In October, Harrisburg, Pennsylvania declared bankruptcy. The state’s capital was trying to squeeze out from under a $300 million debt, one incurred as it tried to update its trash incinerator. In March, the city skipped a $5.27 million bond payment. The city of 50,000 is carrying a debt load over five times its general budget.

Not to be outdone, Jefferson County, Alabama recently received a federal judge’s okay to proceed with what will be the largest municipal bankruptcy in US history. The county used the same filing as Harrisburg’s officials — Chapter 9 — to escape from a $4 billion debt. However, creditors in this case are pushing hard to have the county deemed ineligible for Chapter 9, claiming the county doesn’t carry bond debt.

Eligible or not, Jefferson County is just one of a growing number of municipal bankruptcy filings. The numbers are still small — between five and six annually — but it’s still higher than the average over the last 39 years, which was just over two bankruptcies each year. Still, not all bankruptcy filings are accepted. Harrisburg’s filing was rejected by a US bankruptcy judge, which meant the city was now expected to move forward with rehabilitation plans under the guidance of the state.

Are municipal bankruptcies costly for local business? Not very, it seems. Despite the need for more revenue, few are willing to raise taxes. According to Ira L. Herman, attorney in the New York office of Thompson & Knight, “There have been dozens of municipal defaults in the past 18 months, and many local governments don’t have the political will or the ability to dramatically raise taxes or cut services.”

Not all bankruptcies are bad. The example most quoted is that of Orange County, California, where in 1994 the county filed for bankruptcy protection.  Within 18 months the county came out from under the crisis, and taxpayers were plentiful enough that the $1.64 billion price tag didn’t hurt too badly. During that recovery time, unemployment was down and the housing market rebounded.

Still, municipalities already straining under a weakened economy are finding themselves caught between necessary expenses and expensive projects that could provide little payoff for a big price tag.

Has your municipality struggled with rising debt? What public services are suffering as a result of higher prices and lower budgets?

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