One of the World's Largest Cities Could Go Bankrupt, and It's in the US

It seems improbable that any large city in the world could go bankrupt. However, it happened before when a bad economy met a city that was overleveraged and needed money to operate and improve infrastructure. According to experts, it could occur in one of the world’s largest cities, as it nearly there did in 1975.

New York City was on the brink of bankruptcy four decades ago. Mayor Abraham Beame had even prepared a statement to announce it. A group of financiers and union leaders pulled together a plan to use union pensions to back loans to the city. An organization called the Municipal Assistance Corporation was formed to help New York as well. Among other things, it convinced banks that held city debt to change maturities in New York’s favor and chop some interest rates. The city also made massive layoffs of its workers.

The argument that New York is in profound trouble was laid out recently in the New York Post. Peter C. Earle, an economist at the American Institute for Economic Research, was quoted: “New York City could go bankrupt, absolutely.” Several things would need to happen at once, and some of them already have begun. Among other things, New York State is one of the states where Americans pay the most taxes.

Mayor Bill de Blasio plans to add $3 billion to a budget that is already $89.2 billion. That means the city’s deficit will rise substantially. Spending by the city is up by about $14 billion since he took office.

Adding to the budget, other threats include the tax burden placed on residents. New York has among the highest state and city taxes in the country. By some measures, they are the largest of any American city. On top of this, the federal government under President Trump has curtailed what people can deduct for state and city taxes. This adds to the already heavy burden. Some of the wealthiest New Yorkers have decided to relocate to places like Florida, which has no state taxes. As these people leave, New York’s tax base erodes. The problem is so severe that the state has sued the federal government to block limits put on deductibility. Pointing a finger at the Trump administration, Governor Andrew Cuomo said as the suit was filed, “This is their political attempt to hurt Democratic states. It’s totally repugnant and hypocritical of the conservative ideology which they preach.”

Next, New York City’s property taxes continue to rise. This puts pressure on both businesses and individuals. This is another incentive for both the wealthy and companies to leave the city for less tax-burdened locations. Added to that, New York State is among those where people have the highest sales taxes.

Finally, as part of the formula that could wreck New York’s finances, the top 1% of the city’s wealthy based on earnings are half the city’s tax base. New York City’s Independent Budget Office confirmed these numbers recently.

The most recent bankruptcy of a large American city was Detroit’s in 2013. The city ran into a cash flow problem. There are, however, significant differences between New York and Detroit as it was six years ago. Detroit’s population plunged over the decades from the 1960s through 2010. That by itself undermined the city’s tax base.

And governments much larger than cities have been forced into bankruptcy over the past several decades. These include Iceland in 2008, Argentina in 2001, Russia in 1998 and Mexico in 1982. In each case, an outside financial shock was combined with massive debt loads.

Will New York City’s finances unravel in the next several years? If there is another deep recession, and the city continues to lose its wealthiest residents, it could well fall into extremely deep financial trouble.

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