Podcast: Options are few for cities going bankrupt
This WSU Newsline Podcast is available at http://www.wichita.edu/newslinepodcast. See the transcript below:
You’re listening to the podcast edition of the Wichita State University audio newsline. Learn more about WSU on the Web at wichita.edu.
In July, the city of Detroit earned the dubious distinction of becoming the largest city in the United States to file for bankruptcy. Ken Kriz, Regents distinguished professor and director of the Kansas Public Finance Center at Wichita State University, says the bankruptcy filing makes it difficult to attract new businesses.
Kriz: “Well, businesses tend to want certainty in terms of what their tax rates are going to be and in terms of what public services they’re going to be able to use. And whenever you have a situation like a bankruptcy, it throws that all into doubt, which is not good for attracting businesses.”
Kriz says the timing of Detroit’s fiscal condition led to its bankruptcy filing.
Kriz: “Well, Detroit encountered what I would call a perfect storm in terms of its fiscal condition. First of all, you had a strongly declining tax base. Second, you had problems in the pension system, which go back to the last decade. And then third, you had increasing costs of public services.”
Kriz explains a major reason why Detroit found itself in a difficult position financially.
Kriz: “Well, a couple things. First of all, the population in the city of Detroit has declined by about a third over the last decade. Unemployment reached 18 percent, over 18 percent in 2012. Anytime you have this situation, people aren’t going to be spending as much, people aren’t going to be paying their mortgages so that there are going to be problems collecting the property tax, and numerous other problems with collecting revenues.”
According to Kriz, in a depressed economy the cost of providing services for a city can go up dramatically.
Kriz: “In terms of the cost of rising public services, whenever you have a situation of a strong depressed economy, you have people who can’t afford their house payments and are getting evicted, foreclosed upon. You have a lot of vacant properties. Crime rates tend to go up. There’s a stronger need for public services at the state and county and local level. And so your cost for providing services just go up dramatically.”
A common characteristic for most cities that go bankrupt is very high unemployment rates. Kriz explains:
Kriz: “Well, it is in situations where you have very high unemployment rates, I went back and looked at the cities that have gone bankrupt since 2010, and all of them have unemployment rates in excess of 10 percent as of the last year. So, for those cities that are having the same kind of economic and social problems that Detroit is, they are in danger.”
Options are few and far between for cities facing bankruptcy.
Kriz: “Unfortunately there’s not a lot of great options. One of the ways a city can get around things is by increasing tax rates. Now that only makes the problem worse because then businesses won’t locate there and people are going to be in even more trouble. What some cities have resorted to is to sell off the family jewels, in essence, to liquidate large assets that they hold in order to try and make their monthly payments.”
The challenges are many for city government balancing costs and services, according to Kriz.
Kriz: “The major problem is how do you keep public service costs at a relatively low level so that people don’t have to pay higher taxes, while at the same time still delivering high quality public services? That’s not an easy task for a lot of local governments to master.”
Thanks for listening. Until next time, this is Joe Kleinsasser for Wichita State University.