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:
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.
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.
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.
