Yet another New England city has its eyes on bankruptcy, as local budgets bear the double burden of declining revenues and sagging state aid.

Chelsea, Mass., has been unable to collect taxes so far this year, and the city has not paid vendors for two months, city auditor David A. Hahesy said yesterday.

Mayor John J. Brennan said that these events, combined with the city's shrinking property tax base, have led him to contemplate seeking protection under the U.S. Bankruptcy Code's Chapter 9, which provides for a municipality's fiscal restructuring.

Chelsea's consideration of Chapter 9 follows reports in January that Mary C. Moran, mayor of Bridgeport, Conn., was thinking of such a course. And use of bankruptcy has increased in other regions of the country as a result of the recession. In Colorado, a softening real estate market has given rise to a rash of Chapter 9 filings by special tax districts.

Bridgeport's Mayor Moran subsequently denied reports that her government would resort to Chapter 9. "To date," the mayor said Jan. 9, "Bridgeport has merely taken steps to explore all options available to assure the long-term fiscal stability of the city."

Chelsea's Mayor Brennan, however, has made no such denial. A Chapter 9 filing, as the mayor envisions it, would render the city's contracts "null and void" and "a receivership could restructure the whole city."

With few options open to his city, Mr. Brennan says he believes bankruptcy would wipe the city's fiscal slate clean of superfluous programs inherited from previous governments, such as an annual clothing allowance of $525 a year for each city employee, unlimited sick days, and costly staffing requirements tailored to meet union demands.

But it is unclear whether a bankruptcy court has any powers at all over collective bargaining and other municipal contracts. As bankruptcy law expert James E. Spiotto has written, a bankruptcy court in a municipal case "cannot interfere with the political or governmental powers of the debtor." Both the city's mayor and aldermen would therefore have to acquiesce in any attempt to tinker with labor agreements.

The city board of aldermen and the state could also prevent Mr. Brennan from seeking bankruptcy protection in the first place.

Members of the legislative branch of city government fear that bankruptcy would blacken their political reputations, the mayor said. "They'd lose their jobs and I'd lose my job," Mr. Brennan said. But, he added, "the city has to come before the politician. I'd walk away from it all, if the city could land on its feet."

He added that he had told the division of local services in the state's Department of Revenue of the city's predicament and inquired about the feasibility of a Chapter 9 filing.

"We have it on good authority that Chapter 9 is not immediately available to Massachusetts municipalities," said Leslie Kirwan, acting deputy commissioner of local services in the state's Department of Revenue.

"Chapter 9 says that municipalities must have the authorization under the appropriate state statute," Ms. Kirwan said. At present, no statute explicitly authorizing Chapter 9 filings exists in Massachusetts.

A Massachusetts city or town such as Chelsea would need state legislation authorizing it to enter Chapter 9, Ms. Kirwan said.

Chelsea's woes worsened this year because of a Catch-22 Massachusetts statute that requires cities to present balanced budgets before they seek the necessary approval of their tax levies. After a $2.5 million gap appeared in Chelsea's roughly $42 million budget, the city could not collect taxes.

As a result, Chelsea employees expecting paychecks this week will probably be disappointed. "We're all broke," the mayor said yesterday. "Friday, the teachers are supposed to get paid, and there is absolutely no money."

Whether the city seeks protection from creditors or not, it seems likely to set a precedent for other financially troubled cities and towns in the state. If it does not file for Chapter 9 protection, the city could pursue an equally unusual path -- being annexed by a neighboring city.

"Chelsea is at the forefront of municipalities in trouble," Ms. Kirwan said. She described the city as "very poor, with a small tax base and very heavy reliance on local aid, at a time when local aid is being cut."

Chelsea's local aid has fallen from $21 million in fiscal 1989 to $18 million in fiscal 1992, which begins July 1. Special infusions under a program for distressed cities brought in $900 this year, and $1.4 million last fiscal year.

In April, Chelsea voters rebuffed the mayor's request for more taxes. The state's Proposition 2 1/2 property tax limit requires voter approval for tax rises of more than 2.5%.

To help the city compensate, lawmakers in the General Court of Massachusetts recently passed a bill permitting Chelsea to spread $2 million of its deficit over the coming four fiscal years, a practice that state statute would not permit.

That allowed Chelsea to submit a balanced budget for fiscal 1991, and the city plans to have tax bills in the mail by tomorrow, according to Mr. Hahesy.

But the city still has to resort to some unusual tactics. Citizens legally have 30 days to pay their property tax bills. But, the auditor said, "we will be asking some of the large taxpayers that they not hold onto the money for the full 30 days. We've had to do that in the past on a couple of occasions and people have been cooperative."

Chelsea officials also hope to expedite a $4 million local aid infusion from the state that they expect at the end of June. "Hopefully, the governor will see fit to get us the money a little early."

One unusual player in the drama is Boston University. Under a 1989 agreement, the university assumed management of the city's five schools for 10 years. According to Gerald B. Lewis, the university's assistant comptroller, the city dug its own fiscal grave by not mustering the votes to approve the Proposition 2 1/2 override, and now its schools will suffer.

"The city has proposed a fiscal year '92 budget that is totally unrealistic in terms of providing for education," Mr. Lewis said. The budget includes school funding of $11.6 million for the coming year, well below the $15.9 million requested by the university.

"This is a crisis of self-governance," Mr. Lewis charged. "They're looking for some white knight to come along and help them. We believe that that's not going to happen."

Chelsea has no long-term debt outstanding except a $5 million interest-free loan the state extended in 1986, when the state also installed a fiscal oversight board for the city.

The city has $2.6 million in revenue anticipation notes coming due in August, according to Mr. Hahesy. He said that Rans would likely continue to play a role in helping the city through its fiscal crisis.

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