Municipal bankruptcies increasing nationwide
by Mary Scott Nabers,
CEO of Strategic Partnerships, Inc.
As local governments struggle to make ends meet, many public officials appear to be evaluating what is universally thought to be the least desirable option – municipal bankruptcy. At Strategic Partnerships, we have been tracking municipal bankruptcy and the sad truth is that the trend is on the increase.
The City of Stockton, California, last month became the largest United States city to file bankruptcy. The city, with a population of about 300,000, attributes its financial failure to a number of factors. First of all, the city is no longer able to provide benefits, especially health care, to current employees while continuing the commitment to its pension program. Additionally, a few high profile development projects failed to live up to expectations about the same time property tax revenues took a major decline. The city had financed a number of large projects to develop the downtown area by issuing bonds, and the results did not reach ROI projections. The unstable fiscal environment of decreased revenue and unexpectedly high increases in expenses forced the city to file for Chapter 9 bankruptcy. That action eliminated the employee pension program and resulted in significant layoffs of city employees.
Facing a $46 million deficit and realizing it would not be able to cover payroll through the summer, the city of San Bernadino yesterday became the third California city in less than a month to seek bankruptcy protection. The city had depleted its reserves and tapped its redevelopment funds in an effort to make ends meet, but the recession, skyrocketing pension costs and costly labor agreements proved more than the city could handle financially.
The Town of Mammoth Lakes, California, also made headlines last month as it filed for municipal bankruptcy. This action followed the issuance of a legal judgment against the town for $43 million from Mammoth Lakes Land Acquisition for a property development dispute. The city has a population of 8,000 and an annual budget of $18 million.
Scranton, Pennsylvania, Mayor Chris Doherty attempted to avoid filing for bankruptcy this week by suddenly slashing wages for city employees to the state’s minimum wage level. The city has been hard-hit by the recession and a lagging economy. Doherty hopes to increase taxes for the $16.8 million shortfall and the City Council will pursue loans and other alternative revenue sources. The extreme measure of slashing wages for almost 400 employees was met with loud outbursts of criticism. Union organizations are threatening to take the issue to court.
When municipal bankruptcies are filed, there are no winners. Taxpayers suffer, jobs are lost, city services are minimized and it often takes decades for solvency and stability to return. While a majority of the bankruptcies are filed by small cities, some of America’s most populated cities have recently discussed the threat of bankruptcy.
Detroit, Michigan, was able to avoid filing for bankruptcy in early 2012 when it became known that the city was operating under a $200 million deficit. City and state officials initiated a consent agreement which essentially allowed the state of Michigan to participate on behalf of the city for a majority of the financial decisions. Detroit, a hard-hit area after the recession, experienced high unemployment, declining property tax revenue as people moved to the suburbs and reduced funding that simply would not cover the city’s mandated service requirements. While the consent agreement with the state helped stave off the immediate threat of bankruptcy, the city still faces major obstacles as it attempts to deal with its fiscal problems.
The city of Los Angeles is actively seeking options to resolve a budget shortfall of about $222 million. City officials are evaluating privatization, increasing taxes and decreasing the number of city employees in an attempt to avoid bankruptcy. Just this week public officials began negotiations related to privatizing the city zoo, including all concessions and special programs. Other actions will follow and the hope is that public officials will be able to manage finances long enough for savings to remedy the situation.
Public-private partnerships, although criticized by some, shift public risk to private sector firms, provide immediate funding to public officials in dire need and allow governmental entities to focus on mandated services.