Lessons for Detroit: Municipalities that also declared bankruptcy

Jul 19, 2013

What will bankruptcy mean for Detroit?

There are certainly a lot of unknowns as the city navigates through the largest municipal bankruptcy filing in U.S. history, but we can look to other municipalities that have gone through this process.

Here’s a brief outline of two other major municipal bankruptcy cases in the U.S.:

1) Jefferson County, Alabama

 

Credit ralph and jenny / Flickr

Population: 658,931

Filed for Bankruptcy: 2011

Debt: more than $4 billion

Before Detroit filed papers yesterday, the Jefferson County, Alabama municipal bankruptcy was the largest in U.S. history.

Birmingham, AL is the county seat. The county had more than $4 billion in debt by the time the word “bankruptcy” reached the ears of creditors.

Mismanagement of a court-ordered sewer system was a big contributor to the county’s financial woes.

In 1996, the county agreed to revamp their sewers to comply with the Clean Water Act.

In 2003, a study came out from engineering firm BE&K, revealing the construction project exhibited signs of severe issues in management and poor decisions from local officials.

The $3.3 billion dollar project drastically increased the city’s debt, and in 2011, the county filed for bankruptcy.

Earlier this month, NPR reported the county submitted a 101-page plan to get out of debt that would “force creditors to lose up to 70 cents on the dollar.”

The plan, unveiled over the weekend, would enable the county to get out of bankruptcy by Dec. 20. But it will pay a stiff price — residents will see big increases in their sewage bills. The county has already had to lay off hundreds of workers and cut services sharply. By defaulting on its debts, Jefferson County is also likely to have a lot of trouble borrowing again for years.

Bloomberg’s Margaret Newkirk explained how the county’s residents were impacted:

Its hospital for the indigent ended cancer and pregnancy care. Its website disappeared for two days in April after one of the employees who maintained it left...Stores temporarily stopped accepting county charge cards after its credit limit was cut without warning...The county didn’t have enough staff to open envelopes containing residents’ property-tax payments. It had to get help from the state. The wait for license plates at the courthouse in Birmingham increased after the county closed three other offices.

The county was in bankruptcy court for more than 18 months before their exit plan was filed on July 1. The plan includes big increases for water and sewer rates for residents of Alabama’s most populous county.

 

2) City of Stockton, California

 

Downtown Stockton
Downtown Stockton
Credit Wikipedia

Population: 292,000

Filed for bankruptcy: 2012

Debt: $700 million in debt facing city, city’s running deficit is $26 million

Stockton, California was the largest city to declare bankruptcy until yesterday.

Stockton fell into economic despair for several reasons, the main being the boom and bust of the housing market, huge pensions, and ill-conceived downtown revitalization projects.

According to Tracie Cone from the Huffington Post:

Stockton has tried to restructure some debt by slashing employment, renegotiating labor contracts, and cutting health benefits for workers. Library and recreation funding have been halved, and the scaled-down Police Department only responds to emergencies in progress. The city crime rate is among the highest in the nation.

On April 1st, a federal judge ruled that Stockton was eligible for Chapter 9 bankruptcy.

Now, the biggest fight is between the city and its creditors.

Like Detroit, Stockton has asked lenders and bondholders to receive less than full repayment on loans to the city. While under bankruptcy, the city has greater protection from paying back the creditors in full.

One of the more recent proposals, according to Rich Ibarra at Capital Public Radio in Sacramento, is to increase the city’s sales tax to 9%.

How the people in the city were impacted:

Bridge Magazine's Ron French recently toured the bankrupt city and wrote this:

Life in a bankrupt city isn’t easily summarized on a postcard. The water still runs in showers. The trash is still picked up. Residents already on the bottom rung have nowhere to drop. Yet there’s a sense of surrender here, too, a whiff of weariness from a brutal, humiliating process that has yet to improve their community, or their lives.

“Stockton sucked before,” a toothless convenience store clerk says with a shrug. “It still sucks.”

  • Public Services: Many public services have undergone drastic cuts including the fire department and police department. Library and park services have been cut.

  • Crime: In 2012, Stockton was ranked as the 10th most dangerous city in America based on violent crime and murder rates. According to French: “Recreation and library funding has been cut in half, and gangs are filling the void. Drug dealers are moving into the park...”

  • What happens to the pensioners?: There are a lot of debate surrounding the pensions Stockton owes (which is $900 million to CalPERS). Tracie Cone from the Huffington Post reports: "The potential constitutional question in the Stockton case is whether federal bankruptcy law trumps a California law that says money owed to the state pension fund must be paid."

Meanwhile in Vallejo, California...

Vallejo emerged from bankruptcy in 2012 after four years in bankruptcy courts.

French reports that even after emerging from bankruptcy, Vallejo is still sinking in debt while residents beg for city services to be restored. Like Detroit and Stockton, crime in the city is high.

“Bankruptcy is the absolute last thing you want to do,” says Vallejo community activist Garman. “It is a bare-knuckled brawl. It’s demoralizing and brutal.”

City Manager Dan Keen has a suggestion for Detroit:

“My advice for city considering this jump is get everything you can during bankruptcy,” Keen says, “because when you come back out of bankruptcy, it’s going to get even harder.”

-Melanie Kruvelis and Julia Field, Michigan Radio Newsroom