American Cities Teeter on Brink of Bankruptcy

June 28, 2010— -- Come Thursday, the small, working-class enclave of Maywood, south of downtown Los Angeles, will lay off all its employees, eliminate its police force and contract a neighboring city to run municipal operations.

More than 100 city workers -- the people who keep Maywood's streets paved and parks clean, school crossing guards and police veterans -- will get pink slips. The action is without precedent in the state of California. The police department, which had enjoyed a love-hate relationship with the mostly immigrant city of about 50,000, will account for 70 of those jobs, including 47 sworn officers.

"We've become the extreme example in that the city is now contracting all of its municipal services, absolutely everything, to another city that will now generate revenues off that," Maywood Police Chief Frank Hauptmann told ABCNews.com. "Some ask the question, 'Why even have a city anymore?'"

From California to Pennsylvania, cities and towns are being pushed to the brink by the lingering economic downturn and mounting debt. The obligations of state and local governments have doubled to $2.4 trillion in the past decade, according to a recent report by the Federal Reserve.

Municipal governments will probably come up $56 billion to $83 billion short between now and 2012, said the Washington D.C.-based National League of Cities. The shortfalls will likely result in more layoffs, service cuts and canceled projects and contracts.

Addled by unmanageable debt, municipalities have turned to draconian service cuts and large tax increases. Experts believe some may default on loans because states are too strapped for bailouts; others face bankruptcy filings.

"It may be a real possibility for a few places and we may actually see a few cases of municipal bankruptcy that we haven't seen in previous years," Chris Hoene, director of research for the National League of Cities, which represents the nation's 19,000 municipalities, told ABCNews.com. "But it will still be a rarity."

Since 1937, when federal law first allowed municipal bankruptcy, there have been about 600 bankruptcies involving municipal agencies and entities such as housing developments. Local governments face bleaker revenue prospects as the long recession affects tax receipts and pension-funding deficits mount.