DENVER -- The real financial fallout of municipalities in the latest recession is yet to come, speakers at the Government Finance Officers Association's annual meeting warned this week.
James Spiotto, a managing partner of Chapman & Cutler in Chicago, said experience from past recessions indicates that cities' major fiscal problems usually follow recessions.
For most of the country, that means "we are going into that period now," he added. Philip Dearborn, vice president of the Greater Washington Research Center, said that with the 1982-83 recession the biggest problems showed up in 1984.
With cities like Philadelphia, New York, and Washington already facing severe problems, the speakers at a session on "communities in crisis" said normal belt-tightening solutions may not be enough.
"It is not clear if these cities with these kinds of problems will be able to manage their way out as they did in the past, whether that means some sort of state supervision or whether the budget or financial officers set up rigid disciplines on budgets will solve these problems," Mr. Dearborn said.
But that does not mean most cities will be faced with a sinking financial ship. Mr. Spiotto said a budget deficit for a single year "does not kill a municipality," and he pointed out that in 1983, about 30% of medium and large cities reported budget deficits.
"But a cumulative deficit of past years does create a problem," he added.
Mr. Dearborn, whose group plans a study of city finances across the country, said while most cities can solve their fiscal problems through measures such as spending cuts, hiring freezes, higher taxes and fees, and early retirement options for employees, those measures might not be enough for cities with long-term structural problems like New York.
Allen Proctor, executive director of the New York State Financial Control Board, which was created as an oversight board to help New York City through its 1975 fiscal crisis, said structural problems mean major policy changes are warranted.
And even though New York has instituted several changes, such as reporting its finances according to generally accepted accounting principles, expanding its budget planning horizon, and issuing regular financial reports, the city's current crisis was brought on "by the misfortune of having an abnormally good decade in the 1980s and [the city] was a victim of a level of disillusion that is perhaps more extreme than other [cities]."
Mr. Dearborn said cities with these kinds of problems may have to prune some of the programs they initiated in the 1960s and 1970s, establish reserve funds, and seek a restructuring of their revenues from the state government.
"It looks like New York will be first in the line in eliminating some services that shouldn't have been [city] services," Mr. Dearborn added.
Still, Mr. Spiotto said he did not anticipate a run on Chapter 9 bankruptcy filings by municipalities caused by this latest recession. He pointed out that during the last decade when there were 18,000 to 20,000 corporate bankruptcies a year, municipal bankruptcies only totaled 69. Most of those involved municipal utilities and special districts, he said.
As for a municipally's ability to borrow money to help ease its financial crisis, Mr. Spiotto said changes made in the bankruptcy code in 1988 have enabled municipalities to issue revenue bonds backed by specific dedicated funds. "That bankruptcy-proof [revenue] stream is going to bery very important in the '90s in dealing with municipal finance problems," he added.
