Why some US cities go broke

Why are so many cities in such big dollar trouble these days? The obvious answer is that revenues, in a period when inflation and unemployment are particularly high, will no longer stretch far enough to cover the wide array of services citizens have come to expect from their local governments.

But there are other reasons. One of those -- which has come up large in the experiences of Cleveland and New York -- is poor fiscal management.

Some of this due to the shift from pencil-and-ledger accounting to sophisticated computerized systems, says Randy Arndt of the National League of Cities. But many cities simply haven't kept good books, according to city-finance experts. Some have never had an independence audit. Others have been far off the mark in their forecasting.

"New York City got in trouble primarily because they overestimated revenues to the city," says Donald Beatty, executive director of the Chicago-based Municipal Finance Officers Association. "They practically dreamed up revenue. But the accounting system didn't rack it and wasn't sufficient to point out how bad the estimates really were." (New York appears to have surmounted its fiscal woes, and the city budget director is predicting a $243 million surplus at the end of the current fiscal year.)

Banks are less willing these days to overlook such shortcomings in record-keeping. In both Cleveland and New York it was the banks that called a halt to the cities' bids to roll over debts.

"In most instances, at that stage the problem is basically kicked up to the state, which has the responsibility for overseeing all local government," says Mr. Beatty.

Generally, a state control board or oversight agency such as New York's Municipal Assistance Corporation is set up to approve city budgets and act as a monitor while the local government unit tries to get back on its feet.

But Beatty insists that the responsibility for catching the problem in the first place and for doing something about it remains remarkably hazy. Taxpayer suits, for instance, have never been resolved in favor of the filers. "It's been very difficult to place the blame on any one group or to suggest that fraud is involved," he says.

Political leaders, faced with city financial troubles, face tough choices. Sometimes they aren't especially familiar with the details. More often, they are either unable or unwilling to do something until the crisis is clearly on their doorstep, Beatty says. Perhaps they were elected on a no-tax-hike platform. And they may be no keener on attacking the problem from the other end -- by cutting services or programs.

One notable exception, in Beatty's view, is Detroit Mayor Coleman Young's proposal that police and firefighters accept a 7 percent pay cut and that wages of other city workers be trimmed 5 percent to cope with the $120 million deficit confronting the city. A blue-ribbon panel of business and labor leaders predicted that the city would be bankrupt by July unless wages were cut and taxes raised.

"In my estimation, Coleman Young has done better than most mayors in the country in facing the problem for a long time and trying to deal with it," says Beatty. "The idea that you don't have to face the problem is just no longer acceptable, and I think most people realize that."

City financial troubles of the recent past may be only a hint of those to come, according to this expert. Many local governments, he says, have leaned on federal funds to cover deficits. Some have financed as much as 40 percent of their budgets with US aid.

As federal dollars are pulled back from cities, some may experiment with private-sector contracts for services as one way of improving efficiency and productivity. Some now contract for garbage collection and street-repair work. San Francisco contracts out financial management jobs from budget preparation to accounting.

But most cities, Beatty thinks, probably will have to order their priorities as far as services are concerned and shave off some of the softer ones, such as library or park programs.

"There just won't be the resources available to do all the things we're doing now," he says. "Whether we have a society that will stand that [change] remains to be seen. . . . We could see some very serious problems occurring in our cities within six months to a year."

Much may depend on how tough city political leaders, who have traditionally drawn much of their support from labor unions, become with city employees. After two years of operating under federal wage guidelines, most state and local workers are eager for substantial hikes in pay.

"I think public employees are going to bring a lot of pressure just when cities are l east able to afford it," says Beatty.

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