Several US towns and cities have declared bankruptcy for a variety of reasons (plant closures, industry shutdowns). Stockton, California, is the biggest such municipality so far. It filed for bankruptcy in June, and its case is somewhat different—it spent money it didn’t have and failed to determine if it ever would have it.
Essentially the Stockton City Council approved ever-higher salaries and pension benefits for public employees with no idea of how these benefits would be funded. It happened in part because it is just too simple to satisfy present day demands by borrowing from the future.
This is like kicking the funding can down the road to the unfortunate later owners (“investors”). The Ponzi aspect of it all is promising present owners that the town’s funding plan will adequately protect their investments when in fact no one making those predictions knows whether they are true or false. The long-term funding strategy of all community associations that maintain buildings and other infrastructure must include forensic-like investigations periodically. Without doing this, perhaps half of all future funding obligations will be missed. You can’t promise owners that future funding will be adequate at a given assessment level without knowing that the promise can be kept.
Lack of awareness may be a defense for decisions made prior to the Stockton case, but not any longer. Like cities heading for bankruptcy, there are enough examples of capital underfunding now available to put most boards of older associations on notice that what you see may not be what you get. Eventually, the last owners standing will have to pay for it.
To read Tyler Berding article: Ponzi Scheme?
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