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.
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."
In November 2009, Cooper sat down with the unions and laid out the city's problem. Representatives from the Ranking Officers Association, the Fraternal Order of Police, the International Association of Firefighters and the American Federation of State, County and Municipal Employees sat around the table in the conference room at Hamtramck City Hall, a three-story converted hospital building, as Cooper walked them through a Powerpoint presentation.
The union workers have traditionally enjoyed solidly middle class wages. Under their existing union contract, police lieutenants will earn $78,000 this year, not including benefits. A patrol officer makes up to $58,000. A typical firefighter makes up to $55,000.
Cooper aimed to roll those numbers back. Though Detroit had yet to officially stop paying, he was already worried. He told the unions he wanted to cut benefits. If the unions didn't accept his proposals, he would have to start laying off workers.
Other cities around the country have already reached that point. In July, Maywood, Calif., near Los Angeles, fired every one of its nearly 100 municipal workers. This month, Camden, N.J. -- the country's second most dangerous city, according to an analysis of FBI statistics -- approved a plan to lay off half of its police force.
But in Hamtramck, labor contracts bar such layoffs without the assent of the unions, and Cooper was swiftly rebuffed in his effort to gain it.
The unions were enraged. Just months earlier, the local branch of the International Association of Firefighters had finalized a new five-year contract with the city. The police, too, were bitter, especially given that they collect cash by issuing traffic tickets and seizing drug proceeds.
"We're the only department in the city that's actually generating revenue besides the income tax department," says patrolman Jon Bondra.
The unions blamed the city manager for Hamtramck's troubles, intimating that Cooper has intentionally manufactured a budget crisis as a wedge to force them to absorb concessions.
"This guy hasn't stopped spending any money at all," says Walter Tripp, a police sergeant. "I think he wants to spend as much money as he can to really put us in financial straits."
Cooper denies such talk.
"That's an absolute inaccurate statement," he said.
After the November meeting, the police unions rejected Cooper's request for concessions. Instead, they agreed to a creative plan to raise cash: They would implement a strict traffic safety program, with officers working overtime to write as many tickets as they could.
Traffic enforcement has proven to be a bonanza. In its first year, the program earned the city just over $800,000, according to estimates from Cooper and police officers.
Still facing a considerable shortfall, Cooper sought and gained concessions from the International Association of Firefighters, which, in January, agreed to forgo payment for 13 annual holidays. The union also agreed to increase its contribution to a pension fund in exchange for keeping a pay raise. And the union assented to keeping a single position vacant.
But the firefighters drove a hard bargain. In exchange, Cooper agreed not to lay off any firefighters for a full year.
"The no-layoff clause is kind of like finding the golden ticket for Willy Wonka," says firefighter Matthew Wyszczelski. "Just to have it even for a year is a great deal of protection."
In late May, after Cooper got the bad news that Detroit would withhold payments from the GM plant, he sent a request to the unions, asking for more concessions: a 5-percent salary cut over the next two years, plus an increase in employees' contribution to their pension funds. Those proposals were swiftly shot down.
Cooper says the math is only getting harder. Health-care costs for the city rose sharply this year, he says, as retirees aged.
If the city manager were king, he would axe 10 firefighters and 10 police officers. That would cut a third from the 31-man fire department, and a fourth from the 40-person police force.
But with the unions dug in on their contractual right, Cooper has been forced to pursue cuts elsewhere.
In May, he laid off Eve Doster-Knepp, the city's special events coordinator. Well-liked, effusive and resolutely optimistic, she oversaw city celebrations for Paczki Day, a holiday she describes as a Polish St. Patrick's day -- "boozy and fun"-- and a Labor Day festival that attracted thousands of people.
Doster-Knepp, 35, also ran a series of free seminars that educated Hamtramckans on how to avoid foreclosure. The seminars, which featured panels of credit experts, bankers and real estate agents, were televised locally. The Labor Day celebrations lived on even after she lost her job, but the foreclosure seminars did not.
"I'm a reasonable person," Doster-Knepp says. "I understand that in times of crisis they're not going to cut police so the events coordinator can keep her job."
Her firing saved the city $27,500 a year. Later, Cooper laid off two employees in the public works department, a clerk and a maintenance worker, sparing the city another $102,000.
In a further reach for savings, no matter how small, the crossing guards were let go, and then the parking attendants.
The city manager gave himself a 5 percent pay cut, dropping his salary to about $95,000 a year.
In July, he fired the city's part-time treasurer, Michael Wilk, whose salary was $12,000. Wilk, 65, also owns a funeral home in town and teaches part-time at Wayne State University in the mortuary science program. He soon returned to his old post, but with one key difference: No pay.
Like the unions, Wilk now has ill feelings for the city manager, noting that Cooper still earns near six figures.
"He thinks he's the only martyr here," Wilk says of Cooper. "He made an announcement at a staff meeting that he was giving up the most. And I came back and looked at him and said, 'No you're not. I am.'"
Cooper declined to respond to that characterization.
The atmosphere around City Hall is tense. This month, somebody plastered the interior of the City Hall elevator with print-outs of a Detroit Free Press article that describes Cooper's forced resignation from his previous job, as city manager of nearby Mount Clemens.
In November, Cooper wrote a letter to the Michigan Treasury, requesting that Hamtramck be allowed to enter bankruptcy.
"While this step may seem radical in its approach, it is the only approach that will quickly and effectively allow us to address our shortfall," Cooper wrote, in formal language that barely conceals his desperation.
The city "will not able to pay its bills or meet payroll of as February 1, 2011," Cooper wrote. He went on to describe what he'd done to try to repair the city's finances, but said the unions had his hands tied, and the consequences were dire. Bankruptcy would allow the city to work around their contracts.
But Michigan rejected that appeal. No city in Michigan has ever entered bankruptcy, and state law makes that step extremely difficult to initiate, requiring a lengthy and convoluted process that could easily take many months.
That left Cooper staring at the same basic configuration: Not enough revenue coming in and -- as he portrays it -- too many expenditures required under union contracts.
"We won't be able to meet payroll, we won't be able to pay any of our bills," he says. "We will in essence be broke."
The state has offered Hamtramck three different loans. Cooper has said repeatedly that he'd rather enter bankruptcy than take a loan, but there are now signs he might cave. On Tuesday evening, according to local blogger Hillary Cherry, Cooper proposed a new plan that would involve the city's taking a $3 million loan from Michigan.
"We are looking at this option while still pursuing bankruptcy," Cooper said in an e-mail.
Cherry, for her part, says a loan won't fix the city's problems.
"They're still spending money like it's in the bank," she says. "I think the jig is up."
Cops and firefighters bristle at the suggestion that their services amount to a discretionary item that can be rolled back to settle the crisis.
The police union's contract contains a bare minimum number of officers that the city is not allowed to go under -- a condition dating back to a particularly alarming shootout that put officers at risk on New Year's Eve in 1989.
The department is at the bare minimum right now, with some officers serving multiple roles.
"I'm doing the work of what we had four officers doing," says Tripp, the police sergeant. "I'm in charge of the traffic department, ID, special assignments, community police, our K9. I do all the CSI, the crime scenes, the accident reconstructions, all the shootings. I got my plate full."
The force is composed of three shifts of eight patrolmen each. Half of those eight are on the road, with the remaining four working at the station, answering 911 calls, booking prisoners or taking down reports.
Firefighters lack a minimum manpower clause in their contract, but their representatives say that they, too, cannot spare any more people without putting the public at risk. Seven firefighters are on duty at a time: Six put out the fire, while one stays back as the dispatcher.
"It's our lives we're putting on the line," says Wyszczelski, the firefighter. "The seven-man minimum is there to protect us and protect the public."
But the city manager says that cuts are unavoidable, and if he is not able to make them before the money runs out, everyone will lose their paycheck.
That has happened before. In 2001, during previous financial troubles, firefighters and police went for seven weeks without paychecks. And still they were contractually required to do their jobs.
"It was a bad, bad time," recalls detective Michael Szymanski, who retired this week after 25 years on the force. "I was actually humping a scout car, answering calls, like a uniform cop would do. It left us bare boned."
No one knows how the current shortfall will be resolved, even as the city's residents profess unflagging faith that something will show up to keep the community going -- never mind that the numbers don't add up.
"Hopefully, however this pans out, we're gonna come out of this the same way we always do," Wyszczelski says, laughing slightly, as if not fully believing his own optimism. "Hamtramck's just gonna keep chugging along."
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