Huffpost Business

Cities Near Bankruptcy May Be On Their Own Soon

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The Wall Street Journal reports on a brewing storm between state and city finances -- cities that have long relied on state governments for financial help are finding that the states won't or can't likely help them in the near future:

Cities have limited options when presented with state cuts, but some are fighting back. Last month, the League of Arizona Cities and Towns sued the state over its demand for city funds. A group of California redevelopment agencies sued their state to block it from conducting a "raid" of $350 million in local redevelopment funds.

States typically reduce city aid during budget shortfalls. Localities will be hurt more during this recession than when government finances turned down earlier in the decade, said Scott Pattison, executive director of the National Association of State Budget Officers. After the 2001 recession, sales and income taxes were squeezed, but property taxes -- the primary source of local-government funds -- held up relatively well.

In today's recession, both state and local revenues are suffering across the board. In the past 30 years, state spending has grown by an average of 6.3%. States cut a total of 0.1% from their budgets for fiscal 2009, which ends in June; the faltering economy is increasing projected deficits in the coming months.

And 24/7 Wall Street thinks that city bankruptcy become the federal government's problem:

Unfortunately, this leaves the federal government to deal with the problem. Unlike the way that it handled the financial and car industries, it better get out in front of this one. It is severe and growing rapidly. There is no department within the cabinet set up to handle state and city problems. The work of dealing with failures of local government will have to be handed to one or another cabinet secretary.

The time has run out. And, no one has set up a system to deal with the fallout.

Filed by Dave Burdick