Who knew cities could go bankrupt? These days, we understand the possibility too well. Like corporations and people, cities can find themselves in court renegotiating debt. In the past year, cities in states from California to Rhode Island have either filed for bankruptcy or are considering it. Like the United States government, the debt dilemma concerns raising revenues (usually taxes) or reducing expenditures (usually on city services).
How do cities spell relief? Are cities in Northern Arizona in danger of doing so?
Chapter 9 municipal bankruptcy relief is reserved for cities, counties, townships, and school districts that find themselves in financial trouble. When services cost more than revenues, a city may have to consider this option. It’s nearly impossible to force this choice on a city and Chapter 9 filings are rare. Since 1934, when the U.S. Congress first established the process, fewer than 500 petitions have been filed.
But, could it happen here?
“No,” said city managers Kevin Burke of Flagstaff, Jim Ferguson of Winslow, and interim city manager Joe Duffy of Williams. A key factor is low debt burden. According to Burke, Flagstaff’s “debt to assessed value remains in check.” The city is scheduled to “retire debt early and the new debt is funded within the existing property tax levy.”
In August, however, Standard & Poor (S&P) awarded a negative outlook for Flagstaff after assessing the city’s reserve fund. S&P is the same credit rating agency that downgraded the U.S. bond rating this year.
While a negative outlook is cause for concern, Burke said that the credit agency looked at “cash on hand.” Per policy, Flagstaff maintains a reserve of unallocated money for emergencies. “We rarely ever use those dollars,” said Burke. This year, Flagstaff plans to spend money on capital projects. Whether or not the project goes through depends on many factors, such as whether the city can attract matching funds. “Either way,” said Burke, “on paper, it shows that we will be reducing our reserves.” That resulted in the negative outlook, though Burke predicts that if the reserves are not spent as planned, S&P may reassess the city and give it a “stable” outlook. “We think that is more likely,” he said.
In fact, S&P’s rating was good enough to garner the city a low interest rate (2.12 percent) in its $15.86 million sale of general obligation bonds in late August to fund projects like an emergency communication radio system, another fire station, and new street/utility projects.
“Winslow is not anticipating any downgrading of our bond rating,” said Ferguson. “We are in good standing on our bonds and have built appropriate reserves to ensure performance.” According to Ferguson, Winslow is in no danger of bankruptcy unless “the entire municipal bonding market is impacted.”
Like all cities in Arizona, though, revenues for Williams have decreased significantly, stemming from the economic downturn. According to Duffy, his city has “stayed ahead of the revenue decrease, taken the necessary, sometimes painful measures, to keep our budget balanced, while maintaining our levels of service in most areas.”
An important debt burden for cities is pensions for city workers, like police officers and fire fighters. In Williams, 2.4 percent of the budget goes toward pension expenses while the city payroll is 33 percent of the total operating budget. The city reduced its staff over the past several years and doesn’t anticipate increasing it as the economy improves (though readers should note that Williams is presently advertising for a permanent city manager). Flagstaff has reduced its pension obligations to workers in non-public safety categories. Burke cited 2011 legislation in Arizona that places the majority of new funding responsibilities on employees. Winslow takes part in the State Retirement Program and its “contribution has been funded annually without problems,” said Ferguson.
While cities in Northern Arizona aren’t in danger of needing Chapter 9 relief, the situation isn’t quite rosy either. Flagstaff “has been making tough financial decisions for the last three years,” said Burke, “in order to position ourselves to live within projected revenues.” He added that it will be difficult to maintain existing levels if inflation increases and revenues stay flat. In that case, the city will review its services “and look for programs that can be consolidated, transferred or eliminated. This could be painful.”
City managers encourage citizens to stay aware and involved, especially in annual budgeting processes. What else can citizens do to help? “Buy local,” said Burke. FBN
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