Hamtramck officials want to declare bankruptcy because it would invalidate contracts with police and firefighter unions, allowing the city to renegotiate pensions and retiree health benefits.
Since the San Francisco Bay area city of Vallejo declared bankruptcy in 2008, it has shaved costs by closing fire stations and reducing funding for senior centers, libraries and public works.
Even setting aside the possibility of insolvency, the coming years could put to the test the historical American assumption that local government is the best form of government.
Unlike their federal and state colleagues, local officials don't have the luxury of passing the buck to someone below them. When the dollars run short, they must raise taxes, cut services or consider filing for bankruptcy protection. State and local governments cannot run deficits.
"I think a number of years ago, prematurely, the metaphor of 'perfect storm' was used to describe what was happening to state and community finances," said Geoffrey Beckwith, president of the Massachusetts Municipal Association and a board member of the National League of Cities. "But that was really just a warm-up, sort of a tropical storm, compared to what communities and the states and the federal government are all going through now."
The figures are bleak:
— More than half the 335 counties and 646 cities analyzed by McDonnell Investment had deficits in their general funds in 2009, a trend that appeared to hold true in 2010. Audits showed 12 percent of counties, 16 percent of cities and 22 percent of school districts had less than a month's worth of money in their general funds, a precariously low level.
— For eight consecutive quarters, downgrades of municipal bond ratings have exceeded upgrades, according to Moody's Investors Service. And that trend is likely to continue in 2011 as local governments face "unprecedented financial strain," said Anne Van Praagh, Moody's vice president and senior credit officer.
— 87 percent of cities were less able to meet their fiscal needs in 2010 than in the previous year, according to a survey by the National League of Cities. And nearly two-thirds of surveyed counties said they anticipated revenue shortfalls this fiscal year, according to the National Association of Counties.
The consequences will be felt across an array of local services. Local governments already have made the relatively easy budget cuts, such as limiting library hours, reducing park maintenance or trimming grants to local arts programs. Now the cuts are more directly affecting the everyday lives of residents.
In January, the city of Camden, N.J. — one of the nation's most impoverished and high-crime municipalities — laid off nearly half of its police force and about one-third of its firefighters to offset falling tax revenue and diminishing aid from the state. Police Chief Scott Thompson said officers will no longer respond to minor traffic accidents and will not take reports on small thefts or property damage complaints.
A police union warned in a full-page newspaper ad that Camden will become a "living hell." Residents are trying to fill the gap. The anti-crime volunteer group Guardian Angels says it will patrol Camden, just as it has done in Newark, N.J., since police were laid off there last November.
In the Bayless School District in suburban St. Louis, students now must walk to school — or catch a ride from parents or neighbors — after the school board ended bus service. The cut came after Missouri Gov. Jay Nixon eliminated almost half the state's school transportation aid.
"It was a cut that while painful, avoided more damaging cuts like layoffs or increased class sizes," Bayless school board president Jeff Preisack said.