DALLAS -- East Cleveland, Ohio says it is insolvent and that bankruptcy is its best option to preserve essential public services.
If it follows through, East Cleveland would be the first Ohio city to file Chapter 9, according to the Ohio Office of Budget and Management.
The city of 18,000 has no outstanding bonds.
It formally petitioned State Tax Commissioner Joseph Testa, who must sign off on a local government Chapter 9 filing under state law. The commissioner's approval would pave the way for such a filing.
The city said it is struggling to meet payroll and benefit obligations because of a revenue crunch that is not likely to ease.
"Despite the city's best efforts, East Cleveland is insolvent. Based upon financial appropriations projections for the years 2016, 2017, 2018 and 2019, the city will be unable to sustain basic fire, police, EMS [emergency services] or rubbish collection services," according to its April 27 letter to the commissioner. "The city has tried to negotiate with its creditors in good faith…It has been a somewhat impracticable effort."
The city has adopted a financial recovery plan that was signed off by a state-appointed fiscal commission; though it was "intended to restore the city to fiscal solvency, will have the effect of decimating our safety forces. Hence, our goal to effect a plan that will adjust our debts," the letter said.
One restructuring expert called the city's plan a temporary fix that doesn't appear to address the means by which it could stimulate its economy and ensure its long-term viability.
The city's filing would only adjust its debt and not generate revenues, said James Spiotto, a former bankruptcy attorney who is a managing director at Chapman Strategic Advisors LLC. "If you just go through Chapter 9 it's not a solution, it is Band-Aid and it will only last so long; they need something that will help them be able to address their issues to raise tax revenues that will help them afford their cost of government," he said.
The city's major sources of revenue come from income taxes, local government revenues distributed by the state, property taxes, and trash collection fees, as well as a street lighting assessment. The city has seen steep reductions in the past few years.
The Cleveland Clinic-owned Huron Hospital shut down in 2011 and has since been demolished. Losing the hospital cost East Cleveland about $10 million a year in income tax, the city's finance director Jack Johnson said in an interview Friday.
The city has also suffered a disproportionate loss in state funds in recent years relative to other communities in Ohio.
Johnson said five years ago the state, in a bid to restrain spending, began cutting the Local Government Fund. The Local Government Fund is an important revenue sharing program established in Ohio in the 1930s. Local governments receive a set percentage of all taxes collected by the state. Communities use money from the local government fund to pay for general expenses, from road repair to fire and police departments.
The city's total revenues are projected to fall below $10 million this year from more than $11 million in 2015, according to a report from the state auditor that examined city finances and the impact of various fiscal options.
The city currently has $3.4 million in outstanding accounts payable, which include several judgments from lawsuits that have been settled. The city's 2015 appropriations don't cover those costs because it can't afford to pay them.
The auditor's report examined several scenarios under which the city would sell notes to pay off its debt, but several of the option assume vendors would take haircuts and deficits could persist going forward as the city works to repay the debt. The potential sale of assets is not considered an option due to their condition. City employees participate in state-run pension funds and the city pays between 10% and 24% depending on the type of employee.
The report notes that Chapter 9 will provide only near-term help.
"Chapter 9 bankruptcy is not a prospective solution, meaning it will not prevent debt from accumulating in the future, will only serve to adjust the municipality's current debt and will not guarantee resolution of the city's structural imbalance," the report reads.
Johnson said that the cuts have had a harder impact on the city because of the amount of money the city received in relation to the size of its community. Funds, he said, are allocated by counties based on a formula favoring communities that have higher instances of residents being on public assistance, higher unemployment rates and older housing stock. East Cleveland ticked all of the boxes.
The city 's population is down about a third from 2000 and by more than half since 1950, when roughly 40,000 people lived there.
About 40% of East Cleveland's residents live below the poverty line, according to information from the Census bureau. The city's median household income of $20,660 is less than half the statewide $48,849.
"When our allocations were cut it was more dramatic than it was to any community in the state," said Johnson. "At one time we had about $5 million and now we get about $1.2 million."
The city has considered a merger with neighboring communities, like Cleveland, but that plan has been stymied by court action, according to the letter filed with the tax commission.
Spiotto suggested an alternative that would involve the state legislature providing additional sources of revenue for the city through a bridge loan or grant.
East Cleveland was placed in a state of fiscal watch in 2012 after the city failed to provide an acceptable plan for tackling its deficit. Ohio State Auditor David Yost declared the city in fiscal emergency later that year after officials once again failed to present a feasible financial recovery plan to eliminate the deficits.
A special supervision commission was formed to review and make suggestions on a recovery plan. Last year Yost's office issued a statement that municipal bankruptcy or merging with the city of Cleveland likely offered the most viable options for the city.