Strapped for Cash, Local Governments Sputter

As fallout from the housing market collapse and financial crisis continues to spread across the country, America's city and county governments struggle to make ends meet.

Increasingly, some local governments simply cannot.

A quick and ugly snapshot:

The city of Vallejo, Calif., outside San Francisco, filed for Chapter 9 bankruptcy in 2008, even before the worst of the economic crisis began. A reorganization plan is still winding its way through a federal court with no end in sight.

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Jefferson County, Ala., weighed down by $3.2 billion in sewer debt, has been struggling to avoid bankruptcy. Soon, some in the state fear, it may have no choice.

In Harrisburg, Pa., city officials worked with an outside consultant to create an emergency financial plan to stave off a crisis and figure out a way to meet $300 million in debt tied to a botched incinerator project. Harrisburg Mayor Linda Thompson has insisted bankruptcy is the last option, but has also said that all options were on the table, a spokeswoman for the city said.

Borrowing more money, which is how Harrisburg and other municipalities fell into the red in the first place, is often no longer an option. State-level funding is drying up. Property taxes, among the largest sources of revenue for local governments, are heading down along with property values as lagging assessment cycles catch up with realities in the market.

'Tipping Point'

While there hasn't been an actual spike in municipal bankruptcies in recent months relative to historical norms, the outlook is bleak.

"We're now at a tipping point," said Jim Spiotto, an attorney with Chicago-based Chapman and Cutler, which specializes in distressed municipal finance.

His firm has tracked 206 municipal bankruptcies since 1980, including cities, counties and various other debt issuing entities such as school districts, hospital and sewer authorities. The peak year for filings was in 1987 when there were 18; last year, there were nine, including the City of Prichard, Ala., and the Village of Washington Park, Ill.

Terrible Trifecta

"What happens from here depends on how local governments choose to respond," Spiotto said. "They have to work through these problems, and there is every reason to believe that they can."

The triple whammy of falling tax revenues and high unemployment as well as massively unfunded state and local pension liabilities (by one count as high as $1 trillion) is crushing local governments in ways not felt since the Carter administration.

There is reason, though, for some optimism amidst the gloom. Major municipalities, such as New York City in the mid-1970s and Philadelphia in the early 1990s, have pulled back from the brink of insolvency using a mix of new taxes, layoffs and other spending cuts.

Working through tough economic times -- belt tightening -- is leading to tough choices as well as some controversial measures and proposals. Imposing annual fees for access to 911 emergency services has stirred debate in Tracy, Calif. In Utah, meanwhile, a legislative proposal to save money by eliminating some students' senior year of high school drew fire and was eventually taken off the table for another year. Recently passed measures to increase income taxes in Oregon continue to divide that state.

Civil Servants on Firing Line

Still, something has to give. Often, it is civil servants and their unions.

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