Bankruptcy Decisions Show Cities' Fiscal Pain

Article excerpt

LOS ANGELES - The decision by three California cities to seek bankruptcy protection in the space of two weeks is unlikely to presage a wave of copycat filings. But it does underscore the mounting financial pressure facing local governments around the country.

Collapsing property values and entrenched unemployment have pushed cities and counties to the economic brink. Tax receipts in some locales have shrunk more than 20 percent over the last three years, and soaring pension costs exceed funding levels by as much as $3 trillion nationwide.

As the California cities of Stockton, Mammoth Lakes and, most recently, San Bernardino show, the temptation to flee to Bankruptcy Court is growing. Last year, four municipalities nationwide also applied for so-called Chapter 9 protection, including Jefferson County, Ala., which eclipsed Orange County as the largest such filing in U.S. history. Meanwhile, the Bay Area city of Vallejo emerged from its own reorganization.

What's clear is that the fiscal pain experienced by U.S. cities is widespread and shows no sign of easing.

When San Bernardino's council voted to authorize a Chapter 9 filing last week, it said the city had just $150,000 in the bank and couldn't make the next payroll. If it ends up filing, the city of 213,000 will be the second-largest in the U.S. ever to seek bankruptcy protection, after Stockton.

"Up to this point, we've seen idiosyncratic situations where there was exposure to one of a kind risk," such as a court judgment or natural disaster, said Anne Van Praagh, a managing director in the public finance division at bond rating company Moody's.

"With Stockton and San Bernardino, we're seeing something potentially different. They've taken all the measures they can," she said. "The question is, where do they go next? What can they do at this point?"

Unlike Orange County - whose infamous 1994 bankruptcy was caused by a massive $1.6 billion in losses on risky investments - San Bernardino, Vallejo and Stockton pulled the trigger because, simply put, revenues didn't match their obligations.

Mammoth Lakes, meanwhile, filed for court protection to escape a multimillion-dollar court judgment that it didn't have the money to pay.

In Michigan, four cities and three school districts are currently operating under emergency management by the state, which means the local officials have effectively lost their administrative power. Three other cities in the state, including Detroit, are operating under consent agreements that may end in having their finances taken over as well.

For some municipalities with financial woes, bankruptcy might provide a shortcut to better fiscal health by forcing bondholders, unions and creditors to come to the table and negotiate meaningful change.

But as Harrisburg, Pa., found out last year, not every city is eligible to file. A costly incinerator project left it deep in the hole and unable to pay its bills. But its Chapter 9 filing was dismissed by a federal judge who ruled that Harrisburg was in a class of smaller cities prohibited from filing in that state. Today the city of 50,000 is operating under a receiver.

Directly up Interstate 81, the city of Scranton this month took the dramatic step of cutting all municipal pay to just $7.25 - minimum wage. The mayor has proposed an 80 percent increase in property taxes to help close a nearly $17-million budget deficit, a move that could help Scranton stave off bankruptcy.

Experts expect Chapter 9 filings to remain rare. From 1980 through the first quarter of this year, there were just 254 Chapter 9 filings, according to the American Bankruptcy Institute. And only about one-fifth of those were filed by cities, towns or counties. The bulk were by school districts, hospital districts and similar entities.

In part that's because roughly half the states make it difficult if not impossible for municipalities to file. It's also because historically, bankruptcy reorganizations have not always eliminated the underlying financial problems. …