August 21, 2012

6 U.S. Cities That Fell Off the Fiscal Cliff—and Survived

AdvisorOne looks at six municipalities that filed for bankruptcy but climbed their way back to solvency

No superhero saved these cities, but bankruptcy and painful fiscal surgery did. No superhero saved these cities, but bankruptcy and painful fiscal surgery did.

With municipal bankruptcy rocking cities from coast to coast, we wondered how the process works out in the long run for those cities that fall off the financial cliff.

The law allowing cities to reorganize and forgo debts under Chapter 9 of the bankruptcy code was passed by Congress in 1934 when, in the depths of the Great Depression, cities needed help to survive. In the nearly 80 years since the law was approved, about 500 filings have been made. Many have been by sewage districts and other municipal authorities, so the evidence of how Chapter 9 helps, or hurts, a city is small.

Still, some cases offer a glimpse of the future for those, like Central Falls, R.I., and Stockton, Calif., that recently took the fateful step of filing for bankruptcy, which AdvisorOne focused on recently in 6 U.S. Cities on the Edge of a Fiscal Cliff.

Here is AdvisorOne’s look at 6 U.S. Cities That Fell Off the Fiscal Cliff—and Survived:

Former Mare Island Naval Shipyard is seen in the background across from the Vallejo water front in Vallejo, Calif. (Photo: AP)

1. Vallejo, Calif., 2008

This town of 116,000 near San Francisco offers a case study of modern city bankruptcy and its aftermath. The closing of a shipyard in 1996 started Vallejo’s descent to Chapter 9. The housing boom disguised the truth of the town’s true problems. Raises were given out by the City Council. Then it all came crashing down in 2008. As other California cities declared themselves insolvent this summer, a judge allowed Vallejo to emerge from bankruptcy.

But as The Associated Press reported in July, there is a “new normal” in the city that is a far cry from the pre-bankruptcy days. Concessions have been won from the city’s unions, but more will be needed soon as the city still operates in the red. But at least broken traffic lights that have been blinking for years can now be fixed as the city starts to move again.

A member of a gang task force gets ready to patrol the streets in Desert Hot Springs. (Photo: AP)

2. Desert Hot Springs, Calif., 2001

This California town’s saga of financial woe began in 1990 when developers sought to build affordable homes in the town east of Riverside. The City Council balked, and after a court judgment of $3.1 million against Desert Hot Springs the case seemed settled; but the town appealed. The legal bills mounted before the courts finally ruled against the town and it decided to file for bankruptcy. After years of uncertainty, the bankruptcy calmed things down. Municipal bonds were sold in 2004 to resolve the bankruptcy and Desert Hot Springs’ population grew to 25,000 in 2010, more than 50% higher than in 2000.

Cliffs of Laguna in Orange County.

3. Orange County, Calif., 1994

Until the recent bankruptcies of Jefferson County, Ala., and then Stockton, this affluent stronghold in the Los Angeles area was the largest municipality to file for bankruptcy. The $1.6 billion filing came after Treasurer Robert Citron borrowed money to invest in instruments that would only pay off only if interest rates remained low. They spiked, leaving taxpayers holding the bag. A bankruptcy plan that included hefty tax hikes mixed with budget cuts was rejected at the polls. The plan eventually enacted slashed the budget 41% with no tax increases. Although The Los Angeles Times reports that the debts won’t be paid off until at least 2017, the county is now said to be well run.

Old Bridgeport greeting card.

4. Bridgeport, Conn., 1991

This is a tale of the city that declared itself bankrupt only to have its Chapter 9 filing rejected almost immediately. Bridgeport had been struggling for years, cutting police and other essential services before it took the bankruptcy plunge.

Immediately, the state of Connecticut moved to block the petition. A judge ruled that since the city was paying its bills as they came due it was not insolvent and could not declare bankruptcy. Its projected deficit at the time was $17 million on a budget of about $300 million. The filing, albeit short, had a ripple effect, cooling off the muni bond market, making it harder for other cities to borrow.

The following November, a new mayor, Joseph Ganim, was elected. He was credited with reviving the city. In his fifth term, things took a turn for the worse, when he was forced to resign after being convicted on racketeering, extortion and bribery charges.

Rock n' Roll Hall of Fame (left) on the lake. (Photo: AP)

5. Cleveland, 1978

After the wave of municipal bankruptcies in the 1930s, Chapter 9 lay mostly dormant for decades. Then, in 1978, Cleveland defaulted after Mayor Dennis Kucinich (later becoming a U.S. congressman) failed to broker a deal with the city’s banks over paying off $15 million in debt. The banks insisted that Cleveland Municipal Light be sold off. Kucinich balked, saying such a move would cause electric rates to spike.

By 1984, The New York Times reported that the debt was paid off and the city had resumed borrowing under a new mayor. It even had attracted the new headquarters for Standard Oil. While things were better for a time—even the sad-sack Indians made it to the World Series—the city is again facing fiscal problems.

Statue of Liberty

6. New York City, 1975

“Ford to City: Drop Dead.” President Gerald Ford never uttered those words, but the New York Daily News’ headline captured public sentiment when the city was rebuffed in its bid for federal loans to avoid default. Instead, the Big Apple under Mayor Abe Beame was forced to get its fiscal house in order with severe budget cuts and tax increases. Congress was finally persuaded to OK loans (recent accounts say Ford was buying time to bring the lawmakers along) and the City that Never Sleeps, after several horrible years, righted its ship and has found its economy sailing along for decades.

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