Last month Harrisburg, Pennsylvania failed to pay its bondholders. The municipality asked and received help from the state’s “Distressed Cities” program. It worked so well the first time, this month Harrisburg officials have asked the state to cover their bond payments again.
If it sounds familiar, it is. The same moral hazard problems that the stimulus introduced to the states, exist when the state bails out its municipalities. In essence, a bailout weakens the incentive to deal with the underlying problem. Mary Williams Walsh writing at the The New York Times reports that the growing resort of local governments to the state’s coffers is coming at time when states are facing their own fiscal problems, putting further strain on state finances.
Is going to bankruptcy court a better plan for distressed municipalities? Consider what happens when many municipalities enter into a no-man’s-land: unable or unwilling to fix their finances and kept alive with state infusions. A state bailout of municipalities can morph into a federal bailout of states – again.