By Jane Han
NEW YORK — The U.S. economy is on a recovery track, but now another dark and dismal outlook is hovering above — the threat of municipal bankruptcy.
Major cities from Los Angeles to Detroit are facing a crunch due to excessive spending, plunging city revenue and unsustainable pension costs, pushing them closer to going belly up.
Some experts see this problem as so serious that it’s labeled the next biggest threat to the American economy after the housing bubble.
“There’s not a doubt in my mind that you will see a spate of municipal bond defaults. You can see 50 to 100 sizeable defaults.
This will amount to hundreds of billion dollars,” said Meredith Whitney, a banking analyst who rose to fame for correctly predicting that Citigroup was in trouble just before the financial crisis.
She recently told CBS’ “60 Minutes” that the debt crisis could bring down more than 100 cities, leading to a municipal meltdown.
A look at dozens of state and local government operations show that coffers are drying up fast, if they haven’t already.
Cities including Los Angeles, New York City and San Francisco plan to lay off firefighters, police and other city workers, sell off properties and cut back services for city parks and senior citizen centers.
Facing deficits totaling billions of dollars in 2011, these decisions are no longer an option but a necessity for many local governments.
“We spent too much on everything.
We spent money we didn’t have. We borrowed money just crazily. The credit card’s maxed out, and it’s over. We now have to get to the business of climbing out of the hole,” New Jersey Governor Chris Christie said in an interview.
Sizing down is a start, but the real problem, experts say, is largely super-high pension costs.
For example, California now spends more money on public employee pensions than it does on the state university system.
Likewise, other states have pension payments that are impossible to meet so impossible that they can potentially drag the entire state down.