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Bankruptcy choices highlight fiscal pain of cities nationwide

Even though bankruptcies are expected to stay rare, the financial woes of U.S. cities are widespread and show no sign of easing.

July 15, 2012|By Ken Bensinger, Kim Christensen and Jessica Garrison, Los Angeles Times
  • When San Bernardino’s City Council voted to authorize a bankruptcy filing, it said the city had just $150,000 in the bank and couldn’t make the next payroll.
When San Bernardino’s City Council voted to authorize a bankruptcy… (Irfan Khan, 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% 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.

PHOTOS: California cities in bankruptcy

All that has fed fears that American cities are lined up to fall like so many dominoes. But municipal bankruptcy filings are likely to remain rare for a variety of legal and political reasons.

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

"It does not look pretty. It's not going to look pretty over the next three or four years," said Michael Pagano, dean of the College of Urban Planning and Public Affairs at the University of Illinois at Chicago. "It's a long-term structural problem, and cities need to think of new ways to collect resources to fuel their services, or they are only going to be in worse trouble."

Like hundreds of other cities around the country, Stockton, San Bernardino and Vallejo share a number of fundamental problems that drove their finances into the ground. Blue-collar cities with aging infrastructure, they have relatively poor populations. And they're saddled with ballooning pension and healthcare obligations for civic employees and retirees.

Then came the recession, and with it foreclosures, crashing property values and the disappearance of retailers that were vital to sales-tax revenue. Cities that had been scraping by suddenly found their bank accounts depleted and their budgets in a death spiral.

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% increase in property taxes to help close a nearly $17-million budget deficit, a move that could help Scranton stave off bankruptcy.

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