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Tale of Two Cities Struggling to Survive

As cash-poor states across the US struggle to pay their bills, two cities within especially distressed states—California and Pennsylvania—are illustrative of just how tough closing budget gaps can be.

Vallejo, Calif., is in bankruptcyand, across the country, Harrisburg, Pa., the state capital, isinsolvent.

This week, at the start of their fiscal year, the governors of both states issued dire warnings.

Gov. Arnold Schwarzenegger ordered that 200,000 California state workers be paid at slightly more than minimum wage in an effort to break a stalemate between state legislators over its $19 billion shortfall, reported the AP.

Pennsylvania’s governor, Ed Rendell, told his constituents Wednesday, when discussing the $1 billion that had to be slashed from budget, “There’s no way to do this without inflicting pain,” according to the Harrisburg Patriot-News. The reduced budget, awaiting Rendell's signature, is now at $28 billion.

“Most cities in this state, and the state itself, are in the same place that we’re in, they just don’t know it,” Osby Davis, mayor of Vallejo, population 120,000, told CNBC this week. (Watch more of his comments and a video report from Vallejo in the clip here.)

Vallejo filed for Chapter 9 two years ago, but its fiscal problems remain mammoth.

On Thursday, the city’s police officers received a 7 percent raise and 100 percent health coverage, bringing the average salary and overtime for a Vallejo cop to about $122,000 annually, plus $97,000 in benefits.

Effectively, Vallejo police now make about double what police in Los Angeles earn, where the population is at about 4 million.

To meet Vallejo’s contractual obligation to the police department, the city had to lay off 17 more police officers. Earlier, the town had to let 41 officers go, also due to finances.

The city council opted for this latest police contract as a defensive measure, a lesser of potential evils. Their reasoning was, had the contract talks stalled and gone to binding arbitration, Vallejo may have ended up paying more to its police officers.

In Harrisburg, population 50,000, the city controller favors going the route of Vallejo: filing for bankruptcy. Its mayor, Linda Thompson, prefers to deal with the city’s $300 million shortfall through such measures as layoffs and merging or eliminating city departments and bringing in cash using the city’s large parking system and other real estate holdings. (See Thompson's interview with CNBC in the video report from Harrisburg here.)

“We can’t handle that $300 million worth of debt,” city controller Dan Miller told CNBC. “We’re insolvent, so we need to have a clean slate and a defined solution and a break to start all over.”

Harrisburg is facing a fiscal jam because of a years-old incinerator project, initiated by the city to generate revenue, which turned into a $300 million money pit.

For 2010, the city has obligations of $68 million, a sum that exceeds its annual budget. And Harrisburg has no clear mechanism for repaying its debts.

Said Tom Metzold of Eaton Vance about what’s happening across the land: “This is a wake-up call for state and municipalities to take a look at finances and do what’s necessary to insure the viabilities of the cities and towns and states.”

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