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Hamtramck's Budget Nightmare: Michigan Town Left With Nothing Else To Cut


First Posted: 12/15/10 04:40 PM ET Updated: 05/25/11 07:20 PM ET

This story is the first in a series that will examine the myriad consequences of the debt crisis confronting American states and cities.

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Bill Cooper, the city manager of Hamtramck, Mich., surveyed the possible solutions to his looming budgetary catastrophe, all of them various flavors of bad.

He could lay off firefighters or police officers, whose services comprise nearly two-thirds of the city's $18 million annual expenditures. Their unions, however, had already absorbed substantial hits and would surely fight back. Public safety, too, would suffer -- no minor consideration in this suburban community bordering Detroit.

As he confronted the ugly prospect of municipal bankruptcy, Cooper focused on the few programs he considered discretionary, beginning an awkward, even bewildering process of nickel-and-diming his city back toward solvency.

He laid off the city's crossing guards, all five of them, logging a grand total of $8,000 in annual savings.

He laid off two parking attendants, leaving just one to look after scofflaw parkers in this city of 20,000 people scattered over about two square miles. Here was another $60,000 in annual savings. The auto-industry town, beset by red ink, now beckoned as a haven for double-parkers.

"You have a better chance of not getting caught today than you had a year ago," Cooper says.

It has come to this in states and cities throughout the nation, many still absorbing crippling budget shortfalls in the wake of the worst economic downturn since the Great Depression. Amid nearly double-digit unemployment and weakened economic opportunities, many municipal governments are capturing significantly-diminished tax revenues and facing stark choices as they try to balance their books.

Just as many U.S. households have seen their savings wiped out, leaving them vulnerable to a shock that could send them into bankruptcy or foreclosure -- a lost job, an unexpected medical problem -- many of the nation's cities are now similarly on the edge, one bad surprise away from disaster.

A pile of loans to fund a troubled incinerator has brought Harrisburg, Pa. to the edge of insolvency. The unanticipated costs of fixing a failed steam plant have delayed debt payments by the city of Menasha, Wis. for more than a year. Ballooning labor costs dragged Vallejo, Calif. into bankruptcy.

Last year, cities cut their spending by 1.9 percent, according to a report issued last week by the Congressional Budget Office. This newfound austerity has reversed a long, steady trend of expansion in municipal payrolls. Since the summer of 2008, city payrolls nationwide have shed some 360,000 workers, according to the report.

The growing strains on municipal balance sheets are expected to intensify as pension costs continue to swell. Exacerbating the problem, the recent financial crisis trashed city and state pension funds, which lost 29 percent of their value between the end of 2007 and the beginning of 2009, according to a Milken Institute report.

In the years leading up to the crisis, governments procrastinated in setting aside money for pensions. Now, according to a calculation by finance professors Robert Novy-Marx and Joshua Rauh, the promises that cities have made to their retiring workers outstrip the actual assets in their pension funds by $574 billion.

Michigan currently has 68 cities on its "fiscal watch" or "fiscal stress" lists, meaning these communities are at risk of running through their money. Many communities, Hamtramck included, have seen sharp drops in their populations as laid-off manufacturing workers have moved elsewhere in search of new jobs. Cities now struggle to provide the same services with depleted tax revenues.

"You've got a perfect storm hitting many of these communities," outgoing Michigan Gov. Jennifer Granholm said last month.

In Hamtramck, the shock came via a legal scuffle with neighboring Detroit, itself confronting critically-lean coffers. For nearly three decades, the two municipalities have shared property-tax revenues from a local General Motors plant that straddles the border. But beginning last year, Detroit -- which collects the money from GM -- withheld funds from Hamtramck, a toll that now reaches $3 million and will soon swell to $5 million, according to the city. Detroit officials said their city was merely making up for the fact that it had been overpaying its neighbor for five years.

The result of this dispute: A pair of lawsuits and a gargantuan hole in Hamtramck's budget, sending Cooper, 61, the mustachioed, chatty career municipal manager, scrambling to find a way to close the gap.

Barring a miracle, he predicts the tiny Wayne County city will run out of money by February.

Cooper finds himself shackled. Union contracts bar him from laying off workers, and Michigan law prevents him from taking his city into bankruptcy, which might offer a way out of those strictures.

The law prevents Hamtramck from filing for bankruptcy until it can no longer pay its bills. That puts Cooper and his city in a perverse position familiar to any struggling homeowner who has sought to negotiate lower mortgage payments from their lender: First, they are often told, they must go into arrears.

"It became pretty obvious pretty quickly that we were gonna run out of options here real quick," Cooper says. "To be just suddenly cut off is close to an impossible situation."

Cooper has slashed everywhere he can, but the juiciest targets -- police officers and firefighters -- remain out of reach. Union contracts make layoffs nearly impossible. If Cooper were to fire union workers, the union would take him to court, and would probably win.

The unions argue that the prohibitions on layoffs are there for good reason: safety. Reducing ranks would put the remaining workers in greater danger, the argument goes, when they enter a burning building or take gunfire during a drug bust. Hamtramck is almost entirely surrounded by Detroit, which -- according to an analysis of the latest FBI data -- is the nation's third most dangerous city in terms of violent and property crime.

Michigan has offered Hamtramck a variety of loans to keep it solvent, but Cooper has said he doesn't want the city to take on more debt. It's already paying $600,000 a year on bonds issued during another financial crisis a decade ago.

But with pressure building, City Hall was awash in speculation this week that Cooper would finally bend and accept a loan from the state. Still, even that would only postpone a day of reckoning, the city manager asserted.

Cooper now says the city will be unable to pay its bills past January. If that comes to pass, city workers could go for weeks, or even months, without paychecks.

For now, the well-meaning citizens of Hamtramck -- police officers, firefighters, tree trimmers and trash collectors -- are effectively draining the city's finances, with nothing short of a potential collapse in sight.

'BIG BROTHER'

During a June speech about the future of Hamtramck, Mayor Karen Majewski fought back tears. She stopped to compose herself, and then reached under the lectern for a handful of tissues.

"The truth is, if the present perfect storm continues, and nothing changes in our situation, we could be right back in receivership by this time next year, and probably well before," she said, struggling to steady her voice as she began to cry. An audience member sighed.

Long a hanger-on in Detroit's auto-centered orbit, Hamtramck has in recent decades evolved into its own distinct community, known for its music scene, its ethnic restaurants and its neighborhood feel. Much as Brooklyn has become an artist's haven in New York City, Hamtramck has emerged as a Bohemian-infused enclave that stays true to its blue-collar roots. Every year, the city hosts the "Blowout," a four-day, 15-venue local music festival that the Detroit alternative weekly Metro Times claims is the biggest such event in the nation.

As recently as 1970, Poles -- who once dominated the ranks of surrounding auto plants -- comprised 90 percent of the local population. Today, the city is the most diverse community in Michigan, with 40 percent of its population foreign-born. The mayor calls Hamtramck a "global village." At the end of her speech, she thanked her audience in Polish, Albanian, Arabic, Slovenian, Russian and English.

Yet despite its substantial refashioning, one facet of life has remained constant: Making cars has paid the bills, sometimes for better and lately for worse.

Many locals once punched the clock at the American Axle & Manufacturing plant. But American Axle shut down last year and shipped its operations to Mexico. Hamtramck lost about $500,000 in annual tax revenue, and more than 500 United Auto Workers members lost their jobs.

The American Axle headquarters remains, a seemingly cruel monument to the area's unemployment rate, now more than 14 percent, and an epidemic of houses lost to foreclosure.

"They still have this beautiful, gleaming building that overlooks all these mothballed factories," says Sean Kowalski, 46, who owns a coffee shop in town.

Locals recall the Dodge Main plant, which shut down in 1980, but was fortunately soon replaced by GM's Poletown plant. The factory has employed as many as 3,000 workers who have made Cadillacs, Oldsmobiles and Buicks.

The Poletown plant now looms larger than ever over Hamtramck life. It has become the most crucial piece in an effort by General Motors to remake itself as a more innovative company. In July, U.S. President Barack Obama visited the Poletown plant to highlight the launching of the Chevrolet Volt, the gas-electric hybrid vehicle that he called the "car of the future." The magazine Motor Trend named the Volt its car of the year.

But the locals aren't so sure.

"All we hear is that Hamtramck will be building the Chevy Volt, that Hamtramck is adding another line, that Hamtramck holds the future for GM, maybe for the whole domestic auto industry," Majewski, the mayor, said in her June speech. "Instead, it's the Hamtramck Poletown plant that may be our undoing."

The Poletown plant is at the center of the now-crippling dispute between Hamtramck and its neighboring city. Since 1981, Hamtramck and Detroit have shared property tax revenue from the plant. Under the agreement, Detroit collects the taxes and then pays Hamtramck its share. That money -- about $2 million annually -- makes up 11 percent of Hamtramck's budget.

But in 2007, Michigan determined that Detroit had incorrectly distributed the revenue and owed the state $22 million that was intended for schools. As a result, Detroit -- which Hamtramckans refer to as their city's "big brother" -- decided it must have overpaid Hamtramck.

This past January, after slowing down its payments, Detroit paid Hamtramck for half of 2009. And then the payments stopped.

In September, Hamtramck sued Detroit, seeking a continuation of its payments. Detroit sued Hamtramck to try to recoup $7.1 million it had already paid.

The Detroit mayor's office declined to comment, citing the fact that litigation is active.

But no deep investigation is required to surmise that Detroit itself is finding the budget process a challenging exercise.

Revenue shortfalls forced the city to shrink its budget from $3.7 billion last year to $2.9 billion this year, and still the municipality is confronting a deficit of more than $80 million.

The city's pension plans are underfunded by $6.4 billion, according to Novy-Marx and Rauh. They project the pension fund will be insolvent by 2023.

Detroit is now so desperate that a current proposal would have the city shut down basic services such as trash collection, police protection and road maintenance in more than one-fifth of its territory.

As Detroit grapples with how to square its books, its decision to withhold payments from Hamtramck is effectively spreading the pain to the other side of the city boundary.

"As much as we're concerned about Detroit surviving, they right now are having a very direct effect on our survival," says Cooper, the Hamtramck city manager. "The odds of us getting the funds in time to help us out are pretty thin."

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