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Road to financial distress in varies by city in U.S.: report

The word 'Bankruptcy' is seen painted on the side of a vacant building by street artists as a statement on the financial affairs of the city
The word 'Bankruptcy' is seen painted on the side of a vacant building by street artists as a statement on the financial affairs of the city

(Reuters) - Detroit, Chicago and three other U.S. cities fell into financial distress for a variety of reasons, according to analyses of financial data released on Thursday.

The Center for State and Local Government Leadership at Virginia's George Mason University examined a handful of the most troubled cities, along with Baltimore, which despite a population drop and high poverty levels is on a solid financial footing.

Detroit, which made the biggest municipal bankruptcy filing in U.S. history on July 18, wound up in bankruptcy court due largely to its steep population drop, cuts in state aid and collapsing real estate values, the report said.

Chicago's issues leading to steep cuts to its credit ratings are rooted in large measure in its high labor costs, while San Bernardino in California is seeing tight times chiefly because of a flawed city charter and inhospitable state politics, the study found.

Detroit wound up in bankruptcy court because, while its revenue is higher than other Michigan cities on a per capita basis, there was not enough cash to cover services. High debt and pension costs also contributed.

"Filing for municipal bankruptcy is a critical step for Detroit to stop its hemorrhaging and to develop, in concert with the state, a realistic plan to overcome its insolvency," the center said.

The study noted Michigan's biggest city needs radical changes to its physical borders and governance, as well as shared services to succeed.

Chicago, meanwhile, faces "seemingly intractable labor issues" that are impeding changes to rein in burgeoning pension costs, according to the center. That in turn could fuel fears of higher property taxes and derail economic expansion.

"The more of its budget the city must divert to meet unsustainable pension obligations, the less it has to address its goal of investments in the city's infrastructure, schools and public safety - investments fundamental to the city's economic future," the analysis said.

California's San Bernardino landed in bankruptcy court due in some measure to a flawed city charter that was amplified by an ingrained political culture, low state funding and economic shocks. The city charter gives the mayor broad power to veto ordinances, while at the same time granting the city attorney broad discretion to ignore requests from the mayor.

"A weak charter combined with a negative political culture made overcoming the economic shocks and state actions too steep a hill for San Bernardino to climb," the center said.

Pittsburgh's fiscal decline came to a head in 2003 and the state swooped in to help. While the city has made progress on its finances, it still struggles with state laws that limit revenue and require binding arbitration for public safety unions, the center concluded.

Providence, Rhode Island, was held up as a city that is making its way back to fiscal stability after loss of population and industry had put it on the brink of bankruptcy. A shared sacrifice approach that included spending cuts and tax increases led the city toward recovery, the center's report said.

(Reporting by Karen Pierog; Editing by Eric Walsh)

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