Cash-Strapped Cities File For Bankruptcy

Guests

Michael Corkery, staff reporter, Wall Street Journal
Marc Levinson, lead bankruptcy counsel for Vallejo, Calif.
Phil Batchelor, interim city manger, Vallejo, Calif.

Pennsylvania's capital, Harrisburg, has filed for Chapter 9 municipal bankruptcy. The filing is being contested in court. It's the sixth city to file for protection in 2011, and raises questions about whether Harrisburg can afford to continue to provide the expected level of services to residents.

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NEAL CONAN, host: This is TALK OF THE NATION. I'm Neal Conan, in Washington. We all know about the debt problems of the federal government. Many states are squeezed, as well. Now more and more cities are in trouble. Harrisburg, the capital of Pennsylvania, petitioned for bankruptcy last week. That filing is being contested in court right now, and it may be weeks before we know how this all shakes out.

But Harrisburg is the sixth city to file for protection under Chapter 9 this year, and, depending on how things play out, we may see the largest municipal bankruptcy in U.S. history later this week in Jefferson County, Alabama, which includes the city of Birmingham.

And when city budgets suffer, sometimes essential services can fall through the cracks: Bridges and roads don't get repaired, budgets for firefighters and police get slashed, teachers laid off, and in a new development, bondholders can get paid off before pension checks go out.

How's this playing out where you live? 800-989-8255. Email: talk@npr.org. You can also join the conversation on our website. That's at npr.org. Click on TALK OF THE NATION.

Later in the program, an evangelical professor on the anti-intellectualism of many fundamentalists. But first, Michael Corkery joins us from Harrisburg. He covers municipal finance for the Wall Street Journal. Nice to have you with us today.

MICHAEL CORKERY: Hi. How are you?

CONAN: And I know you're working on a story about what a city in bankruptcy looks like. What are you hearing today?

CORKERY: That's right. So it's another interesting day in Harrisburg. The governor has just - the governor of Pennsylvania has just signed legislation that would effectively result in the state takeover of the finances of Harrisburg, which is Pennsylvania's capital. And this comes after last week's bankruptcy filing by the Harrisburg City Council becoming, you know, one of the latest cities to declare bankruptcy this year.

CONAN: And what would bankruptcy mean?

CORKERY: Well, it's - one, it's unclear, in part because it's contested. The city council has filed bankruptcy, but the mayor opposes it. The state also opposes it, and they're trying to get it thrown out of bankruptcy court. But it will be weeks before we see a resolution on that question.

In the meantime, you know, police are being paid, teachers are being paid, bondholders are being paid. So it looks like a normal, functioning city. But, you know, sort of symbolically and the reputation of the city has certainly been tainted, you know, particularly because it's Pennsylvania's capital, and it's declared bankruptcy.

CONAN: And a lot of the cities are in - that are in trouble are in trouble because of some great, big project that they started that they hoped would help things along. And in Harrisburg's case, it was a generator, a trash-burning generator for electricity.

CORKERY: Right. That's right. Harrisburg had an incinerator that it had hoped would be self-sustaining and would generate enough revenue that it would actually make the city money. But, of course, after some problems with the construction and after they borrowed $300 million to try to fix it, many, many refinancings, they found themselves way overloaded in debt. And it's something they just cannot pay, which is what brought them to this moment.

And essentially the city's insolvent, and it needs help.

CONAN: The irony is that trash-burning plant is now actually making money - not enough to pay off the debts, but it is actually making money. In Alabama, the problem is a big sewer system, and that's the city of Birmingham. That's rather a larger place, too.

CORKERY: That's right, same - very similar situation. Birmingham had a sewer system. They did a big upgrade, you know, in the beginning of the last decade, borrowed way too much money, took on all sorts of complex swaps and derivatives that ended up going south on the county. And again, they, you know, took on too much debt.

You know, it's definitely a theme with these two cities and in others, where, you know, cities essentially try to get ahead of themselves. You know, they try to take on complex businesses or enterprises that they're just not equipped to do. They mix on, you know, in the case of Jefferson County, some very complicated financing schemes brought to them by Wall Street bankers, and you have a financial disaster.

CONAN: And maybe $3 billion in bankruptcy later this week - again, there's a vote later this week. Boy, it's complicated. But that would be the biggest in American history. It is interesting: Obviously, in better times, a lot of these problems can be papered over if you're still getting a lot of tax revenue.

CORKERY: That's right. So these problems are hitting where cities are facing the problems that states and the federal government are facing. You know, revenue is down. You know, the housing market, I mean, you know, cities get their taxes from, you know, property taxes. Property values are way down.

So they're kind of out of solutions. They're also - you know, cities and counties are getting hit. They're getting squeezed the most. You know, the cuts are starting at the federal government, pushed down to the states. The states are then pushing cuts in aid down to the local level. And it's the local level where the biggest squeezes are feeling. So that's - in the municipal world, that's where the biggest - weakest links are.

CONAN: And we see situations - I think it was Topeka, Kansas, voted a couple of weeks ago to decriminalize domestic violence and misdemeanors because of budget cuts. They didn't have the money to enforce these laws.

CORKERY: Right. It's - they're going down to bare bones. I mean, they're cutting as much as they can. But, you know, in this case, it's - in Harrisburg's case, it's debt. They just can't find the money to pay for it.

In many, many other places, it's things like pensions, where, you know, these are liabilities and promises that were made years ago that are getting bigger and bigger. And again, they're just - there just isn't the will to raise taxes or even the ability to raise taxes in this economy to pay for these things, which in another bankruptcy case in Rhode Island, it's the pensions that actually, you know, prompted the city to file for bankruptcy in the summer, hopefully trying to renegotiate some of those contracts with the retired city workers.

CONAN: And an interesting law in the state of Rhode Island, they passed a law saying if there's a shortfall of income, the bondholders get paid off before the pensioners do.

CORKERY: That's right. It's actually - it's a very groundbreaking law. It still has to hold up to legal scrutiny and a court test. But if it does, that could essentially be copied by other cities, because what it does is it takes away the biggest risk of bankruptcy, which is that, you know, that bond investors will no longer invest in a city's bonds because they're afraid, you know, you'll go into bankruptcy or default.

This would essentially insulate them and allow a city to go into bankruptcy, sort of a strategic bankruptcy like we saw in the case of GM and Chrysler, deal with what they need to deal with - in many cases pensions - and at the same time still have access to the capital markets. I mean, it's sort of the best of all possible worlds if you're a struggling municipality. But again, there's some real legal issues.

That law in Rhode Island was passed right before the city of Central Falls went into bankruptcy. I think the unions that represent the public workers there I think have a pretty strong case that, you know, this is potentially unfair. It's, you know, upholding one creditor over another.

CONAN: So we'll have to see how that shakes out, as well. We've been talking a few individual cases, but Harrisburg is not alone in Pennsylvania, the situation in Alabama not unique. There are many places in California, other cities and municipalities around the country, that are - well, they're not in bankruptcy, but they're approaching the edge of it.

CORKERY: That's right. I mean, bankruptcy, for decades, was something you'd never consider as a city. I mean, it was so taboo, the idea, the taint that it would bring, you know, to your city not only just in the bond market, but just generally, the reputation that it would - the harm that it would do to your reputation made it quite prohibitive.

But we're seeing it. More and more cities, whether they're in it or considering it, it seems to be a viable option. And that represents a big change, I think. And I think there's a couple reasons for that. One is what we talked about, the problems are intractable, and there's just no way out. But I think two, I think there's just a shift in the mentality about default and bankruptcy, generally.

I mean, we, you know, just went through a mortgage crisis where people did the unthinkable: They walked away from houses and mortgages and they defaulted. And I think, you know, the big B word is not such a taboo anymore, and you're seeing that on the municipal side, as well.

CONAN: Michael Corkery, thanks very much for your time today. We look forward to your story tomorrow in the paper.

CORKERY: Okay, thank you.

CONAN: Michael Corkery covers municipal financial issues for the Wall Street Journal, joined us today from Harrisburg, Pennsylvania, which as he explained, is undergoing some difficulties.

Vallejo, California, filed for bankruptcy in May, 2008, as the housing boom collapsed and the city could no longer afford to pay its workers. A judge recently approved the city's Chapter 9 plan. In a couple of weeks, Vallejo should be out of bankruptcy. Marc Levinson is a bankruptcy lawyer in Sacramento and the lead counsel for the city of Vallejo in its Chapter 9 case, and joins us now from a studio in Sacramento. Nice to have you with us today.

MARC LEVINSON: Good afternoon, Neal.

CONAN: And as we just heard, bankruptcy seems to be - obviously, it's a last resort, but Vallejo is very close to being out of bankruptcy, the city still, though, struggling. What's the lesson learned after you go into bankruptcy?

LEVINSON: Well, you have to understand that Vallejo did not file a bankruptcy case as a strategy. It filed for bankruptcy relief because it ran out of money. It simply couldn't pay its bills. And its choice was to default on obligations and get sued and ultimately have to pay the money, or violate California law by borrowing from restricted funds to pay its general obligation debts, or file bankruptcy.

So it filed bankruptcy because it had no choice. Bankruptcy is always a bad choice, whether it's Chapter 11 or Chapter 9. But it becomes a very good choice when it's the only choice.

CONAN: And that is, more and more, the situation of places like Harrisburg and other places?

LEVINSON: Well, I can't speak to Harrisburg and Jefferson County other than what I read in the media or hear in the media. But what I can tell you is that Vallejo filed in May of '08, and there hasn't been a systemic failure of a California city since then.

And why is that? Because Vallejo has helped set some of the ground rules for what can and cannot happen in a Chapter 9 case. And cities and their creditors have been able to work out arrangements to avoid bankruptcy since. And that's the way it ought to work.

That's the way it works in Chapter 11, where you kind of know the ground rules, and you do your best, whether you're the debtor or the creditor, to avoid bankruptcy and the cost and the uncertainty and all the other parade of horribles that Michael talked about.

CONAN: We're talking about cash-strapped cities and what happens after a city or county files for bankruptcy and what pushes it to the edge. How's this playing out where you live? Give us a call: 800-989-8255. Email us: talk@npr.org. Stay with us. I'm Neal Conan. It's the TALK OF THE NATION, from NPR News.

(SOUNDBITE OF MUSIC)

CONAN: This is TALK OF THE NATION, from NPR News. I'm Neal Conan. After the housing bust, a number of states struggle to pay their bills. The steep drop in property values meant less revenue from property taxes.

It's a problem now playing out in many cities around the country, including a number that filed for bankruptcy protection. The drop in revenue raises a number of questions about whether cities and counties can continue to offer the services that residents expect. Bridges and roads don't get repaired, budgets for firefighters and police get slashed, teachers laid off, and in a new development, sometimes bondholders can get paid off before the pension checks go out.

How's this playing out where you live? 800-989-8255. Email us: talk@npr.org. And you can join the conversation at our website. That's at npr.org. Click on TALK OF THE NATION. Our guest is bankruptcy attorney Marc Levinson, the lead bankruptcy counsel for the city of Vallejo, California in its Chapter 9 case. And I wanted to ask you: Is Chapter 9 such a dire prospect, that sometimes cities can use it effectively as a threat?

LEVINSON: The short answer is yes. Bankruptcy benefits the city because it stops lawsuits. It enables it to reduce the payments that it has to make. But ultimately, it's very expensive, very time-consuming. And every dollar that's spent on the bankruptcy process - on people like me, on lawyers for the lenders - is a dollar that ought to be used to repair bridges and pay firefighters. There's no question about that.

So if the parties can sit down in good faith and negotiate a deal to avoid bankruptcy, that's intelligent. That's what ought to happen. And again, that's what has been happening in California.

The problem is that bankruptcy does not create revenue. It only enables the debtor - whether, again, Chapter 9 or Chapter 11 - to readjust - to adjust its debts. So when you have a revenue drain, as we do in California because of the housing bust, the bankruptcy cannot fix that. All it can do is try to adjust the debt to deal with the reduced revenues that are coming in.

CONAN: We want to hear how this is playing out where you live. Let's start with Mike, Mike with us from Dunn County in Wisconsin.

MIKE: Good afternoon. I just turned on the radio here, on the wonderful show that you have here, unfortunately on a very unfortunate topic. But I was a police officer for 23 years in a town here in northern Wisconsin, a pretty good-sized municipality that unfortunately got involved in some very poor investments in some projects, construction projects and some developments that fell under.

And they literally just laid off the entire police department and brought back those of us with seniority to work as security guards with less benefits and less wages. So after 23 years of being a police officer with this department, I now work a rotation, a Monday-through-Friday rotation, and weekends are covered by the county, as a security guard - basically underpaid or a security guard that makes substantially less than what I used to make.

And we're fighting to maintain some of the benefits and the things that we had contractually obligated that were part of our, you know, our - what our benefits plan that we're trying to fight to keep, because we're in danger of losing most of that, as well.

CONAN: The pensions in particular?

MIKE: The pension, yes, is one of them.

CONAN: And I wondered, Marc Levinson - and I know that the laws are different in different states. But if a city declares bankruptcy, can it get out from under its pension obligations?

LEVINSON: Well, you've got it right, Neal. The laws are different in different states. All I can tell you is that in Vallejo, in our plan of adjustment, the city did not attempt to alter pension benefits, and that was a decision that was made for a number of reasons that are probably privileged.

But one of them that's obvious is that the city did, through its plan, adjust the health benefits that it was paying to its retirees, the so-called OPEB. And the harm to pensioners was great. Reducing the pensions would have been even greater, and there's only so far that the city would go to hurt people like Mike, who devoted their careers to the city. And some don't have the ability to re-earn the money.

But again, it is a matter of local law, and it will be the fight over the next three, five years throughout the country about the ability of local governments and state governments to reduce pensions to people who worked their lives in order to earn the pensions. That's the fight we'll see coming up.

CONAN: Mike, thanks very much for the call, and sorry for your situation.

MIKE: Thank you.

CONAN: Let's see if we can go next to - this is David, David calling from Tucson.

DAVID: Yes, hello, Neal. I'm past a president of Service Employees International Union with Pima County government. I'm currently president of Pima County Association of Active and Retired Employees. And what we've seen is the consistent cost shifts from the state to Pima County government. We've watched our workforce go ahead and shrink by one-fifth.

We've seen retirees thrown off the availability of a health care plan once they've left service. We've seen attendant care health - home health care attendant workers privatized. The county nursing home was just sold off to go ahead and add $6 million to the general fund. But simultaneously, the state wants to shift care of prisoners on low-level felonies to county government.

So what workers have experienced is a loss of income due to rising health care costs as costs have been shifted to employees. We've seen state retirement contributions have to increase for county employees. And the folks are losing money. We're solvent, but a lot of this is done on the backs of the workers, the civil servants.

CONAN: Well, David, thanks very much, appreciate that. And I think that's happening in other places, as well. We've been talking about Vallejo, California. Joining us now is Phil Batchelor, who was brought in as interim city manager there. Nice to have you with us today.

PHIL BATCHELOR: Thank you, Neal. Nice to join you.

CONAN: And would you recommend bankruptcy for anybody else?

BATCHELOR: No. I think bankruptcy is the last alternative. I think, you know, you need to look at what the ramifications are of going into bankruptcy. It's not just about money.

CONAN: What else is it about?

BATCHELOR: It's about the cost of the people that are involved in it. For example, what is it like once a city declares bankruptcy and they're under the banner of bankruptcy? What does the word bankruptcy equate to in most people's minds? You know, is it insolvency? Yes, but it's other things, too.

It is dysfunction. It is, you know, broken. And it's very difficult, not only for the citizens of the city to be living in a city that's considered to not be functioning properly, but the employees. The employees are caught up in this.

Once we declare bankruptcy, we're not suddenly off the hook. We then begin, as Marc indicated, we have to reduce the expenditure levels in the city. In 2008, when the city declared bankruptcy, filed for it - for Chapter 9, as Marc talked about - we then began a process of reducing our expenditure level to match the revenues. The expenditure level was at $83 million. The revenues were $65.

CONAN: Yeah. And is the answer sometimes to punt problems down the road, for example, maintenance on city facilities?

BATCHELOR: Absolutely. So what happens, we started to make reductions. Our fire department, we have eight fire stations. Three of them were closed. Four engine companies were disbanded. Our police department saw 47 percent decrease. We stopped paving most of the roads that we didn't have federal funds to pave.

CONAN: And what does the future look like?

BATCHELOR: Well, we are in the process - we're just about out of bankruptcy, as Marc and the Orrick team have done a wonderful job working with us and getting us out of it. And it's just a matter of the technicalities to be out, but for all practical purposes, we're out, and we're beginning to rebuild.

We went to the federal government and said: What can you do to help us? They said: We've got our own problems. The state of California has multi-billion-dollar problems, also. So we're on our own.

CONAN: Marc Levinson, you talked that Vallejo, unique in California, but obviously not elsewhere, as you read in the media. Is this going to be a growing problem?

LEVINSON: You know, the commentators are split on this. Some people see the coming flood, and others say, no. This is a political issue that can be solved by legislatures and taxpayers. No one really knows. All of this is new, but what I do see is that cities are - and local governments generally are deferring infrastructure maintenance. They're cutting back on the workers. They've cut to the bone.

When Vallejo filed its bankruptcy case, it had already cut everything that was possible to cut legally. It wasn't funding library and museum services. It had reduced repairs on the police vehicles and the like. And sooner or later, that catches up to you.

I forget if it was you, Neal, or Phil who mentioned, you know, kicking the can down the road.

CONAN: I think it was me. Yeah.

LEVINSON: That's what governments have done, is that they've always been able to refinance. But now as they lack the revenue to refinance, they're making the cuts. And sooner or later, something has to give. And when you factor in the pensions that are getting - the pension obligations that are getting larger and larger and larger - and that's what threw Central Falls in. That's what threw Pritchard, Alabama, into bankruptcy. Sooner or later something has to give.

And either there have to be voluntary concessions, or there will be bankruptcies. Hopefully, the legislatures will step up and fix the problems, but, you know, I don't want to get political but I haven't seen the political will in state legislatures to help bail out the cities. Which, as Michael said earlier, are the recipients of the cuts and have nowhere else to turn because they're at the bottom of the food chain.

CONAN: Marc Levinson, thanks very much for your time today.

LEVINSON: Thank you.

CONAN: Marc Levinson, a partner in restructuring group for the Orrick law firm in Sacramento and joined us from a studio there. Phil Batchelor, good luck to you there in Vallejo.

BATCHELOR: Thank you.

CONAN: Phil Batchelor is interim city manager for Vallejo, California. In a moment, we'll be talking about some of the ramifications following the death, today, of Moammar Gadhafi in Libya with former Secretary of State Madeleine Albright.

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