This city had no real financial reason for going into default last week.
But if it doesn't straighten up, it may have two good reasons - a lack of cash and no way to borrow money - for going into bankruptcy early next year.
These conclusions emerged from interviews with federal, state and local officials who have watched in horror as Cleveland has gradually sunk over the last decade into fiscal looniness.
Their fears are reinforced by an unpublished, but widely circulated, accounting firm's report predicting that, if Cleveland does nothing, its treasury will be $6.1 million in the hole by March and down $14.4 million by June.
The real reason for the current mess, most experts agree, is the bitter political standoff between Cleveland's brash young mayor, Dennis J. Kucinich, and the City Council majority, backed by the local business establishment. Kucinich has called the year-long feud "the politics of insanity."
A glimmer of rationality came this week when Kucinich, reversing an earlier stand, said he would let the voters decide whether to sell a city-owned electric power plant if the council would let them vote on a measure to raise tlocal income taxes. The council is expected to consider the plan by the end of this week.
One federal expert, Donald Haider of the Treasury Department, said Cleveland "had no good reason" to default last Friday on $15.5 million in short-term notes, $14 million of which are held by local banks and the rest by the city treasury.
"The city could have raised taxes and sold some assets to avoid default," he said in a telephone interview.
"But it has real cash flow probles, and now there's the possibility that it could go into bankruptcy," said Haider, who is the deputy assistant secretary for state and local finance.
A city defaults when it fails to pay its debts. It becomes bankrupt if a court delcares it to be insolvent and moves to distribute its assets among creditors.
A local budge official, who asked not to be identified, agrees that default could have been avoided if serveral things had happened:
If the City Council had approved Kucinich's proposal last week to raise the local income tax from 1 to 1.5 percent. That was a remarkable turnaround for the mayor, who three times since 1970 had been in the forefront tf successful opposition to ballot issues that would have increased the tax.
If the council had accepted a Kucinich plan to sell $6 million in land the city does not use.
If the council and the banking community had backed another Kucinich proposal for a $90 million bond issue in March and if the bands had rolled over, or refinanced, the $4 million in notes. But the political air had become so poisoned that agreement was impossible. Kucinich, after all, had called council members everything from "bufoons" to "lunatics," and had labeled big business here "the biggest collection of abysmal failures in the United States."
On the other side, the council majority and the business leaders have been accused of being willing to accent financial disgrace in order to discredit Kucinich.
That deadlock may have been broken Tuesday, when Kucinich, still a dedicated foe of the light plant sale, agreed to let the people decide. Council leaders and bankers responded with cautious optimism, although the fragile truce could still fall apart.
Cleveland's general fund, or day-to-day, budget of $147 million is in trouble for several reasons. It anticipated the sale of the $6 million worth of city land-revenue that never came. It also anticipated $5 million worth of federal antirecession aid, but it collected only $2.5 million because the program ended this fall and Congress failed to extend it.
Finally, the city was socked with a federal court order earlier this year telling it to pay $12 million that its light plant owes for power it bought from the big private utility here-the Cleveland Electric Illuminating Co. (CEI). So far the city has paid all but $3 million.
If the city sells its light plant to CEI, which has offered $158.5 million, it would get $38.5 million immediately, plus $4 million ayear for the next 30 years. Also, it would not have to pay the $3 million under the court order.
Kucinich does not want to sell, because the 64-year-old light plant is the city's vehicle for suing CEI for $330 million in an antitrust case. Kucinich says he thinks the city will win the case. Also, he has used the light plant's motto of "power to the people" as his political credo.
The city's general fund budget is part of a $336 million overall operating budget, which includes a lot of funds that generate their own revenue for such things as water, small sewers, two airports, sidewalks and streets.
Cleveland also received $98 million in federal aid, which inlcudes $45.6 million under the Comprehensive Employment and Training Act, $34 million in community development grants and 15 million in generall revenue-sharing money.
The city gets $27 million in Cuyahoga County personal property tax and a small amount from the state- $18 million in local government funds plus $5.7 million for road repair.
The state and ferderal aid goes mainly for specifically designated purposes, and the city still will not have enough to pay all its bills by March if the unpublished report by the nationally known accounting firm of Ernst & Ernst is correct.
City officials have asked the federal government for help but they have wanted things the law does not allow. They asked for community development money to nuy trash trucks and snow-removal equipment.They wanted the comptroller of the currency to pressure the local banks into rolling over their debt. In each case, they were told such things would be illega.
Cleveland officials also learned quickly that they could not expect a massive federal bailout like New York City's $1.65 billion in 15-year federal oan guarantees, which Congress passed in June. In essence, the feds see New York as a potential national crisis, but they view Cleveland as an isolated-and very local-case.
Cleveland's default is puny compared with New York's failure to pay $1.6 billion in notes in 1975. Cleveland's notes are held by local banks, which are hardly threatened with collapse by the default. New York's outstanding debt of $12 billion at one time was held by 800 banks in 33 states, and some of those banks could have gone under if they weren't repaid.
New York Cityhs aggregate budget was greater than that of its state, and the state's credit rating was endangered by the city's near collapse. Cleveland's budget, and the state hardly feels threatened. New York state strove mightily to help its city, Ohio so far has done nothing. Last week Some federal officials suggest that Ohio set up a board to oversee Cleveland's finances, the way New York state did with New York City. But Ohio officials are cool to such a plan, which one state legislator here proposed last week. Ultimately, Cleveland's best hope is that its people will vote to raise their income taxes, which would bring the local treasury an extra $33 million a year. But, given the voters' track record, no official here is taking any bets that next years Cleveland will become a fiscal nirvana.
Some federal officials suggest that Ohio set up a board to oversee Cleveland's finances, the way New York state did with New York City. But Ohio officials are cool to such a plan, which one state legislator here proposed last week.
Ultimately, Cleveland's best hope is that its people will vote to raise their income taxes, which would bring the local treasury an extra $33 million a year. But, given the voters' track record, no official here is taking any bets that next years Cleveland will become a fiscal nirvana.