The next mayor will face trying times from his very first month in office. Despite abating media coverage of the city's fiscal crisis, the coming year may be the most trying of times for the city. Myths of restructuring aside, the state of the city's finances is closer to true default than ever before.

		Christopher Briem, a former analyst at the Congressional Budget Office, is a regional economist at the University Center for Social and Urban Research, University of Pittsburgh.

The Act 47 process is meant to prevent a municipality from ever defaulting on its debts. To that end, the current recovery plan has at best briefly delayed the inevitable. Without more fundamental changes, the very real possibility of bankruptcy for the city of Pittsburgh must be faced head on.

If bankruptcy happens it is because most think its impact will be limited to the city and its current residents. The question that ought to be asked is what would bankruptcy mean throughout the region and across the state. The entire region's image will be tarnished as national headlines will tell the world of a bankrupt Pittsburgh, yet make no clear distinction between the city proper and the region around it. If the city defaults on future bond payments there will be concrete fiscal consequences throughout the region and state.

Debt restructuring is a common part of most bankruptcy proceedings. In Pittsburgh's case, individual bondholders are not at risk because the city's debt is fully insured. Insurance companies were paid an up-front premium to cover the very possibility that the city would default.

	Daniel Marsula, Post-Gazette Click illustration for larger version.

Across Pennsylvania, other local municipalities, school districts and special district governments issue bonds that are similarly insured. No Pennsylvania municipality has gone through the federal bankruptcy process since Act 47 was passed. That perfect record must be reflected in the cost of bond insurance offered throughout the state.

If the Act 47 process proves to be a failure in Pittsburgh's case, either the bond market will price that risk in accordingly and raise the cost of borrowing statewide or bond insurance companies will raise the price of bond insurance offered in Pennsylvania.

Pittsburgh's general obligation bond debt is an outlier compared to any other jurisdiction in the nation. The city itself measures the total debt it owes to be $1.3 billion, or roughly $10,000 for every household in the city. That number may be low when the debt the city could be accountable for in the case of default by any of the Pittsburgh public authorities is added in. Combined with a growing pension liability that will eventually come due, these enormous debts make for an untenable future.

Can Pittsburgh literally go bankrupt? Chapter 9 of the federal bankruptcy code is written precisely for local municipalities to do just that. Few major cities have ever gone bankrupt, but it is not unprecedented. In California, Orange County's 1994 bankruptcy is considered the largest municipal entity to enter into a Chapter 9 process. Ironically, what precipitated Orange County's bankruptcy was the mismanagement of a multi-billion dollar investment fund.

Pittsburgh, where there exists nothing in the form of savings or surplus, can only hope to some day reach the level of long-term fiscal solvency that Orange County had as it entered bankruptcy.

The Pennsylvania Intergovernmental Cooperation Act, the mandate for the city's current oversight board, would seem to limit the ability of assisted municipalities to file a Chapter 9 bankruptcy without the state's approval.

With or without approval, if a bond payment goes unpaid the distinction between a technical default and de jure bankruptcy would become a minor distinction to financial markets. What makes the city's current situation more precarious than in the past is the lack of any meaningful financial reserve to fall back on and few assets that could be sold to raise needed cash.

There are clear tests that a federal judge would apply to decide if Pittsburgh was eligible to enter into a Chapter 9 bankruptcy. In 1991 a federal judge blocked the city of Bridgeport, Conn., from filing for bankruptcy on the grounds that the city was not sufficiently insolvent and still had the fiscal capacity to tax or borrow itself out of its predicament. At the time Bridgeport had a population of 140,000 and a bond debt of $220 million. Pittsburgh has a population under 320,000, but a debt level six times higher than Bridgeport's. Coupled with Pittsburgh's pension liability, it is difficult to argue that the city's ever-shrinking population will ever be the source to pay the city's accumulated debts.

The fiscal problems now faced by the city are the result of the hyper-fragmentation that has been cemented into Pennsylvania's political structure for a century. The logical people to bill for the city's unpaid debts are the citizens who once received the services that their taxes did not fully pay for. The problem is that the bulk of this debt was incurred decades ago. The people who should get that bill have long since moved to other nearby municipalities or have passed away. Each year fewer of the current city residents have anything to do with the debt service they are required to pay for.

The problem for the future is that people have the ability to vote with their feet. Most will logically choose not to pay bills not of their making. Potential future Pittsburghers will take into account these debt payments, and the massive taxes they precipitate. The result is a self-reinforcing spiral of continued population decline, making fiscal recovery exponentially more difficult.

The situation is made worse by the fact that not everyone has the ability to move to the suburbs. The population more and more concentrated in the city, including students and the elderly, are the groups least able to generate additional tax revenues.

The fiscal year 2006 city budget, as projected by the outgoing administration, has a mere $1.2 million surplus, roughly 0.29 percent of a total $415 million budget. That virtually non-existent cushion is actually an optimistic scenario for where the city will find itself at year's end. A fixed property assessment base, declining population that erodes income tax revenues, delayed or nonexistent casino revenues, rising fuel prices and escalating pension fund payments will each dwarf any surplus the city budget will have for years to come.

It is inconceivable that the city would borrow more money to pay for operating expenses. Yet, if it does not, bankruptcy in one form or another will result when some bill goes unpaid.

Chapter 9 bankruptcy is fundamentally different from other forms of bankruptcy as might befall an individual or business. The city will not be broken up and sold off to pay creditors. By law no police cruiser would be repossessed or any piece of fire equipment put up for sale. Could city expenses be further reduced? Possibly, but given the scale of service reductions implemented thus far, there is a real question of how far cuts in core services can go.

In the end, the nexus of bankruptcy proceedings will be the city's debt and required interest payments. Does bankruptcy have to happen? Of course not, but the steps that must be taken to prevent it go beyond the marginal steps that have been taken thus far.

For those who think the consequences of a bankrupt city would be limited, nothing could be further from the truth. Bankruptcy or not, the region and state will share the costs in either scenario.