Michigan Town Is Left Pleading for Bankruptcy

Leaders of this city met for more than seven hours on a Saturday not long ago, searching for something to cut from a budget that has already been cut, over and over.

This time they slashed money for boarding up abandoned houses — aside from circumstances like vagrants or obvious rats, said William J. Cooper, the city manager. They shrank money for trimming trees and cutting grass on hundreds of lots that have been left to the city. And Mr. Cooper is hoping that predictions of a ferocious snow season prove false; once state road money runs out, the city has set nothing aside to plow streets.

“We can make it until March 1 — maybe,” Mr. Cooper said of Hamtramck’s ability to pay its bills. Beyond that? The political leaders of this old working-class city almost surrounded by Detroit are pleading with the state to let them declare bankruptcy, a desperate move the state is not even willing to admit as an option under the current circumstances.

“The state is concerned that if they say yes to one, if that door is opened, they’ll have 30 more cities right behind us,” Mr. Cooper said, as flurries fell outside his City Hall window. “But anything else is just a stop gap. We’re going to continue to pursue bankruptcy until the door is shut, locked, barricaded, bolted.”

Bankruptcy, increasingly common among corporations and individuals, remains rare for municipalities. Local leaders who want to win elections find it unappealing and often have other choices for solving financial woes. Besides, states have a say in whether a municipality may pursue bankruptcy at all, and they have every reason to avoid such an outcome, not least of all for fear of a creating a ripple effect that could cripple the municipal bond market and drive up the cost of borrowing.

Yet with anemic property tax revenues and forecasts of more dire financial times ahead, some experts and elected leaders fear that more localities may have to at least consider bankruptcy.

“There could be many cities in this position next year,” said Summer Hallwood Minnick, director of state affairs for the Michigan Municipal League, who added that in this state, cities had already struggled with billions less than expected in state revenue sharing. “All our communities have done is cut, cut, cut. They’re down to four-day workweeks and the elimination of parks, senior centers, all of that. So if there’s anything else that happens, they will be over the edge.”

This month, the authorities in Rhode Island said the City of Central Falls could face bankruptcy if immediate, drastic changes — perhaps the city’s annexation into a neighboring municipality — failed. Some leaders in Harrisburg, Pa., which owes millions in debt payments tied to an incinerator project, say bankruptcy may eventually be the only choice.

Prichard, Ala., which stopped paying monthly checks to retired city workers when its pension fund ran out last year, is appealing a bankruptcy judge’s ruling that it did not qualify for Chapter 9 under Alabama law.

Only about 600 cities, counties, towns and special taxation districts have filed for bankruptcy (known as Chapter 9 for these sorts of entities) since 1937, said James E. Spiotto, a municipal bankruptcy expert at Chapman & Cutler, a law firm in Chicago, and fewer than 250 in the last three decades. In part, it can be hard — even impossible — to do: about half the states have statutes authorizing such filings, but some of them set limits or require elaborate approval processes. Other states have no specific provision allowing cities to pursue bankruptcy, and at least one, Georgia, bans such moves.

So far, the financial misery of the past two years has not caused a surge in bankruptcy applications; about 15 municipalities pursued bankruptcy in the last two years. But if revenue forecasts continue as predicted, 2011 might bring a rise in cities faced with such a fate.

Hamtramck (pronounced ham-TRAM-eck) did not anticipate its current circumstances. Officials in Detroit announced this year that they had for years overpaid Hamtramck in a revenue-sharing deal related to a General Motors plant that sits smack on the border of the two cities. The dispute is likely to be resolved, eventually, in court, but meanwhile, Detroit has stopped paying $2 million a year, and Hamtramck is watching a growing gap in its $18 million budget.