Bankruptcy of Tiny Chelsea, Mass., Dramatizes a Major US Problem

FOR the first time since the Great Depression of the 1930s, a city in Massachusetts has gone into bankruptcy. A narrow tax base and low level of average income, along with cuts in federal programs and state aid, resulted in a $9.5 million deficit that has driven tiny Chelsea into receivership.But Chelsea is not unique. With the United States economy struggling to come out of a long recession, many local governments across the country can no longer bridge the gap between the level of taxation citizens are willing to approve and the increasing price of the services they are accustomed to. According to a survey conducted last May by the National League of Cities (NLC) in Washington, D.C., one-fourth of the 2,400 US municipalities of more than 10,000 people are under significant fiscal stress. "This is the highest percentage we've had since the mid-1980s, when we first did this survey," says William Barnes, director of research at the NLC. The major cause is lack of financial discipline on the part of local governments, says Pete Sepp, director of public relations for the National Taxpayers Union, also in Washington. The resources given to governments at all levels are more than adequate, he says, and the financial problems are direct consequences of the spending habits of the 1980s, when the economy was growing. "States and cities spent money like water," says Mr. Sepp. "Now that the revenues have fallen, they can no longer support expensive services. Everything suddenly becomes a painful cut." Chelsea has had its share of cuts: 80 teachers out of 300 were laid off before the opening of schools this fall. Forty City Hall employees lost their jobs. But the cuts were not enough to cover the $9.5 million deficit, devastating for a city of 28,000 people. Chelsea's Finance Control Board rejected an emergency budget on Sept. 4 and on Sept. 11 the Massachusetts legislature approved Gov. William Weld's request for appointing a receiver to run the city. "My objective is to get out of Chelsea as soon as possible," says James F. Carlin, the man appointed by Governor Weld to lead Chelsea out of bankruptcy. The terms of the receivership allow Mr. Carlin to stay for as long as five years to put the troubled community back on its feet. Carlin, a multimillionaire businessman, was Massachusetts secretary of transportation under former Gov. Edward King in 1983, and chairman of the Board of the Massachusetts Bay Transportation Authority (MBTA). It took him four years to get Boston's transit system on a sound financial track. This time, Carlin has to fight the legacy of a city administration that critics charge allowed overly generous union contracts. To deal with it, Carlin, who will be paid a symbolic $1 a year, has been given virtual control of the city's government. There will be no mayor in Chelsea, and the board of aldermen and other elected officials will have only an advisory role. The idea of receivership was supported by Mayor John Brennan Jr., especially after an override, which he proposed, of the Massachusetts tax-limitation law was rejected in April by a 3-to-1 margin. Receivership is not seen as a good solution by all of Chelsea's residents. Many fear a tax increase. Fire Chief Louis Addonizio, whose department faces possible loss of salary increases, says the receivership "is a violation of civil rights. It takes away all the powers that the citizens have; it's almost like taxation without representation." This issue has been picked up at the state level by Sen. Bill Owens (D) of Boston, who is working on legislation aimed at helping depressed communities in Massachusetts. His idea, based on a model Pennsylvania has adopted, is to create a state authority vested with the power to issue bonds that would guarantee the loans cities would need to cover their debts. "We're in very difficult times," Senator Owens says. "If we're not willing to do that, at least five or six cities in Massachusetts could be in the same situation [as Chelsea]." "How many Chelseas there are will depend in part on the course of the economy," says Mr. Barnes of the NLC, "and how much state governments are willing to assist local governments in distress."