When it comes to money, emotion can wreak havoc in our lives. A relative or friend uses a doleful expression to request a “loan” to stay out of dire circumstances. After a while, these “loan” requests become more frequent. Now that you’ve started a precedent, how do you stop? This same dilemma can happen with Minnesota cities just like Mankato, Owatonna, and Albert Lea. The bankruptcy attorneys at Behm Law Group, Ltd. want to illustrate a case in point.
It used to be that cities which experienced financial difficulty simply increased taxes. Then came The Depression of the 1930s. This method no longer worked.
Subsequently, a Chapter 9 municipal bankruptcy law was created. Only about half of the states in the U.S. incorporated this law into their systems according to an article by Adrian Shirk.
Since 2008, over 50 cities have filed for Chapter 9 bankruptcy; only 13 successfully. By far the largest municipal bankruptcy in the U.S. is Detroit, Michigan.
Cited Reasons for Detroit’s Bankruptcy
Detroit filed for Chapter 9 bankruptcy on July 18, 2013. To many, this result was inevitable. After reviewing Detroit’s financial history since the 1950s, reporters Nathan Bomey and John Gallagher concluded that time and time again, city leaders either refused or failed to enact tough decisions that could have staved off financial collapse.
They cited these factors as having the greatest impact on Detroit’s bankruptcy filing:
- mass departure of city residents
- sharply decreasing tax revenues
- soaring home abandonment
- billion-dollar borrowing by city leaders
- creation of new taxes
- failure to reduce expenses when necessary
- large bonuses given to workers and retirees
- failure to reduce health care benefits
All of these factors over many, many years spelled financial disaster. It seems some leaders never want to play the bad guy. In so doing, they become the bad guy anyway.
Let us explain. When people encounter difficult situations, your heart may go out to them. But, when it comes to money, a leader has to weigh the considerations of all residents. It’s not about making people happy in the short term by giving them money. It’s about how to effectively use taxpayer money to achieve the best, long-term results. This takes thorough planning, discipline, transparency, and effective communication.
A city needs to be run like a business. Leaders have to pay for street lighting, signs, police, fire, utilities, courthouses, public schools, public hospitals, parks, other public properties, and municipal salaries, benefits, and pensions.
In fact, the top two sources of municipal debt are the employee salaries and benefits of both current and retired employees.
Just like in a personal household or in another business, when income declines and expenses stay the same or increase, adjustments need to be made to stay out of debt. In a city’s case, city services suffer first. Maintenance items get postponed. Residents have to endure the new normal. City morale tanks.
Sometimes, the state offers to provide money in exchange for taking more control over the city’s budget.
Some Decisions Detroit Made After Bankruptcy
In Britain, if a city were to file for bankruptcy, everything would be liquidated. In the U.S., the counterparties have to stay as long as they are assured their debts will be paid.
This rule was fortunate for Detroit. Creditors eyed the 57,604 piece collection of artwork in the city-owned Detroit Institute of Art. Instead of auctioning everything off and losing part of the city’s culture, the collection was divested to a series of charitable trusts. For the next 20 years, the Detroit Institute of Art “committed to contribute $100 million to the city’s recovery.”
In addition, Detroit agreed to:
- restructuring labor union pensions
- utility shut-offs
- state loans
According to the Michigan Constitution, pensions can’t be cut; however, Chapter 9 bankruptcy takes precedence over this rule.
While Detroit had more than 100,000 creditors, far more than you would ever likely have, we can still learn from Detroit’s predicament.
Steps to Avoid Bankruptcy
Work to keep income greater than expenses. If circumstances change, drill down to discover the root cause, and act accordingly. Do not react emotionally or let your emotions dictate how to spend your money. At times, that can be easier said than done.
Have a financial plan. Follow your plan. Scrutinize changes. Follow up with careful decision making. Even with that, if you ever have questions about bankruptcy in Mankato, Albert Lea, or Owatonna, MN, consult the bankruptcy attorneys at Behm Law Group, Ltd.