Muni Threat: Cities Weigh Chapter 9

The economic slump is forcing debt-laden municipalities nationwide to consider filing for bankruptcy.
by | May 2010

Flint. Gould. Harrisburg. Isleton. Prichard. Shamokin. Vallejo. Some may sound familiar; some may not. But the one thing these cities and towns have in common is that they're either flirting with bankruptcy or have filed for protection. As more municipalities face the daunting specter of budget deficits too big to close, more cities, towns and villages may soon join their brethren in bankruptcy.

Debt-laden Harrisburg, the seat of Pennsylvania's state government, has toyed with the idea of filing for Chapter 9. Other cities already have done the unthinkable: In 2009, Vallejo became the largest city in California to file for bankruptcy.

At the height of the Great Depression, more than 2,000 municipalities defaulted on their bills and obligations, according to the National Bankruptcy Review Commission. To help deal with the crisis, Congress created Chapter 9 to help cities, counties and towns restructure their debt. Since then, the number and size of municipal bankruptcies has been small, except Orange County, Calif., which filed for protection in 1994.

Today cities are facing the severest fiscal crunch since the Depression. Revenue is down while costs, wages and benefits have continued to rise. States, whose revenues are also down, have had to restrict financial aid to cities and towns. Meanwhile, federal funds from the stimulus package are being phased out. As a result, it's not hard to find news stories about cities discussing bankruptcy.

But most jurisdictions try to avoid this route, knowing that it's a risky move. Municipal bankruptcy means lawsuits and the possible loss of access to bond markets, and it doesn't necessarily break costly union contracts, as Vallejo is finding out.

Instead, experts recommend that cities and towns look for further ways to cut costs or raise revenue, possibly through the sale of assets such as infrastructure or land. In Harrisburg, which has a population of less than 50,000, the mayor has proposed raising property taxes and water bills. But it might not be enough. The city owes almost $67 million this year-more than its annual budget-for the financing of an incinerator plant. The facility, which is the root of Harrisburg's financial crisis, has about $288 million in overall debt.

In addition to increasing taxes and fees, the city also is looking to sell its parking garages and water and sewer systems, all of which generate more revenue than the city makes in real estate taxes. The sale of these assets might help the city in the short term, but could spell financial weakness for years to come.

Yet turnarounds do happen. Springfield, Mass., was broke and more than $40 million in debt in 2001. A state-appointed finance board took over and within five years, balanced the city's budget and erased the debt. It also managed to invest in technology, improve productivity and attract a modest amount of urban development.

Whether Springfield could engineer such a turnaround in today's fiscal climate is hard to answer, but the city stands as a reminder that it's possible to pull back from the brink.

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