July 22, 2013 at 1:00 am
Bankrupt cities offer lessons to Detroit
Many spent millions in legal bills, sold assets, cut workers
A judge accepted the California city of Stockton's bankruptcy application on April 1, making it the most populous city in the nation to enter bankruptcy. At right, Spencer Gorman makes his way up to the second floor to see items at Harrisburg's Wild West auction preview, in Harrisburg, Pa. Approximately 8,000 items are up for sale as part of bankruptcy action. (Associated Press)
The nearly three dozen cities, counties and
special government agencies that have preceded Detroit in filing for
bankruptcy nationwide since 2010 provide a road map for the Motor City.
Like
Detroit, the largest city to file Chapter 9 bankruptcy in history, the
others have taken a variety of actions to win approval of restructuring
plans. They sold city assets, reduced employees, cut budgets and raised
taxes. They negotiated with creditors for months or years to cut and
refinance debt. They spent millions on legal bills — some stalling for
time, others seeking a speedy court resolution.
Since
2010, 36 cities, counties and special districts — such as utility
authorities — filed for bankruptcy, including Detroit, five other cities
and two counties.
The pace of municipal
bankruptcies has increased in recent years. Between 1970 and 2009, there
were 54 municipal bankruptcies, including just four cities and
counties. But National League of Cities executive director Clarence
Anthony says cities “nationally are better off financially than they
were just several years ago. Detroit should not be seen as emblematic of
cities or as a harbinger of what’s to come.”
Many cities are trying to solve their financial problems outside of bankruptcy, Anthony noted.
“The
vast majority of cities continue to make the difficult, yet prudent
financial decisions that keep their cities in sound financial shape and
in good standing,” he said. “Outside of bankruptcy, they renegotiate
contracts, draw on rainy-day funds, form public-private partnerships and
reduce health care and pension benefits.”
Harrisburg,
the capital of Pennsylvania, filed for bankruptcy in October 2011, even
though a state law barred it. After a judge dismissed the case, the
state appointed a receiver to try to restructure more than $300 million
in debt tied to an incinerator project.
In
Detroit, state law allows for bankruptcy, but the city will have to
battle its way into court, defending itself from allegations that it did
not bargain in good faith with its employees. It also has to prove it
is insolvent, a definition that may be up for debate. A bankruptcy judge
in California ruled in June a city doesn’t have to be out of cash to be
declared insolvent.
In recent days,
Harrisburg has been auctioning off 8,000 items purchased by a former
mayor for a planned Wild West museum that never opened. The auction has
raised more than $2 million.
Detroit, too,
will have to sell off some assets, said Doug Bernstein, a bankruptcy
expert at the Bloomfield Hills law firmPlunkett Cooney. Detroiters,
Bernstein said, already are “heavily taxed for lousy services. Where do
you think that golden goose in revenues is going to come from? You have
to be realistic. You are going to have to have some compromises: We are
selling things.”
Not always speedy process
Detroit Emergency Manager Kevyn Orr wants to
quickly get past the question of whether the city is eligible for
bankruptcy. He’s proposed a speedy timetable, giving creditors until
Aug. 19 to file objections. He wants U.S. Bankruptcy Judge Steven Rhodes
to hold a hearing on the proposal some time after Nov. 4.
But
it’s not always that simple. San Bernardino, Calif., (population
200,000) filed for bankruptcy on Aug. 1. For nearly a year, it has
fought to get past the first basic hurdle: that it is eligible to even
be in bankruptcy. The California Public Employees Retirement System has
objected and is fighting for documents, saying the city is operating as a
“black box” and not disclosing financial information.
While
San Bernardino waits for the green light to move ahead with bankruptcy,
more than 25 percent of its estimated 1,200 municipal employees have
left, and it has cut city services.
Crime is up, the city says, and crime-fighters are down — to 260 police officers in January, from 356 in 2009.
“The
most significant impact will be on our ability to respond to
lower-level crimes,” Police Chief Robert Handy wrote in a memo.
Detroit’s
police force has already been cut by 40 percent over the last decade
and average response time to police calls is 58 minutes, while the
national average response time is 11 minutes.
Detroit at property tax max
After cutting $90 million over three years and
facing a $26 million debt, the city of Stockton, Calif., filed for
bankruptcy in June 2012.
In the run-up,
Stockton, which prior to Detroitwas the largest U.S. city to file for
court protection, faced 22 percent unemployment and a 50 percent drop in
property values. The city cut its workforce by 25 percent, including 20
percent of police and 30 percent of firefighters.
In
June, Stockton officials proposed raising the sales tax from 8.25
percent to 9 percent to pay for more police and raise money to exit
bankruptcy. The City Council unanimously approved the plan July 9 and
voters will decide whether to approve it in November.
Central
Falls, R.I., restructured in bankruptcy, exiting in 2012 in a plan that
mostly hurt retired employees and fully repaid bondholders. The city of
nearly 20,000cut its workforce by about a third, cut pensions by as
much as half, closed a community center and imposed annual 4 percent
property tax hikes over five years. The state passed a law giving
bondholders preference in a bid to ensure the state’s credit rating
didn’t decline.
In Detroit, though, the
city already has made dramatic cuts in services, and cannot raise
property taxes because it’s at the maximum allowable rate. And many
taxpayers are delinquent or unable to pay.
Orr’s
bankruptcy strategy proposes paying most of the money owed to secured
creditors while pension funds, unions and unsecured bondholders would
receive, in some cases, as little as 10 cents on the dollar. Instead of
paying creditors in full, Orr’s plan is to plow millions over the next
decade into improving city services.
'It's like credit card debt'
Jefferson County, Ala., filed for bankruptcy
in November 2011, citing more than $4 billion in debt, largely from a
troubled sewer project. Nearly two years later, the county is nearing an
exit from bankruptcy.
The county has sold
assets, continued layoffs and closed a money-losing county hospital. And
under a deal announced in June, the county will spend the next 40 years
repaying much of the debt it owes — though creditors agreed to forgive a
significant chunk.
Jefferson County, which
has 660,000 residents including Birmingham, spent several years trying
to avoid bankruptcy, making rounds of painful budget cuts, furloughs
and layoffs.
In February, the county voted
to sell a nursing home it owned to raise $11 million and plans to hike
sewer rates by 7.4 percent annually over four years.
Jefferson
County will sell $1.9 billion in new debt, called capital appreciation
bonds, that ultimately will require it to pay $6.9 billion over four
decades of financing. The bonds are criticized by many officials as too
expensive and the Michigan legislature in 1994 banned the use of the
bonds for new school construction, citing the high overall costs.
Detroit
could still opt to use them, but it’s not clear how much the city could
afford to repay over the coming decades. “It’s like credit card debt.
The purpose of a bankruptcy is to get a fresh start,” Bernstein said.
Despite the financial workout, Jefferson County may not be in the clear.
Robert
Brooks, a finance professor at the University of Alabama, said he’s not
convinced that post-bankruptcy Jefferson County will be able to meet
the debt repayment schedule.
“The idea is
that optimistically we are going to grow into our ability to pay this
back. We could be back in bankruptcy in four to five years,” Brooks
said. “When Detroit was going through this, I’m sure someone was telling
them how easy it would be to repay these obligations ... The real issue
is people leading Detroit have to make hard decisions, not political
ones.”
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From The Detroit News: http://www.detroitnews.com/article/20130722/METRO01/307220038#ixzz2ZkcuU4ao
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