

My guess is that they will hike taxes and cut spending (or refinance/restructure some of their debt if at all possible).

 

[Freejack2]

Originally posted by: Ameesh
check out the history of the city of Irvine in California

Are you sure it was Irvine California. I googled Irvine California History and I found nothing about them having financial troubles. Tried adding the word financial to the search and found nothing either.

 

[EagleKeeper]

Orange County in Ca may have had a similar situation a few years back

 

[Hector13]

Originally posted by: Freejack2

Originally posted by: Ameesh
check out the history of the city of Irvine in California

Are you sure it was Irvine California. I googled Irvine California History and I found nothing about them having financial troubles. Tried adding the word financial to the search and found nothing either.

try looking for orange county... they got f*cked by not understanding derivatives in the early 90s.

 

[Wallydraigle]

When one of us can't pay our debts we spend less until we get things under control, but when a city can't pay its bills it raises property and income taxes, public utilities costs, and it sends the police out to write more traffic tickets.

 

[Freejack2]

Thanks Hector13, found it. From what I can see I'd say Schenectady is screwed. They'll have to do massive layoffs and raise taxes. Also found out their grand downtown revitalization project has fallen through. If that city ever recovers it'll be a miracle.
If I recall correctly they raised their property taxes substantially last year. I imagine if they raise them again they are going to lose a lot of population.

 

[ScottyB]

It gets bought by a company and Robo Cop patroles the streets.

 

[GasX]

If you are a bond holder, you know that different bonds have different ratings. AAA is the best and carries the least risk. However it pays the lowest interest rate. BBB is a pretty weak rating and is more risky and pays a higher rate. As an investor, you get the higher rate for taking more risk - e.g. the bond issuer defaults.

If Schenectady defaults on its bonds, then its rating will either plummet or noone will buy any more of their bonds. They will have to learn to live on their allowance like the rest of us...