Broken, but not bankrupt

The city of Ypsilanti is in trouble. City revenue decreased by -0.56 percent between 2004 and 2013, while debt connected to the Water Street project accumulated.

Given these problems, it is understandable that citizens would come to the conclusion that the city is a candidate for Chapter 9 bankruptcy. A possibility that has become all the more fathomable with Detroit’s decision to file for bankruptcy on July 18, 2013.

Cities and towns feel financial stress when citizen’s demands exceed revenues. Those kind of imbalances can be easily fixed with cuts or small increases in revenue. Financial distress is another beast. A municipality is financially distressed when revenues fall short of expectations, and are expected to decline in the future.

Ypsilanti is financially distressed. Revenue has decreased, and can be expected to improve modestly, if not decrease further. Debt has left the city unable to make capital improvements discussed in its Master Plan. The mayor and City Council have made cuts each year, but still have debt to pay off.

Financial audits from fiscal year 2013 show assets exceed liabilities by $16.7 million. However, the city can’t liquidate. Sacrifices needed to pay off $57.8 million in debt will come from city services.

A majority of the financial distress is related to the Water Street project, a failed attempt at economic development. Bonds issued by the city for land to rehabilitate and develop on Water Street amount to $23.6 million.

Moreover, the pension fund for the Fire and Police Departments, which was funded 116.9 percent in 2003, was 66 percent funded in 2012 (the latest date available).

Ypsilanti isn’t the only municipality in debt. The difference is, Ypsilanti doesn’t have the opportunity to expand its tax base like other areas. Its citizens have a median household income of $32,996. In 2008, citizens rejected an income tax on the ballot, and property tax collections have fallen due to a bust in the real estate market.

And business activity is slowed. The city issued 62 business licenses in 2007, but only 31 in 2013. Information obtained by The Eastern Echo shows that development has slowed too. In 2003, the city issued 559 building permits, which declined to 321 in 2008, with a small increase to 327 in 2013.

In other words, there isn’t economic growth around the corner.

Central Falls, Rhode Island is most comparable to Ypsilanti in terms of fiscal crisis and bankruptcy. Two Northern cities with small populations. Approximately 19,809 people reside in Ypsilanti, and 19,416 in Central Falls. In 2011, Central Falls filed for bankruptcy, with $80 million in debt and liabilities.

The small city in Rhode Island closed its local library, and asked municipal retirees for substantial reductions in pensions. Albeit the tidiness of the bankruptcy process, Central Falls was unable to restructure its debts outside of federal bankruptcy court – a more desirable option.

City Manager Ralph Lange of Ypsilanti has said that the city must sell at least $4 million in land on Water Street, otherwise its reserve fund – which it has dipped into to repay debt – will be exhausted and the city will become insolvent. Without the additional revenue from the land sale, the reserve fund’s balance is projected to decrease to $7.9 million in fiscal year 2014, then to $5.5 million in fiscal year 2016, and $1 million in fiscal year 2019.

Even in the direst circumstances, bankruptcy is unlikely. A more likely outcome is the city comes under the auspices of an emergency manager appointed by the state. Or the city is able to restructure its debts and settle with creditors outside of federal bankruptcy court.

Ypsilanti’s debt burden pales in comparison to that of Central Falls at the time it declared bankruptcy. The estimated $57.8 million Ypsilanti carries in debt can be more easily taken care of than the $80 million in liabilities reported by Central Falls in 2011.

To be sure, the city doesn’t have to pay up now. Its liabilities will be paid over time, and the debt that has distressed the community the most, is that from the Water Street project – an even smaller sum.

Ypsilanti is broken, but not bankrupt. There is a distinction. Bankruptcy would require that the city be unable to pay its debts as they come due. To enter federal bankruptcy court, the city would have to be unable to meet payroll, payout contracts, or default on a bond payment. Neither of which are likely to occur before state intervention.

Gov. Rick Snyder, the Michigan Republican, is unlikely to allow another municipality to declare bankruptcy on his watch. And state authorization is another requirement for Chapter 9 bankruptcy. For example, the city of Hamtramck was denied its petition to file for bankruptcy in 2010 and 2011.

In any case, bankruptcy isn’t the doomsday it is made out to be. It’s bad. But it also allows persons, companies, and in rare cases cities, the ability to escape debts that have become unserviceable.

Ypsilanti is in trouble, but its troubles will likely be resolved outside of a federal bankruptcy court.

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