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Bail Outs, Fiscal Crisis -- How Strong Are Our Cities?
Submitted by Kevin Cronin on Mon, 12/29/2008 - 17:08.
While on the subject of cities, some analysts look to the nation's economic woes, it's impact on tax receipts for cities and foresee municipal bankruptcies growing at alarming rates. Cities may need to look to municipal bankruptcy, chapter 9 of the bankruptcy code, to protect themselves and taxpayers. We haven't seen this since the Orange County bankruptcy in 1994, which lost over $1.5 billion.
As an example, Jefferson County in Alabama,seeking to restructure $3.2 billion in sewer debt, has considered bankruptcy in what would be the largest U.S. municipal bankruptcy in history. Vallejo, California (population of 120,000, about 35 miles northeast of San Francisco) has already filed bankruptcy, citing problems with pension and salary commitments. where public-safety salaries and benefits made up about 75% of the city's general fund budget. With the downturn in the housing market reducing tax revenues, Vallejo asked the bankruptcy judge to void the collective-bargaining agreements that led to those salary and benefit arrangements.
Federal municipal bankruptcy laws were first introduced in 1934 during the depths of the Great Depression as municipalities across the country struggled to provide necessary services while facing a dramatic drop in tax revenues. Federal law permits municipalities to seek protection from their creditors by filing for bankruptcy under chapter 9, but only if the state specifically authorizes its municipalities to file. States cannot themselves file. The state may attach various requirements subject to granting authorization such as approval by a state body prior to filing, state appointment of a trustee, and state control over the municipal debt readjustment plan.
Municipal bankruptcy is a big steps, far more significant than just restructuring, like a commercial bankruptcy. Bankruptcy has a big impact on the ability to borrow funds that might be needed to build infrastructure or other public improvement projects.
The federal bailout discussions have also raised the fiscal strength of our cities. Are any Ohio cities at serious risk? Are counties strong enough to bail out cities? Is there a regionalism debate on the agenda in Ohio?