The idea of a city filing bankruptcy is difficult to fathom. How could such a thing happen? Isn't a city, in theory, able to simply raise taxes to cover their liabilities? If a city needs money in a pinch, can't it simply borrow it and pay it back later?

In reality, municipal finance day-to-day is not that much different from corporate finance. They both have to pay their bills. They both have to balance their receipts and their expenses. And when a municipality can't pay its bills - or decides not to for whatever logical or illogical reason - like a corporation, it can file for bankruptcy (except for a couple of states, where municipal bankruptcy is currently illegal).

Orange County, California, is probably the most famous recent example of a government declaring bankruptcy. Their bankruptcy was caused by large investment losses. There are rumors and speculation today that more governments are considering bankruptcy as an option. It has even been suggested that the State of California may file for bankruptcy. Certainly, the 2009 stimulus bill - which transferred hundreds of billions to governments - forestalled some bankruptcies.

Strong Towns has looked at the reliance on grants and aid amongst municipalities here in Minnesota. It is startling how many cities have government transfer payments as their predominant source of revenue. In fact, in 2009, there were three municipalities that funded less than 10% of their government through local taxation.

Checks for Local Government Aid in Minnesota are scheduled to be sent after Christmas. With the recent announcement that the state faces a $1.2 billion shortfall in the current budget - and with few places to cut - there are strong indications that LGA will be delayed, then reduced or eliminated. If more than half of a city's revenue comes from LGA, it is hard to see how that gap can be filled.

Some will blame the state for driving cities into bankruptcy. I would agree, but not for the reason most would suggest. Years of aid has not only created dependency but it has allowed cities to pursue an expensive and inefficient development pattern that can't be maintained without government transfers (one of our four Mechanisms of Growth). We've grown so used to this system that we hardly question it, but when you step back and consider the incredibly low return on investment we all see on our local infrastructure projects, it is a wonder we have made it this far.

It is unfortunate that the current economic crisis is forcing our communities to make this transition in a short and painful timeframe. Although, without being forced to change, many would continue to dig their holes deeper. The communities that will be most successful over the coming generation will be those that orient themselves with a Strong Town approach that emphasizes community-building and increasing the return-on-investment on existing infrastructure.