Bankruptcy Gov

By: EconomyWatch Content   Date: 17 November 2009

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A classic example of government bankruptcy in the US is that of Orange County, California amounting to $1.64 billion. This largest municipality in the US filed for Chapter 9 bankruptcy protection in December 1994 and witnessed a financial recovery only in June 1996. The three important factors considered to have led to the bankruptcy are political fragmentation of the region’s local governments, fiscal conservatism and the financial austerity in governance and expenditures. These factors combined together to impact the functioning of city schools and its water, sanitation and transportation agencies. The Orange Country fiasco also led experts to conclude the importance of fiscal assets protection for local and state governments and the inherent dangers of a freewheeling economy.

Bankruptcy Gov: Real-Life Scenarios 

The ever-increasing ratio of expenses to available resources is a major cause of concern for the US local and federal government. This concern was reinforced by the structural deficits faced by the San Diego government in 2008. California also witnessed increased state spending, which was double the economic growth rate registered in the city.

To contain such dangerous trends, experts recommend state governments to check their unnecessary, unfunded expenditure. For instance, San Diego’s structural deficit was created by several unfunded benefits that cost several millions of taxpayers’ money. Some of those benefits include the Deferred Retirement Option Plan and the 8000 years of pension credits offered to city employees. In fact, the pension expenditures also exceeded pension contributions. To counter this deficit, the city cut back on the delivery of its responsibilities, such as road repair, water security and fire prevention. In fact, quite alarmingly, the 2008 Medicare expenses of the country indicated a trend towards its exceeding even the defence spending.

Governments must understand that the only way to resolve structural deficit is complete bankruptcy. Hence, to avoid such a situation, they must decrease pensions and healthcare benefits to sustainable and consistently deliverable levels. The implementation of such measures may be impeded by apprehensions of annoying the voters and a possible backfire. However, experts recommend that the best way to prevent bankruptcy is to accept the debt scenario, and reduce government expenses and taxation with proper federal debt refinancing.


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