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Distressed companies become stronger after flushing their debt through bankruptcy, allowing them to regain competitiveness & make investments for future. It's incredibly valuable tool, though one largely unavailable to states, cities & public agencies like transit authorities. 1/
The prohibition on bankruptcy is not a feature; it’s a bug that condemns jurisdictions and agencies to a permanent state of limbo. They struggle just to service their existing debt, built up during more prosperous times or while politicians were financially profligate. 2/
The current & future generations that depend on these services are the victims. Entities get caught in vicious cycle of having to raise taxes/fees while cutting services. The result is population declines, economic stagnation, and lower usership. 3/
The only way out is to beg for a bailout from a larger political entity. But bailouts don't solve the structural problem. Even when they happen, they’re sized to solve near-term issues, don’t fix problematic cost structures, and don’t allow access to capital for investment. 4/
NYC Transit Authority is good example. The system was in trouble coming into 2020. Pre-pandemic, the system was expected to have $53 bln of debt in 2023, 50% higher than 2019.
Financial duress ⇨ higher fares/ worse service ⇨ falling ridership ⇨ financial duress. 5/
Financial duress ⇨ higher fares/ worse service ⇨ falling ridership ⇨ financial duress. 5/
Debt service + legacy operating costs leave little ability to invest in a 21st century transit system. The MTA needs a restart that only access to bankruptcy can provide. Otherwise it’s stuck in limbo. All current and future New Yorkers who need mass-transit suffer. 6/
Similar vicious cycles happen at state/city level. Financial duress ⇨ higher taxes/worse services ⇨ decline in tax base ⇨ financial duress. There’s no solution for this. No one can "fix" Illinois. It’s trapped in its debt. 7/
The losers are all the residents of the state, with those who are lower-income hit the hardest. School funding falls. Crime increases. Social services are cut. Housing wealth declines. Health care funding declines. Etc. 8/
While state bankruptcy is criticized as a backdoor way to cut labor costs and reform pension funds (and sometimes both are needed to re-calibrate costs with revenues), @daskeel notes that courts have historically protected labor at expense of bondholders in city bankruptcies. 9/
The real loser in public bankruptcies will be muni bond holders, largely held by wealthy investors. They received a credit spread when buying the bonds. They should be at risk. And I'm saying this as a muni bond holder. 10/ https://www.nationalaffairs.com/publications/detail/state-bankruptcy-revisted
Debt costs for bad credits will increase in the short-term, but being responsible to the bond market is a feature, not a bug. It creates accountability for politicians to run an efficient gov’t and think about the future rather than kicking the can to a future administration. 11/
The market will loan to responsible entities at very low rates. Heck, Google just borrowed 5 year money at 0.45%. But the market will not allow jurisdictions to keep ignoring structural imbalances. The market would force the politically hard, but necessary, actions. 12/
Bankruptcy is an extremely valuable and necessary tool for individuals and businesses. It allows both to move forward in a stronger position. The only realistic way for many of our public entities to escape the vicious cycle they're in is to allow access to the same tool. 13/13
