Economy's strain on local governments grows severe

By Bob Salsberg And David A. Lieb

Associated Press

Published: Sunday, March 20 2011 5:00 a.m. MDT

A huge chair stands in front of a school in Gardner, Mass. Gardner still proudly calls itself "Chair City," from its furniture-making heyday.

Associated Press

GARDNER, Mass. — A sign welcomes visitors to "historic" downtown Gardner, Mass., but history is one of the few things this city of about 20,000 residents has going for it these days.

While it still proudly calls itself "Chair City," the heyday of fine-furniture manufacturing has long past and unemployment stands at about 11 percent. This blue-collar community about 60 miles west of Boston is grappling with a local economy that is generating less tax revenue for basic services and a state government drained by the Great Recession with less money to spread to its municipalities.

Gardner is typical of countless cities and towns around the country compensating with reduced services. Older children no longer have school buses. Public library hours have been slashed. Waits are longer at the assessor's office because of fewer staff. Layoffs have also hit the public works department and local teens can no longer be hired in the summer to spruce-up parks and playgrounds.

"I'm supposed to be doing more, with a heck of a lot less," said Mayor Mark Hawke, a Republican whose city now is receiving less state money than it got a dozen years ago, yet has been saddled by the state with more responsibilities, known as local mandates.

His lament is a familiar one in cities and counties across the country. Gardner's woes come amid a fiscal squeeze unlike any in modern history and are emblematic of the rough road ahead for local governments.

Governors and legislators in many states — themselves struggling with gaping budget holes — are slashing local aid and proposing to push even more duties down the government ladder in a dramatic restructuring of the relationship between states and their local governments.

The financial strain has some city and county officials searching for ways to alter promised pension and health care benefits. Some analysts are forecasting a rise in municipal defaults, in which local governments are unable to pay the principal or interest on the bonds they have issued. When that happens, their credit ratings typically drop and it becomes more costly in the future for governments to finance improvements to roads, buildings and other projects. For the public, that could mean cuts in services or tax increases.

In just over two months, investors pulled $25 billion out of municipal bonds because of fears of defaults. Concerns intensified after Meredith Whitney, an influential financial analyst who heads her own firm, recently forecast the possibility of 50 to 100 municipal bond defaults worth hundreds of billions of dollars this year.

Other analysts believe such a scenario is unlikely, but they acknowledge there could be an increase in government defaults and bankruptcies.

From 1970 to 2009, there were just 54 defaults out of 18,000 municipal entities tracked by ratings agency Moody's. The agency has estimated 10 to 15 municipal defaults are possible this year, although they are more likely to occur in small towns than larger cities.

"Most cities are not talking about insolvency," said Richard Ciccarone, chief research officer for McDonnell Investment Management in Oak Brook, Ill., which monitors a database of government finances.

Yet some are.

The day after the Martin Luther King Jr. holiday, officials from Hamtramck, Mich., drove to the state Capitol with a plea to be allowed to file for bankruptcy protection. The city, whose revenue problems are worsened because of a tax dispute with neighboring Detroit, figures it has enough money to make it through the end of March. Other cities aren't much better.

"We're really a bellwether for so many cities in Michigan," said Hamtramck Mayor Karen Majewski. "Everyone's watching to see what their options might be, and how the new governor and Legislature is going to deal with the situation that's really shared across the state."

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