Are we headed toward a rash of local bankruptcies?

As the federal budget battle rages, some local governments are having their own fiscal problems

By , Guest blogger

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    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.
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As a brief respite from our discussions of all the various flat tax plans being proposed (or recycled) – below is a post I did for Metrotrends yesterday on budget antics at the subnational level.

Last month I blogged 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’m honor bound to report that some cities (and states) aren’t above the political fray.

Exhibit 1 – Harrisburg. The capital of Pennsylvania has been having money troubles for the last few years, and has been on the short list of places most likely to go broke. Earlier this month the shoe dropped, and the city declared bankruptcy. Or at least the city council did – 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’s 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.

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The problems in Harrisburg largely stem from an investment project gone wrong – 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 – Scranton. While much less extreme an example than Harrisburg, Scranton’s 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’s budget. Either plan would generate the $6.5 million to plug this year’s deficit. The only problem with this strategy is that next year’s budget deficit is probably going to be even bigger and then what? This strategy either sells off an asset or commits a decade’s worth of revenue to pay for this year’s problem.

So does this mean we are on the brink of a spate of local bankruptcies? No, although the National League of Cities 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 “new normal” 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)—just 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.

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