BENTON HARBOR, Michigan (Reuters) - Either way you look at it, this Michigan city is on the front line -- either it is a harbinger of battles to come over budget cuts across America or a new chapter in the struggle for civil rights.
Analysts of the unsettled municipal debt market say Benton Harbor, a poor, predominantly black community of fewer than 11,000 on Lake Michigan's eastern shore, illustrates the tough choices ahead for American cities and states.
Many municipalities in particular are gripped in a downward spiral of lost jobs, weak real estate markets and slimmer property tax revenue that deepen budgetary woes and result in fewer services and the loss of even more jobs.
People in Benton Harbor are bitter.
Some claim the situation is caused by a land-grabbing scheme by giant appliance-maker Whirlpool, once a major employer of blue-collar workers in the city. The company denies the accusation.
Others say sweeping powers given to a state-appointed official to fix the budgetary mess usurp the civil rights of the majority black population.
Emergency Financial Manager Joseph Harris was sent by Michigan's government in April 2010 to tackle a $10 million hole in the city's pension funds and a rising budget deficit. He has already cut city staff to 70 from 100. A new state law has since stripped elected officials of their powers and vested them in Harris.
"It is not a question of race," Harris, who is black, told Reuters. "It's purely a matter of financial mismanagement over many years."
Two years after the end of the Great Recession, Benton Harbor's woes are repeated throughout the nation. The U.S. housing market appears to have begun a double dip, deepening what already was its biggest crash since the 1930s, and the job market is only slowly recovering.
While federal aid has shriveled, property taxes in particular have not recovered. Tax revenue that helped municipalities spend more in the boom no longer exists.
"The housing market and unemployment are a double whammy for the economy," said Therese McGuire, a professor at Northwestern University's Kellogg School of Management who focuses on public finance and policy.
"The problem is that compared to previous downturns, this recession was so deep and the recovery has been so weak," she said. "Every level of government has been affected, but municipalities are in the worst position."
Financial aid for states and cities from President Barack Obama's 2009 economic stimulus package, which provided a lifeline during the recession, has largely run out.
Just how many municipalities across the United States are in trouble, and to what extent, is unclear. But Steve Murphy, head of state and local government ratings at Standard & Poor's, said as U.S. states compile their fiscal 2012 budgets -- many of which begin in July -- financial support for municipalities will be cut.
"Over the next three months we'll get a clearer picture of the problem," he said.
News of such woes have rattled the $2.9 trillion municipal bond market, where investors have become wary of shaky state and local government finances and well-publicized predictions of a coming deluge of debt defaults.
The first quarter of 2011 marked the ninth consecutive quarter in which downgrades for states and local governments outweighed upgrades -- by a margin of nearly 4 to 1 -- according to rating agency Moody's. In a statement, assistant vice president Conor McEachern said that trend was "likely to prevail for all of 2011."
Some states may have to step in to save faltering towns and cities like Michigan has in Benton Harbor. Others will cut spending, raise taxes, or both -- reinforcing the downward spiral, Murphy said.
"No one likes cuts, no one likes tax increases," he said. "But for some states there are tough choices ahead."
MANUFACTURING ECONOMY IS LONG GONE
Calling Benton Harbor poor would be an understatement.
According to the Census Bureau, the per capita annual income here -- the city is nearly 90 percent black -- is a little over $10,000. The U.S. average is around $27,000.
Its former manufacturing economy is long gone.
Whirlpool, a global appliance behemoth that began in Benton Harbor, is building a new headquarters here. But it no longer makes appliances in the city, having opened plants around the United States and overseas.
Local manufacturing jobs at Whirlpool peaked at about 2,400, but those well-paying jobs and nearly all the estimated 8,000 manufacturing jobs that existed in the area are gone.
Benton Harbor's population has fallen by more than a third since the late 1960s. Dilapidated homes and shuttered stores are a common sight, while the roads are in a woeful state.
In 2009 the state treasury department sent a team to investigate the town's finances. It's report described a litany of mismanagement, which rendered city budgets "effectively meaningless as a financial management tool."
Harris was sent in.
Harris, appointed by former Democratic Governor Jennifer Granholm, said the budget should run a surplus next year and his work will be done. His cuts have included laying off nine of the town's 23 police officers and its fire department has been reduced to six fire fighters from 10.
The cuts made Jeremy Connell of the fire department uneasy. "My concern is that we will not be able to provide the level of public safety residents here are accustomed to," he said.
There are three other cities in the state, plus Detroit's public school system, that have emergency financial managers.
The new administration of Republican Governor Rick Snyder expects more emergency appointments as its fiscal 2012 budget will cut state "revenue sharing" with municipalities by a third, according to Terry Stanton, a state treasury department spokesman.
PUBLIC PENSION PAYOUTS
Other states have cut services to balance their own books, forcing the problem of service cuts down the line to local governments. Many newly unemployed who are older find their public pensions are under stress too, due to poor stock market performance and oversized payout promises.
A few municipalities, such as Vallejo, California, have had to declare bankruptcy.
About half of the 50 U.S. states have the power to step in and clean up municipal finances.
Just last Friday, the U.S. Labor Department said that in April, government employment fell for the sixth straight month, with 24,000 jobs lost. On the same day, New York City Mayor Michael Bloomberg unveiled a plan that would cut about 7,000 city workers, including around 6,000 teachers, rather than raise taxes to reduce a multibillion dollar deficit.
In Benton Harbor, many say the loss of local control disenfranchises the city's blacks.
Harris' powers have drawn the attention of activists like veteran black rights campaigner Jesse Jackson and of national media.
Benton Harbor Mayor Wilce Cook said "the eyes of the whole country are upon us." "This isn't about the budget, this about our rights," he said. "We are the new epicenter of the Civil Rights struggle."
Another local theory swirls around Whirlpool.
Drive a few minutes from Benton Harbor's rundown neighborhoods and you find expensive new homes, with Lake Michigan on one side and a new golf course on the other. Here, almost everyone is white.
Funded by a number of organizations, including Whirlpool, these homes and the golf course are part of an extensive real estate development project. Some say the company engineered the appointment of someone like Harris to obtain more land for developments for the rich.
"If there were no golf course here there would be no emergency financial manager," said the Rev. Edward Pinkney, the local head of the National Association for the Advancement of Colored People. "If Whirlpool was not here there would be no emergency financial manager."
Whirlpool spokesman Jeff Noel said the project is an attempt by the company to remain a good corporate citizen now that its manufacturing jobs have gone. Any profits from the development are designated for community projects, not Whirlpool, and the aim is to attract businesses here, he said.
Harris said claims about Whirlpool were unfounded.
"It's one thing when a company leaves town entirely," he said. "It's another when the company stays. People have someone to point a finger at."
(Additional reporting by Lisa Lambert; editing by Philip Barbara)