EagleTribune.com, North Andover, MA

February 14, 2010

Lawrence fiscal crisis prompts talk of bankruptcy, receivership

Lawrence fiscal crisis prompts talk of bankruptcy, receivership

By Bill Kirk

LAWRENCE — Bankruptcy. Receivership. Finance control board. Financial overseer.

For the last several months, city and state officials have batted around these and other terms they believe represent the solution to the city's $24.5 million budget deficit.

"If Lawrence can't pay their bills, maybe they should file for bankruptcy and start over," State Treasurer Tim Cahill, an Independent candidate for governor, said last month.

Republican state Rep. Karyn Polito, a possible candidate for attorney general, suggested the city should be placed into receivership.

One vocal critic of Lawrence, fired city planner Mike Sweeney, as well as a growing number of members of the state Legislature, think the state should implement a finance control board.

A fourth option, contained in a bill currently before the Legislature's House Ways and Means Committee, would allow the city to borrow up to $35 million to balance its budget this year while also providing for a financial overseer to come into City Hall to advise Mayor William Lantigua's administration. If progress is not made in solving the city's budget crisis by next year, the state's Secretary of Administration and Finance would then appoint a finance control board.

Whatever option is ultimately chosen, one thing is clear — getting the city back on solid, financial footing is going to be a long and painful process.

The Springfield model

In 2004, the city of Springfield was in a similar predicament to the one Lawrence now finds itself in.

Tom Walsh, communications director for Springfield Mayor Domenic Sarno, said the city had been having financial problems for years, and there was talk that the city could either go into receivership or be put under the oversight of a finance control board.

Gov. Mitt Romney convinced Springfield leaders to accept a five-person finance control board, which had sweeping powers to move in and change the way the city was governed.

"They had authority over everything in the city while they were here," Walsh said. "They had all the powers of the City Council and School Committee and could override anything the mayor wanted to do ... (and) the only thing the City Council had control over were zoning issues."

The state loaned the city $52 million, which was used to balance the budget. Springfield has paid back about $5.6 million of the loan, but a deal now in the works would forgive $11 million of that debt in return for a $23 million payment this year. The remaining $13 million will be paid back over time.

The finance control board was made up of three people appointed by the Secretary of Administration and Finance, as well as the mayor of Springfield and the president of the Springfield City Council. That's the same sort of arrangement now being proposed in Lawrence.

The board commissioned a number of management studies, which resulted in some concrete changes in the city, including the hiring of a chief financial officer. Springfield went from having a $41 million deficit in 2004 to a $35 million surplus this year.

The board also took a hard line with unions, renegotiating contracts with 28 bargaining units in the city and privatizing a number of city functions, like nighttime custodial services and street sweeping.

"The end result is that the city is in much better position than it was 5 years ago," Walsh said. "We are not on the verge of bankruptcy."

But Cindy Roy, spokeswoman for Jay Gonzalez, the state's Secretary of Administration and Finance, said it's unfair to compare Lawrence and Springfield. She said the problems in Springfield were much greater and more varied, and that the solutions being proposed are also different.

"We are not giving the city of Lawrence a loan," she said. "These are very different situations."

1990s Finance Oversight Board

If a control board is put in place, it won't be the first time Lawrence has had its fiscal affairs overseen by the state.

Lawrence's financial troubles date back to 1983, when the Department of Revenue's Division of Local Services began closely monitoring the city. Things got so bad that in 1990 the state came in at the request of some city councilors and established a finance control board.

The board was comprised of seven people, including three DOR employees, one Department of Education official, the mayor, the City Council president, and a School Committee member. The board's purpose was to "ensure the city had balanced budgets and to promote and advocate for various financial initiatives that would support fiscal stability in the community."

Bob Bliss, a spokesman for the DOR, called it "control board-lite." He said that while it helped the city get a handle on its finances, the board didn't have the kind of power to make structural changes that would result in long-term savings.

"It was very similar to the authority that the overseer would have," he said. "It was mostly guidance. It was not the Springfield model."

According to the DOR, after the control board was dissolved in 1998 and until 2002, the financial health of the city improved dramatically.

But in 2003, the DOR said, things started turning sour again, "when Lawrence returned to poor financial management practices," such as using one-time revenues for operating expenses, letting departments spend more than their annual budget allotment and exaggerating its revenue projections.

In a strongly worded statement attached to a February 2008 Financial Management Review requested by then-Mayor Michael Sullivan, the DOR said that if the city didn't take care of a series of deficiencies in its budget at that time, the state would "in all likelihood, (establish) a finance control board ... based on the Springfield model which would take over, in a substantive and authoritative way, management of the city's finances."

Rather than follow through on its threat to bring in a control board, however, the DOR has backed off that stance, and instead supports Gov. Deval Patrick's bill to allow the city to borrow money and bring in a financial overseer, with only advisory powers.

Bliss said the governor and Gonzalez believe Lantigua deserves a chance — although one limited in time to a year — to turn around the city's finances before a decision is made to go to a control board.

"The 2008 management review was intended to send a message of urgency to Lawrence's local elected officials back in 2008 — a message that was not acted on," he said. "A new set of elected officials should get the opportunity to manage the city."

Receivership in Chelsea

While Romney implemented a finance control board in Springfield, it was Gov. William Weld who imposed the only receivership on a city in Massachusetts since the Great Depression.

For generations, it seemed, Chelsea had been used as a political cash register by mayors, city councilors and other public officials more interested in lining their own pockets than in doing what was right for the residents of the city, according to current City Manager Jay Ash.

"There were many years of problems leading up to receivership," he said. "It was a chaotic time... The city was financially bankrupt and cynically bankrupt. Nothing was working right."

In the 1980s, there was a mayoral recall effort combined with "wild accusations of corruption reaching into the mayor's office," Ash said. After receivership was declared in 1991, four former mayors were subsequently investigated and indicted on various corruption charges.

For years leading up to receivership, the city had been under a state finance control board, which simply didn't have enough authority to deal with Chelsea's problems.

"It was nothing more than a Band-Aid," Ash said. "The problem with the finance control board was that it had no power."

By 1991, the city was struggling under a $10 million deficit on a $41 million budget.

Weld appointed James Carlin, the former state Commissioner of Commerce, as receiver. The legislation that brought in the receiver gave Carlin extraordinary powers — he could hire and fire city employees, renegotiate vendor contracts and reorganize City Hall in any way he chose.

The legislation also removed the sitting mayor from power and canceled a pending election.

"The receiver came in with incredible powers," Ash said, "to do almost anything with the stroke of a pen. There is a misconception that the receiver could break union contracts. That was a fallacy. But he had tremendous power, and he was not subject to the political pressures a mayor would have been."

One of Carlin's first tasks was to take on the Fire Department, which was spending $1 million a year on overtime out of a $4 million department budget. He was successful in cutting the overtime budget, although the firefighters union appealed the changes.

After a year, Carlin had broken up the city's corrupt and costly power structure and wrestled its biggest financial problems to the ground. A second receiver was appointed who then worked over the next three years on building the city back up. Part of his role was to rewrite the charter to eliminate the pernicious politics that had been strangling the city.

The result was a whole new form of government: Rather than an elected mayor, the city is now run by a professional manager.

Ash said it's unclear to him if Lawrence should be placed into receivership.

It worked in Chelsea, but in other places, like Camden, N.J., it hasn't. There, a receiver has been attempting to fix the city for seven years without success.

The question for Lawrence, Ash said, is "how radical should you go to fix the problem? If you have a rotting foundation, and you don't tear out the rot, no matter how much you build on top of that, you still have a weak foundation."

Bankruptcy protection?

One way to avoid a protracted recovery would be to declare bankruptcy, as Cahill has suggested.

"I'm not proposing bankruptcy," he said in a recent interview. "But it has to be on the table. It's a poison pill, but the state has a history of loaning money to communities and never getting paid back."

But Gonzalez labeled Cahill's comments "irresponsible." He said calling for bankruptcy "would send a message to the city's bondholders and to other private parties with which the city does business that state and city officials are willing to give up and take the easy way out instead of making the hard choices necessary to restore fiscal stability and to honor the financial and contractual obligations the city has made. "

It's unclear if Lawrence could declare bankruptcy even if it wanted to. In the 300-year history of Massachusetts, no city or town has ever done so.

Bankruptcy has been declared in other municipalities, including Orange County, Calif., in 1994, and Bridgeport, Conn., in 1991. More recently, Harrisburg, Pa., has talked about declaring bankruptcy, as has Vallejo, Calif., and the Detroit public school system.

According to Vic Bass, a noted bankruptcy attorney with the Boston firm of Burns & Levinson, municipal bankruptcies are "extremely unusual" in part because it is a laborious process that involves getting approval by a state's Legislature and working with a federal judge to pay creditors.

"There are restrictions, which vary from state to state," he said. "Unlike a corporation, if bankruptcy fails, a city or town can't just go out of business. In a corporate or individual case, the creditor goes after assets and forecloses on your house or business. I don't think foreclosure on City Hall is an option under Chapter 9."