Bankruptcy Unlikely to Save East Cleveland

Blog Post

The city of East Cleveland is beyond broke, but the Ohio municipality will wait until Spring 2015 to decide whether to file for bankruptcy protection even though the head of the Ohio Office of Management and Budget said she's concerned the city won't be able to make payroll for the first pay period in 2015.

An East Cleveland bankruptcy filing would be a first for an Ohio municipality. The city has been under a state-ordered fiscal emergency since 2012, which means a fiscal commission oversees the city's finances and works with city officials to devise a recovery plan. This is the second time that East Cleveland has been under a state-ordered fiscal emergency as it emerged from fiscal emergency in 2006 after 18 years in such a condition – the longest in Ohio's history – but this time a recovery plan is not forthcoming.

Examples of the city's insolvency are numerous. Recently, the city government's cell phone provider shut off service for nonpayment. The city lacks funds to fill the two new salt trucks it purchased with federal money. In a letter to the state financial commission overseeing East Cleveland, Ohio Auditor Dave Yost referenced anecdotal evidence that doctors are refusing to treat city workers because medical bills have gone unpaid. The city has negative fund balances of about $5 million and has more than $2 million in past due bills.

Despite its dire financial situation, a bankruptcy filing is unlikely to fix the city's woes. As one of the poorest cities in Ohio who has lost two of its largest employers in recent years (and the income taxes paid by those who worked there), there seems to be little hope of a turnaround because the city only appears to be growing poorer. For obvious reasons, a municipality under chapter 9 bankruptcy protection cannot simply liquidate and cease to exist as a corporate debtor could do in a chapter 7 or chapter 11 bankruptcy. Therefore, unless the federal or state government pumps even more money into cash-poor East Cleveland, the city is likely to continue languishing in poverty for the foreseeable future.

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