Are we headed toward a rash of local bankruptcies?
As the federal budget battle rages, some local governments are having their own fiscal problems
City of Harrisburg Mayor Linda Thompson speaks about her city's bankruptcy filing at a news conference at Harrisburg City Hall in Harrisburg, Pennsylvania. Pennsylvania's capital, Harrisburg, filed for bankruptcy in a desperate bid to resolve its debt crisis, setting up a showdown with the state over control of the city.
Daniel Shanken/Reuters/File
As a brief respite from our discussions of all the various flat tax plans being proposed (or recycled) 鈥� below is a post I did for yesterday on budget antics at the subnational level.
Last month I about how the federal and state governments could learn from cities, which seemed to be making the tough choices and balancing their budgets without politicizing every move. This month, alas, I鈥檓 honor bound to report that some cities (and states) aren鈥檛 above the political fray.
Exhibit 1 鈥� Harrisburg. The capital of Pennsylvania has been having money troubles for the . Earlier this month the shoe dropped, and the . Or at least the city council did 鈥� the mayor is against it and so is the state. This has led to a series of announcements from different parties on whether or not Harrisburg is in bankruptcy, who gets to declare bankruptcy, and whether the city council can choose bankruptcy court over accepting a state takeover plan. The council members thought the state takeover would leave the city in worse shape, paying off bondholders while destroying the city鈥檚 ability to meet service needs. It also included veiled threats about state officials needing to learn how to put out literal instead of figurative fires, if the sale of assets to pay debtholders led to a lack of firefighters.
The problems in Harrisburg largely stem from an investment project gone wrong 鈥� an incinerator upgrade that was supposed to generate revenues through generating power that never materialized. With the current antipathy for Wall Street the council members think they are better off in bankruptcy court which could lead to bondholders taking a loss and possibly lower the cost to taxpayers.
Exhibit 2 鈥� . While much less extreme an example than Harrisburg, Scranton鈥檚 city council and mayor came up with competing proposals to solve its budget deficit that involve either selling the parking meters (to the parking authority) or borrowing against meter revenue to get a one-time payment to balance this year鈥檚 budget. Either plan would generate the $6.5 million to plug this year鈥檚 deficit. The only problem with this strategy is that next year鈥檚 budget deficit is probably going to be even bigger and then what? This strategy either sells off an asset or commits a decade鈥檚 worth of revenue to pay for this year鈥檚 problem.
So does this mean we are on the brink of a ? No, although the reports cities ending fiscal year 2010 with the largest year-to-year reductions in general fund revenues. However, most cities balanced their budgets by making even larger cuts in spending. And in what might reflect city officials recognizing a 鈥渘ew normal鈥� in city budgeting, a smaller share of them report that they are less able to meet financial needs, even though revenues are down for the fourth year in a row (in real terms)鈥攋ust 57 percent of cities this year, down from almost 90 percent two years ago. Revenues are going to be tight but in most places, officials are making hard decisions and cutting real programs as well.
Yes, politicians in Harrisburg may be throwing metaphorical cream pies at each other, but most other cities are cutting the mustard.