Cities on the Brink

Municipal finance chiefs are fighting to keep their troubled cities solvent. Sometimes it’s a losing battle.

Meanwhile, revenues are starting to improve slightly. “We were able to get the voters to approve an additional 1 percent of sales tax, translating into $11 million that we didn’t have before,” says Lauchner. “And best of all, bankruptcy has allowed us to restructure our debt obligations. We’re able to make the debt-service payments.” Other advantages of Chapter 9 for Vallejo have included the ability to eliminate binding arbitration and minimum staffing levels in union contracts — “the stuff that’s never positive for a city, because you usually lose,” says Lauchner.

Harrisburg: Incinerating Cash
Dan Miller, controller of Pennsylvania’s capital city of Harrisburg, can relate to Lauchner’s experiences, although the outcome in his case isn’t what he had hoped for. He and other city leaders filed for bankruptcy protection in 2011, only to have a federal judge dismiss their petition. Miller is convinced bankruptcy is inevitable.

13Oct_Cities_Harrisburg“It’s where we will ultimately end up,” he says. “Our city had a history of borrowing for today without thinking about tomorrow. They kept kicking the can down the road until it ended up at my feet.”

Harrisburg’s fiscal woes stem from a failed 1960s-era trash-to-energy incinerator project that burned up city coffers instead, leaving it more than $400 million in debt, or quadruple the annual budget. “We kept refinancing the incinerator every few years, but it kept eating up more and more cash,” says Miller, who in a sign of the times is running for mayor on a pro-bankruptcy platform. “We ended up owing more money on the incinerator than it was worth, even though its revenue now exceeds the operating expenses.”

Harrisburg first defaulted on the 2002-era Series A bonds backing the incinerator, and then defaulted on its general obligation bonds, which Miller says run about $12 million a year. As if these fiscal woes aren’t bad enough, the city confronts $180 million in unfunded health-care liabilities. “We need to be putting away $15 million to $18 million a year to fund these liabilities, but we can’t afford to,” Miller says.

Harrisburg is now mired with a 20 percent budget deficit, which city leaders hope to trim through yet another bond restructuring, one hinged to the sale of the incinerator and a separate deal to lease some city parking garages to an outside vendor. “The only way we’re making it now is by not paying our debt service,” Miller maintains. “We can’t do anything with our very generous union contracts because we’re under contract with the unions and they won’t budge. We can’t cut the film festival because it’s already cut. There’s just no more fat left. Bankruptcy is our best and only option.”

Jefferson County: Money Down the Drain
Bankruptcy was the only option left for Jefferson County, Ala., which filed for bankruptcy in November 2011, following the collapse of an agreement between county officials and investors to refinance $3.1 billion in sewer bonds. Like other municipalities under water, Jefferson County first slashed payrolls, facilities and services to make up for the budget shortfall, but the actions failed to stanch the red ink.

3 thoughts on “Cities on the Brink

  1. I was the city manager in 2008 that recommended BK for Vallejo. We had no choice; the city ran out of money to pay for union contracts. The city labor unions were stupid and they could not comprehend the math involved in operating a city.

    Basically, the math goes something like this: The fire union charged their members $175.00 month x 12 months/year x 100 fire fighters x 2 ( election cycle every 2 years) = $410,000. Police union charged $125 per month x 12 months/year x 145 cops x 2 years (election cycle once every two years) = $435,000. Together these two unions bought their elected Council members every 2 years since they financed the local elections by the tune of $$845,000 for every election. No one could compete with the fund raising. They controlled the City Council, their own contracts and the rest of the city too. Hence, their contracts were not sustainable and bankruptcy was the result. The Fire and Police union cooked their own “petard” as the saying goes.

  2. A couple of comments related to the County of San Bernardino: the County did not borrow $37M to help solve its budget problem, it actually prepaid $37M in debt using one-time funds to generate ongoing savings to help bring the budget in line. Second, the County is moving away from cafeteria style benefit plans, which are pensionable in our system and thus cost substantially more.

    These types of actions, combined with cooperation from employee bargaining groups and an elected Board willing to make difficult financial decisions in a timely manner have allowed the County to continue to adopt structurally balanced budgets throughout the economic downturn.

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