Bankrupt Cities

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by Dianne Hermann (Copyright 2013)

 

On July 18th Detroit, once known as America’s leading industrial center buckled under the weight of its own debt to became America’s latest bankruptcy casualty.

Detroit is the 11th most populous city in the United States. Its population peeked in the 1950s during the automobile industry boom when it was ranked 4th with almost two million inhabitants. It has since been in a steady decline. Today, Detroit’s population is around 750,000 with 78,000 structures abandoned.

The depth and breadth of Detroit’s financial woes boggles the mind. City leaders estimate Detroit’s debt to be a staggering $18-20 billion. Even Obama’s federal bailout of General Motors in 2009 couldn’t jump-start the financially strapped city.

Here are some of the factors that led to the city’s economic demise. In 2011 just over half (53 percent) of Detroit homeowners paid property taxes. Standard & Poor’s Ratings Services frequently downgraded its rating on Detroit’s general obligation making it more difficult for the city to borrow money. Its S&P rating was just reduced from ‘C’ to ‘CC.’

A combination of mismanagement, corruption, and loss of revenue in Detroit led to a decrease in city services. Police response time is 58 minutes when the national average is 11 minutes. One-third of its ambulances are out of service.

Additionally, Detroit was in the middle of union contract negotiations with the city’s unions, which filed an injunction to try to stop the bankruptcy. Detroit Emergency Financial Manager Kevyn Orr said the city’s two retirement systems were underfunded by about $3.5 billion.

The list of U.S. cities, counties, and municipalities declaring bankruptcy is growing. It’s not just the sheer number of cities, but also the size of the cities that is cause for concern.

California has led the way in the overall number of recent filings. If the state does not fall into the ocean because of an earthquake, it may succumb to financial liquidation and fall off the proverbial fiscal cliff.

On June 28th, Stockton, California, with a population of nearly 300,000 people, filed for bankruptcy. Mammouth Lake followed suit on July 1st, on the heels of San Bernardino, which filed last August.

Other California cities are currently considering filing for bankruptcy protection, like Compton and Victorville.

The reasons cities file for bankruptcy vary. In the case of San Bernardino, a report by the city attorney said officials hid the scale of the city’s debt by falsifying budget reports to the mayor and council for 13 of the past 16 years. It claims more than $1 billion in debts it cannot pay. Mammoth Lake filed for bankruptcy after a $43 million legal judgment against it, while Stockton, among other things, could not meet its obligation to fund its pension system, CalPERS. It doesn’t help that Stockton was named the 10th most dangerous city in the U.S. by the Wall Street Journal.

Among the counties filing for bankruptcy, Jefferson County, Alabama, has the largest outstanding debt, which exceeds a whopping $4 billion when it filed in November of 2011. The Birmingham-based county issued sewer bonds in the late 1990s after the federal government forced it to upgrade its sewer system amid Environmental Protection Agency accusations of sewage leaking into area river systems. Add a lagging economy, court judgments, and political corruption, and you have a recipe for southern-fried upside-down financial trouble.

Larry Langford, a Democrat and former Birmingham mayor, presided over the Jefferson County Sewer Commission when the city issued bonds to fix sewer problems. Langford is now serving a 15-year sentence for corruption after taking bribes.

It’s not just big cities with big populations and big public service pension systems that fall into the financial miasmas. Central Falls, Rhode Island’s smallest town, filed for bankruptcy in 2011 when many of its textile factories closed. Central Falls had a measly $80 million in pension obligations, but its budget was only $17 million.

Some of the reasons for towns falling victim to financial trouble are hard to fathom. Moffett, Oklahoma, filed for bankruptcy in 2007 because the state’s attorney general and Department of Public Safety declared Moffett an illegal speed trap, stripping its authority to issue speeding tickets on the four-mile stretch on U.S. Highway 64. These tickets accounted for an astounding 78 percent of the town’s revenue. No tickets, no town.

The small town of Westfall, Pennsylvania, filed for bankruptcy in 2009 following several lawsuits, one of which involved a $20 million judgment over a condo project. The town’s Board of Supervisors conspired to block a building development by rezoning the land in secret then harassing the developer. In addition to a judgment against the town, the supervisors themselves were held personally liable.

In order to avoid bankruptcy, many cities and counties made drastic financial changes in the way they do business. Jobs were cut, employee pay and benefits were reduced, retirement pensions were renegotiated, and services were slashed. Is this a harbinger of things to come and a warning to other locales

CNN reports that experts predict the under-funded pension liabilities and stagnant tax revenues could cause more cities and counties to opt for bankruptcy as a remedy for their financial woes.

Apparently some municipalities haven’t learned from past mistakes. They aren’t heeding warnings about the perils of overspending and the repercussions of underfunding pensions.

Prichard, Alabama, filed for bankruptcy twice, in 1999 and again in 2009, even after being warned about these costly mistakes. The city of Desert Hot Springs, California, declared bankruptcy ten years ago and Orange County, California, filed almost twenty years ago. Twenty years ago! Isn’t anybody paying attention? Who’s responsible? Who’s minding the store?

The common thread that links most cities and counties that file for bankruptcy is underfunded pensions. In my next article “Pension Funds – Waiting For The Other Shoe To Drop” I’ll discuss the path cities and counties walked that led to their financial downfall and how other locales are on the brink to follow suit. Of greater concern is that some of our 50 states are not far behind.

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