Unsustainable spending threatens city finances across the country. Filing bankruptcy would allow cities to cut their spending by getting out from underneath unsustainable payroll obligations. That means public employees would likely lose a portion of their retirement and health care benefits.
Like past bailouts, Rep. Frank's backdoor bailout shifts the risk of bad investments from companies like A.I.G. (the second largest holder of municipal bonds) to taxpayers. And like other bailouts, it only makes the situation worse by treating the symptoms and ignoring the cause: unfettered growth and spending by cities and other municipal governments.
The only real solution to municipal insolvency is to shrink cities, counties and towns to their core functions as defined by the principles of limited government. A recent Goldwater Institute report, A New Charter for American Cities, shows how it can be done.
Nick Dranias holds the Goldwater Institute Clarence J. and Katherine P. Duncan chair for constitutional government and is the director of the Institute's Dorothy D. and Joseph A. Moller Center for Constitutional Government.