Life in America’s Bankrupt Margins

Life in America’s Bankrupt Margins

Mark Davidson

As we brace to enter the Trump presidency, the impacts of the Great Recession perhaps appear to be less defining of our times. A modest economic recovery continues, boosting state coffers and ensuring that state and local governments across the United States receive much needed funds from a highly indebted Federal government. Renewed economic growth has boosted consumer spending and supported the construction industry. For most US cities, the worst of the financial crisis appears to be over. If Trumpism brings the promised radical overhaul of economic and tax policy, we might be tempted to make a historical distinction; recessionary-related austerity is giving way to a largely untested pro-growth social experiment predicated on further public borrowing and the construction of infrastructure. But is this vision of the United States’ short-term future fully warranted? Some caution appears to be in order.

While a reading of these strangest of times is a necessary task, it runs the risk of underplaying the deep and systemic impacts that the last ten years of reforms have already exacted. In the United States, post-recession austerity has been structured by its federalist system. Akin to processes of cuts to local government in the UK, this has seen Federal and State governments pushing deep budgetary cuts to the municipal level. When some cities ran into budgetary shortfalls in 2009-2010, they found levels of government higher-up the chain were unwilling to assist and, more often than not, elected officials in state capitals and Washington D.C. were imposing reforms that made matters worse.

It is little surprise that in this context cities like Detroit, Michigan, and Vallejo, California, went bust after the Great Recession.(1) Vallejo, a city of 120,000 residents, located at the northern edge of the San Francisco Bay, had been suffering for years due to the closure of its Navy base. It managed to balance its growing expenditures via what turned-out to be a huge property market bubble that generated a temporary boost to construction and permit fees along with healthy property taxes. When the bubble burst, house prices dropped by over 40% and fee-generating construction halted. Obligated to pay its public employees generous and growing salaries, the city filed for Chapter 9 bankruptcy. A more complicated story played-out in Detroit, although the basic components are similar. After years of managing an increasingly risky budgeting, the economic downturn generated a nightmare akin to those experienced in Las Vegas casinos.

Thirteen municipalities eventually filed for bankruptcy after 2010. This represents just 0.06% of all local governments eligible to file. For the vast majority of cities a combination of budget and staffing cuts got them through the recession without fiscal meltdown. And yet even the minute group of cities that went bust remain significant for two key reasons. First, cities like Detroit have come to represent the extremes of urban decline. Already famous for the damage that deindustrialization and disinvestment unleash, Detroit’s bankruptcy provided just another example of capitalism’s ruthlessness. Second, the reforms these cities were forced to implement under extreme budgetary stress have revealed new limits to the ability of urban governance to wrestle with problems generated and co-ordinated from the political centre. More simply, bankruptcy meant much tougher decisions were made in these rare instances of failure while across the cases these decisions stretched the capacity of neoliberal models of urban governance to deal with their crisis conditions.

Closing the budget gaps in bankrupt cities is not an easy task. American urban governance, via state regulations, credit ratings and council protocol, is structured to ensure budgets are balanced. When things go badly wrong, as they did for some cities after the Great Recession, solutions are therefore predictably elusive. In order to be eligible for what is known as Chapter 9 bankruptcy, cities must demonstrate that all possible options for budget balancing have been exhausted. Once demonstrated, the powers of Federal Bankruptcy Courts can then be used to restructure financial obligations without the approval of creditors. Chapter 9 bankruptcy is therefore intended to enable a kind of budgetary restructuring that is not possible under ordinary economic conditions.

For any city facing Chapter 9 proceedings, it must strategize where ultimately to inflict the pain of budget restructuring. Across the small number of post-2010 Chapter 9 cases, cities have approached this problem in a variety of ways. In Vallejo, for example, its main problem was singled-out as the contracts of unionized public employees, making this the main point of contention in bankruptcy negotiations. In Detroit, a more complex budget diversified the areas of possible restructuring to focus on opaque pension financing arrangements and the city’s valuable art holdings. In other examples, State government’s stepped in to stop bankrupt cities pursuing strategies that could unsettle statewide systems of municipal government.

In the course of Chapter 9 bankruptcy proceedings, all city creditors are potentially subject to court-sanctioned debt restructuring. The extent of debt right-off is unlimited, being largely based on the judge’s perception of burden. Creditors, with literally everything to lose, are therefore heavily incentivized to work against other creditors. Tribalistic contests have therefore reigned across the bankrupt cities. Solidarities are dispensed with for attempts to protect financial interests and push burdens onto others. Inevitably this has created a messy and somewhat client-focused process of negotiation. This game of musical chairs has played out differently across the cities. In Vallejo, retirees were compelled to take the biggest hit, with their healthcare drastically reduced. In Detroit, San Bernardino and Stockton, it was municipal bondholders who paid the highest price for these cities’ reclaimed solvency.

This factional process is mirrored within bankrupt cities themselves. As budgets are cut, public services are operated on smaller and smaller budgets. In the larger bankruptcies of Detroit, Jefferson County, San Bernardino, Stockton and Vallejo, all parts of the municipal budget were slashed. Police and fire services were, at least temporarily, dramatically reduced. In Vallejo, three fire houses were closed, 63 police officer positions cut and even a 17 member SWAT team disbanded and the police ‘K9’ unit was cut by 75%. Social services and public administration positions were also cut in all these cities, even after three decades of local government shrinkage.

These types of cuts have, of course, a geographical dimension. If you are cutting police patrols or closing fire houses, you have to decide where to do so. Some communities tend therefore to be affected more than others. And although the idea that social and municipal services are evenly distributed across American cities is mythical to most people, austerity cuts have increased vulnerability for many residents. It is no surprise then that in Detroit’s much-lauded art-saving “Grand Bargain”, major provisions were made for reinvestment in heavily-reduced public safety services. In a city that has witnessed urban wildfires in its heavily abandoned neighborhoods the promise of even more state withdrawal presented a dismal prospect for the Motor City.

In both the processes of bankruptcy and the reforms enacted through it, affected cities have experienced an almost existential struggle for resources in which the constituent parts of the city have been pitched against each other. Although a modest economic recovery has eased some municipal tax woes, cities such as Atlantic City, New Jersey, continue to put this kind of struggle in the national news headlines. The urban fiscal crisis might have eased, but it is not absent from the American urban landscape even well into the current economic recovery. Municipal bankruptcies are not the new norm, but they have demonstrated the potential extremes of a speculative and underfunded Federal urban system. If things go badly wrong, cities like Detroit and Vallejo now present prospective scenarios that all levels of government must take into consideration.

This situation does not, of course, represent a massive change of political course. Since the 1980s, Federal and State governments have withdrawn from their redistributive roles but, rather than balance out uneven development, neoliberal policies have further accentuated it. This has generated winners (like Atlanta, Georgia) and losers (like Cleveland, Ohio) in the American urban system. The same neoliberal policies have also created new political cleavages, as the 2016 Presidential election shockingly demonstrated with previously “safe” Democratic states like Michigan and Pennsylvania voting in Republican Presidential and State candidates.

As the Trump presidency moves forward the post-recession spate of municipal bankruptcies may still represent something of a harbinger of US urban doom. Growing public debts at all levels of government present huge governance challenges. Reconciling them will likely involve painful decisions about inflicting the costs of restructuring with the heaviest burden paid by the poorest cities and the poorest populations within those cities living with public services picked-clean by tax auditors and judges. If municipal bankruptcies are any indicator of how neoliberal governance deals with such crises, it will likely be more of the message that “you are on your own”. In cases like Detroit and Vallejo, a reluctance to bail-out struggling cities who had also made poor governmental decisions meant that any recognition of the responsibility of structural economic process was avoided. The result has been continued social and political fracturing in many cities. When the next economic crisis inevitably comes around there will be much less resource to help out and an even greater need for new social solidarities to help counter the ravaging effects of austerity.

The complete list of 13 cities who filed for Chapter 9 bankruptcy protections: Gould, Arkansas (Dismissed); Vallejo, California; Westfall Township, Pennsylvania; Village of Washington Park (Dismissed); Town of Moffett, Oklahoma; Prichard, Alabama; Boise County (Dismissed); Central Falls, Rhode Island; Harrisburg, Pennsylvania (Dismissed); Jefferson County, Alabama; Stockton, California; Town of Mammoth Lakes California (Dismissed); San Bernardino, California


Mark Davidson is an Associate Professor in the Graduate School of Geography at Clark University. He has published widely on the topics of gentrification, urban policy and urban politics. His current work investigates austerity in the United States and contemporary democratic urban theory.