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.

"There are a few places that are in dire enough straits that (bankruptcy is) a legitimate consideration on the table," Hoene told ABCNews.com.

The pain spreads across the nation: • Harrisburg, Pennsylvania's capital, owes $68 million in bond interest payments this year, a sum larger than its annual budget. The $68 million is part of $288 million in outstanding debt from an incinerator project. The Harrisburg Authority, the state body that issued the bonds for construction of the municipal trash incinerator, has been unable to make payments. The county, which picked up the bill last year, is now suing for the funds. In addition to the incinerator debt, Harrisburg must deal with a $9 million deficit in the current budget. The city is considering layoffs in its 537-member workforce. It has assigned AARP volunteers to man police stations in order to have all officers on the streets. Mayor Linda Thompson has said the city won't declare bankruptcy. The city is sifting through assets to see whether anything can be sold, including western artifacts purchased by former Mayor Stephen Reed for nearly $8 million. Bought with public funds, the wagon wheels, rifles and other memorabilia were destined for a Wild West Museum that never opened. "It's unclear whether all of the items are authentic," city spokesman Jim Penna told ABCNews.com.

• Jefferson County, Alabama's most populous county, is saddled with about $5 billion in debt stemming from the overhaul of its sewer system in the mid-1990s. Merit increases for county workers were frozen; building and road repairs halted. A brand new jail sits vacant because there are no funds to hire workers or pay utilities. Officials have said bankruptcy is a possibility.

• The impoverished city of Central Falls, Rhode Island, near Providence, last month agreed for a receiver to take control of its finances and consider the rewriting of contracts and cutting of pension benefits. A city of 19,000, Central Falls has a budget of about $18 million and projects a $3 million deficit this year and a $5 million gap in fiscal 2011. The city also has $4 million in a pension fund that has $35 million in unfunded liabilities.

• Detroit, Michigan, is one of seven American cities assigned junk bond status by the nation's leading debt-rating agencies. The city made up for a 2010 budget deficit of $280 million by issuing $250 million of 20-year municipal notes. Earlier this month, Detroit revealed plans to close 77 public parks in a cost-cutting move by Mayor Dave Bing. Roughly 1,400 acres of parkland will be closed on Thursday. Bing has won concessions from more than half of the public-sector unions but the city council has pushed for deeper cuts. Detroit has closed dozens of schools in recent years and cut other city services, such as busing, as it grapples with population declines. When Bing took over in May 2009, the city had about 13,000 employees and a deficit of more than $300 million. He has let go more than 2,000 people since then and forced roughly 1,500 nonunion workers to take pay cuts. The city also instituted furloughs for employees.

In Maywood, the city is eliminating all positions except the city manager, city attorney and a handful of elected officials. All services would be contracted out. Maywood's $10.1 million general fund budget has a deficit of about $450,000. Compounding the problem, the city can't obtain insurance because of a long history of lawsuits, mostly against the police department.

Left without insurance as of July 1, the Maywood city council decided two weeks ago to lay off nearly all of its employees, disband its police force and pay neighboring Bell to run the city. It's estimated the city will save $164,375 a year. The Los Angeles Sheriff's Department will replace Maywood's police.

"This occurred with less than 30 days notice and getting even an emergency plan contract in place with the Sheriff's Department left us with less than 10 days to disband a police department that had been in service for 86 years," Hauptmann said.

Tucked into the heavily industrial southeast part of Los Angeles County, Maywood is predominantly Latino and densely packed into just 1.2 square miles. Officials estimate about half of the city's residents are illegal immigrants. Critics have blamed the city's woes on what they call the ineptitude of local governments. In May, the California Joint Powers Insurance Authority, a government agency made up of more than 120 cities to share costs, advised Maywood officials to end years of "passive administration."

Hauptmann, the police chief, said that at midnight on July 1, his officers will return to police headquarters and hand over Maywood to the Los Angeles County Sheriff's Department. All 911 lines will be transferred to the neighboring jurisdiction.

"You lose your workers comp and general liability insurance and then no one else wants to commercially insure the city because of past decisions that were made that put them in this position," he said. "You can actually lose a police and fire department over something like this. It's probably going to set an example to other communities across the country."