In May, I wrote about "Cities on the Brink" of bankruptcy, focusing on how Pennsylvania's state capital of Harrisburg was so deep in debt that it was considering the extreme: declaring bankruptcy under Chapter 9 of the Bankruptcy Code, which was created by Congress during the Depression when more than 2,000 municipalities defaulted on their bills and obligations.
This week, Harrisburg public officials announced that the city would not make a scheduled $3.29 million payment on a bond for an expensive and troubled incinerator plant. While Mayor Linda Thompson has been adamantly opposed to taking the bankruptcy route, some members of the city council are in favor and municipal experts now think it's only a matter of time.
"This shows that the city is failing to function," Matt Fabian, managing director of Municipal Market Advisors, a Massachusetts-based research firm, told the Washington Post. "Now it seems that a municipal bankruptcy filing is almost a foregone conclusion."
With Harrisburg dangling on the precipice, the phrase "city bankruptcy" continues to crop up as municipalities struggle with lower revenue and rising costs in the aftermath of a recession that continues to grind out in states and localities.
In California, the city of Antioch is considering just such a step. Vallejo, Calif., has already done so. Meanwhile, the state of Rhode Island has issued new bankruptcy guidelines for its cities, according to the Providence Journal-Bulletin. The state of California is actually doing the opposite, as Governor Arnold Schwarzenegger is about to sign a bill that will make it much harder for cities in the Golden State to go bankrupt, according to CNNMoney.
Declaring municipal bankruptcy is considered so extreme and has such a negative effect on a city's fiscal situation (lawsuits; possible loss of access to municipal bond market) that it really is seen as a move of last resort.
Yet the municipal picture remains bleak. In July, the National League of Cities, issued a report showing that America's cities were facing a fiscal crisis that could force job losses approaching 500,000, along with significant service cuts. One could view such draconian cuts as the first stage of what might eventually become Chapter 9 for less fortunate city governments.