Simply relying on tax increases won't be enough to get cities out of debt, according to economists. As a result, an increasing number of American cities are filing Chapter 9.
"The economic slump, however, is forcing debt-laden cities, towns and smaller taxing districts throughout the U.S. to consider using Chapter 9. As their revenue declines faster than expenses, some public entities are scrambling to keep making payments on municipal bonds. And that is causing experts to worry about the safety of securities traditionally considered low risk.
'People believe that municipal debt is safe based on assumptions that are no longer true,' says Kenneth Buckfire, managing director and chief executive of Miller Buckfire & Co., an investment bank that has worked with corporations on restructurings and now is advising municipalities. For example, it isn't safe to assume that governments can raise taxes to cover shortfalls, he says."