Foreclosures, declining property taxes take economic toll

World Report | Chen Weihua

When the town of San Bernardino, California, was hit by declining property taxes caused by massive foreclosures and lower housing prices, the city closed most of its offices on Fridays, and over a 3-year period cut employees' salary by 10 percent and reduced its workforce by 20 percent.

On Wednesday, the City Council voted 5-2 to declare a fiscal emergency and file for Chapter 9 bankruptcy protection because the city was facing insolvency. San Bernardino's deficit is expected to hit $45 million in the coming year. With only $150,000 in the bank, it cannot even honor the Aug 15 payroll.

San Bernardino, with a population of 210,000, is the third California city to file for bankruptcy in recent weeks, joining Stockton and Mammoth Lakes.

Compton, situated to the southeast of downtown Los Angeles, may soon follow suit as it will run out of funds by Sept 1.

Across the US, states, cities and towns are facing similar financial strain as declining revenues during bad economic years can no longer support redevelopment projects and exploding pension costs.

In April, Los Angeles top budget official Miguel Santana warned the city could go bankrupt if it does not introduce new taxes, privatize some city services and reduce its staff.

A poor financial situation has already forced the city of Hemet, California, to outsource its trash collection and consider substituting its police force through a contract with the Riverside County Sheriff's Department.

Just last month, San Diego and San Jose, two large cities in California, voted to cut pension benefits to city workers in order to have enough money to provide basic services to their residents.

Two weeks ago, Scranton, Pennsylvania, had to reduce all city workers' pay, including to the city mayor, to the minimum wage of $7.25 an hour after they were hit by mounting debt and plummeting revenue.

While bankruptcy is still regarded as a rare phenomenon, about 640 US cities have filed for bankruptcy since Chapter 9 for municipal bankruptcy was introduced in the 1930s. Of that number, 13 were in 2011.

While bankruptcy may be embarrassing for a city and affect its appeal to businesses and investors, some believe it can be a shortcut to better fiscal health for cities with high debts because it forces bondholders, creditors and unions to sit down and negotiate changes.

As news of US municipal bankruptcy hits China, many Chinese may try to comprehend what it means for their cities.

Statistics from the National Audit Office showed local government debts in China had reached a record 10.72 trillion yuan ($1.7 trillion) by the end of 2010.

Many provinces are facing huge costs from massive development projects and declining tax from the property market, which are identical problems to those experienced in US cities.

Many local governments believe they can keep themselves solvent by selling land or borrowing from banks. Local banks are often ready to come to their rescue. Statistics from the National Audit Office showed about 79.01 percent of local government debts are outstanding bank loans, with about a quarter of local government debt paid by land sales.

No one seems to know how long that source of funding could last while the central government continues to tighten up the property market.

In a bid to hold local governments responsible for their own debts, the State Council, for the first time last November, granted Shanghai, Zhejiang, Guangzhou and Shenzhen the right to issue local treasury bonds.

Chen Weihua reports in New York.

(China Daily 07/31/2012 page22)