U.S. governors have few answers as cities face bankruptcy risk

By Mark Niquette
Bloomberg News

WASHINGTON - U.S. governors of states where municipalities filed for bankruptcy say there was little they could have done, even as cities such as Stockton, Calif., crack under continuing fiscal pressures.

Stockton, a Central Valley agricultural center with a population of 292,000, this week may take the first steps toward becoming the most populous U.S. city to file for bankruptcy, and will consider defaulting on $2 million of debt payments, officials have said. California Gov. Jerry Brown said Feb. 26 he wasn’t prepared to discuss the situation.

“I want to see what exactly there is,” Brown said in an interview at the National Governors Association meeting in Washington. “They’ve started a process, and that process will continue to proceed, and hopefully the city and the creditors will find some reasonable accommodation.”

While an improving U.S. economy is helping boost revenue for states, cities face declining aid and a drop in the property-tax take since the housing crash. Cities under fiscal stress are trying to avoid bankruptcy and bolster their finances, including Pontiac, Mich., which abolished its police and Cleveland, which demolished thousands of condemned structures to preserve property values. Such actions aren’t always sufficient.

Unlucky Number

The nation had 13 municipal bankruptcies last year, James Spiotto, head of the bankruptcy practice at the Chicago-based law firm Chapman & Cutler, said in a telephone interview. They included a record $4.1 billion filing by Jefferson County, Ala., as well as Boise County, Idaho; Central Falls, R.I.; and Harrisburg, Pa., an effort later thrown out of court. The others were special-purpose districts and public-benefit corporations.

Jefferson County filed in November in a case tied to a botched sewer-system refinancing. County, state officials, a court-appointed receiver and bondholders failed to implement an agreement to cut debt, increase rates and have the Alabama Legislature bolster county finances.

Gov. Robert Bentley, a Republican, Feb. 26 declined to discuss the case, and said he encouraged the county not to file. Alabama, he said, can do little for the county that encompasses Birmingham, whose 212,000 residents make it the state’s largest city and economic engine.

Gave His All

“We did everything we could do,” Bentley said. “They’re going to have to come up with a local solution, and they’re working on that.”

County officials have said they can’t escape bankruptcy without restoring or replacing a wage tax that a court stuck down. Under Alabama custom, such a measure needs unanimous approval from state lawmakers that represent a municipality. Such a bill died in June, blocked by a Republican senator.

Rhode Island Gov. Lincoln D. Chafee, an independent, said he’s concerned about the impact of the bankruptcy of Central Falls, and identified five other municipalities in distress: Providence, East Providence, Woonsocket, West Warwick and Pawtucket.

“It’s a real crisis in Rhode Island,” he said in an interview at the association meeting, which ends Monday.

Central Falls, the state’s smallest city, with about 19,000 residents, entered bankruptcy in August after property values plummeted and it was overwhelmed by pension liabilities.

Chafee blamed the recession and previous administration for cutting state aid and “leaving cities and towns to fend for themselves.” Whether those cities join Central Falls depends on the Legislature’s adopting changes to local pension plans, including allowing the suspension of cost-of-living adjustments for retirees, he said.

Eaten Alive

Harrisburg, a city of about 49,500 that is Pennsylvania’s capital, is in receivership after being driven into insolvency last year by financing an overhaul and expansion of a municipal incinerator that doesn’t generate enough revenue to cover its debt. Gov. Tom Corbett said he hopes that by next year, “we’d be on a good course to get Harrisburg back where they need to be.”

Corbett, a Republican, said in an interview that he doesn’t expect the state to intervene in any municipality this year, though states and local governments must control pensions.

They must “get those costs in line so that we aren’t spending a huge portion of our general fund revenues -- and each municipality the same thing -- just taking care of the past obligations,” he said.

Michigan’s first-term Republican Gov. Rick Snyder sought a law last year expanding the powers of emergency managers over city finances. Snyder said he hopes not to use it in Detroit, where he appointed a review team in December.

Lousy Experiences

“We want to work collaboratively in partnership with our local jurisdictions,” he said. “Bankruptcy would not be a positive experience in any regard. The track record’s not good for municipalities in particular.”

While 2011’s bankruptcies were “extreme cases,” cities face pressures from a somnolent national economy and have few places left to cut, Naomi Richman, managing director of public finance at Moody’s Investors Service, said in a telephone interview. The ratings company’s outlook for U.S. local governments remains negative in 2012 for the fourth straight year, it said in a Feb. 1 report.

Municipalities that file for bankruptcy pay a high price in the cost and delays of litigation, and the example of Vallejo, California, which emerged from bankruptcy last year with a skeletal workforce, should be a motivator, Spiotto said.

“It cries out to everyone, the municipal elected officials, the workers and their unions, and the taxpayers, to find a way of reasoning together,” Spiotto said.