American Cities Going Broke
Moody’s
Managing Director and Chief Officer of U.S. Public Finances has revealed that
the number of towns, counties and cities that are defaulting on some or all of
their debt is on the increase. She
attributes the cause to a sluggish economic recovery, a significant amount of
credit pressure and the inability to grow out of their financial problems. Debt management has been a real problem, and
many cities see defaulting as the only solution to avoid total economic
disaster.
Other economic analysts feed that different circumstances has brought each government to this point. However, there are a few shared underlying causes. Many of the governments demonstrated poor debt management skills and borrowed based on unrealistic projections of expenses. As shrinking tax base is one of the most difficult problems a local government can face. In Detroit, the population has been cut in half over the past 50 years. Unemployment is in the two digits, and it’s an uphill battle to raise revenue to service its debt. Many governments have debt that exceeds annual revenue by three, four and five times.
The failure to accurately project revenues and poor debt management plagues many of these governments. In Le Center, Minnesota, the government has consistently overestimated revenues from real estate projects. In Menasha, Wisconsin, the government issued bonds for a new steam power plant that was cancelled. The goal of the plant was to attract manufacturers to the region, but once it was cancelled, the city’s obligation debt was more than seven times its 2001 revenue.
The Greater Wenatchee Public Facilities District in Washington defaulted on $42 million of debt linked to the Town Toyota Center. The multi-purpose arena caused a .02 percent regional sales tax imposed by the city. In addition, bonds went on sale to further help alleviate the debt. According to Moody’s, any long-term plan to alleviate the debt would only put more stress on the city’s finances, adversely affect ability to invest in infrastructure and impede operational flexibility. Litigation is likely to follow the arena’s default adding to more financial stress.
Debt management problems are also hounding Harrison, N.J. In 2006, the government guaranteed $39.4 million in bonds to buy land for the Red Bull Arena. This deal has not been at all profitable for Harrison, The condo developments that were expected to help pay off the stadium still were not completed as of last year. In addition, to get the franchise to pay taxes, the government had to take the franchise to court.
Other economic analysts feed that different circumstances has brought each government to this point. However, there are a few shared underlying causes. Many of the governments demonstrated poor debt management skills and borrowed based on unrealistic projections of expenses. As shrinking tax base is one of the most difficult problems a local government can face. In Detroit, the population has been cut in half over the past 50 years. Unemployment is in the two digits, and it’s an uphill battle to raise revenue to service its debt. Many governments have debt that exceeds annual revenue by three, four and five times.
The failure to accurately project revenues and poor debt management plagues many of these governments. In Le Center, Minnesota, the government has consistently overestimated revenues from real estate projects. In Menasha, Wisconsin, the government issued bonds for a new steam power plant that was cancelled. The goal of the plant was to attract manufacturers to the region, but once it was cancelled, the city’s obligation debt was more than seven times its 2001 revenue.
The Greater Wenatchee Public Facilities District in Washington defaulted on $42 million of debt linked to the Town Toyota Center. The multi-purpose arena caused a .02 percent regional sales tax imposed by the city. In addition, bonds went on sale to further help alleviate the debt. According to Moody’s, any long-term plan to alleviate the debt would only put more stress on the city’s finances, adversely affect ability to invest in infrastructure and impede operational flexibility. Litigation is likely to follow the arena’s default adding to more financial stress.
Debt management problems are also hounding Harrison, N.J. In 2006, the government guaranteed $39.4 million in bonds to buy land for the Red Bull Arena. This deal has not been at all profitable for Harrison, The condo developments that were expected to help pay off the stadium still were not completed as of last year. In addition, to get the franchise to pay taxes, the government had to take the franchise to court.