>> what exactly is the situation. >> it's happening from coast to coast. >> the city kept issuing debt. >> bankrupt cities. >> it is a horrible thing to see. >> waste, corruption. >> what words would you use to describe the financial situation? >> oh, hopeless. >> hopeless? >> hopeless. >> who is to blame? >> who will pay? >> the salaries and benefits have to be renegotiated. >> when question come together

at a city there's nothing we can't accomplish. >> fox news reports cities going broke. reporting from wall street in new york city here is bret baier. >> we are going to take you inside an alarming trend cities that are in debt we win with america's financial nerve center. the first reason is simple some of the nation's most desperate cities are in trouble because of the millions they borrow from wall street. we saw that in a city buried under decades of debt. >> you would think it would have been run by the keystone cops. >> what is the fiscal situation now? >> we are insolvent. >> he is harrisburg's

controller. >> my office is projecting we would have a $15 million deficit this year. i think we are going to struggle from paycheck to paycheck. we have $1.6 million healthhat paid and payroll every two weeks is a million dollars. there you go. if we make payroll next week and pie that bill we have no more money. >> harrisburg is deep in wall street and can't make the payments on millions of dollars of bonds. it has gotten so bad harrisburg doesn't even have a credit rating any more. >> it is difficult to sell homes. they elected steven reed mayor. he remained in office 28 years a building boom financed by a series of big debt in wall street. the first in 1986.

harrisburg borrowed $390 million to build a hide troe electric dam on the river and redevelop a waterfront. regulators blocked the dam so they would pay that back and reed would move ahead with the waterfront project part of the vision to turn harrisburg into a national tourist destination. that included a new $1.6 million baseball stadium to lure a minor league franchise to town. years later harrisburg issued bond to buy the team. price tag $6.7 million. then an attempt at wild west museum. he spent over $8 million over 16 years on artifacts from six shooters to doc holliday sword. much of the collection is stored in this warehouse. the museum never opened.

national civil war museum did open in 2001 at a cost of more than $30 million. >> we have all got togethhat tor in one town. you are a nationally scaled national tourism. >> these are all of the ideas. they weren't vetted through the public or town hall meetings. >> linda thompson was on city council from 2002 to 2010. >> this is what they needed to do. these were his explanations when challenged on it. >> the challenges wouldn't come until the finances collapsed under the most expensive. >> this incinerator was the biggest problem. it never worked like it was supposed to it burned up hundreds of billions of dollars. some people call this the incinerator from hell. >> originally built in 1972 before reed took office the plan was supposed to generate profit

by charging fees to burn garbage. it didn't work out that way. mechanical problems shut it down. >> the city had to make decisions at certain points in time. do we incur more debt or sell it and get rid of it? the city kept issuing debt. >> attorney is a municipal bonds specialist. they hired him as severe to clean up harrisburg's mess. >> in 2003 there was million dollars of debt outstanding. within 4 years 326 million. it could carry 100 million if it was operating properly. >> that debt crippled harrisburg which he says scrambled for cash wherever he could find it. for xafrn he says to make extra money the city started over charging sewer customers for administration costs. it let century old pipes

collapse. >> it is not unusual to have it directly related when you trace through all of the money to incur the debt. >> before the mayor used some of the money for the incinerator bonds for other projects, how was he able to do that? >> by moving money around in different funds. i can't tell you what money went where other than he did. for example if you want to do something like start a museum rather than going to city council and putting $500,000 in the budget you issued bonds for an incinerator and you take a portion of that bond issue to get money for a purpose he may not be able to get approved if he goes through the normal budgeting process. >> that doesn't seem leagu-- le. >> you voted for the bond idea? >> yes. >> we had a froegsnal consultant that said it would pay for

itself. >> i regret it to the tune that we relied on our consultant. >> one thing her city council did do is stop read from using any money from the incinerator bond issue to pay for other projects. >> no authority fee sees funds, funding or income shall be applied to purchase artifacts or benefit any city, museum or related project>> the situation had gone from fiscal tragedy to farce. while the council scuttled reads plan for a 30 plus million dollar national sports hall of fame next door to the baseball stadium the city did go along with a facelift to the ballpark itself which would send taxpayers deeper to debt. >> he sold at a $7 million prophet but turned around and borrowed $18 million for stadium

upgrades. >> my responsibility started back then. i began to sound the alarm about nuclear. >> a private citizen since 2010 reed did not respond to multiple interview requests over several weeks via phone and e-mail. >> we drop by his house and the building where he has an office. >> he's not in the office right now. >> within hours reed contacted us by e-mail. he claims various tourism initiatives boosted the economy and he did not wrong to pay for them. >> as for the incinerator it was improved all governing bodies. he also wrote he had a workable plan to wipe out the incinerator debt but city council stopped the process dead in its tracks. he turned down our requests to speak with him on camera. >> he won't talk with us. is he a bad guy?

>> he's likeable. very smart man. the taxpayers believed in his leadership and trusted in him. >> he left them with a mess. the question now how to deal with it. you think vic the state appointed severe put together his plan to pay back the debt by among other things raising harrisburg's earned income tax and leasing out some of the parking. he got behind that plan. controller dan miller and city council don't think harrisburg residents should be the only one making concessions at this point. they want bank see courts to sort it all out. >> what do you say to people who say that's a combat. >> you can only so much blood to the tournament. >> dominic fred reek co the ceo of the insurance guarantee which insured the bond. insured will have to pay off the investors they sent harrisburg

failed to. >> even if the project goes kau poot the government is still on the line to pay what is due? >> they make an absolute promise to that. >> full faith and credit is the temple. >> if you give me your full faith and credit are you on the line? >> last october the council fired bankruptcy. thompson the mayor refused to sign it. miller is running against her in last year's primary. dave you think vis resigning in frustration. we are at a point where you could not hand down the line it is so broken that you need to deal with the problem. >> now. >> it's now, yes. >> up next the battle over pensions and benefits. fox business network lou dobbs with that story after the break.

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welcome back. as you have seen, cities with big dreamsnd >> as you have seen cities about big dreams and big bills come here to wall street with the cash to finance them. goore towns are going broke not by issuing bonds but by issuing mrom misspromises the pc employee union. that story has a new york angle, too. lou dobbs explains. it is a good natured sort of battle. it was in 1935 president franklin roosevelt made it easier for workers in the private sector to create unions. when he signed the wagner act he had ties between organized labor and the democratic party. >> it doesn't include enthusiasm for ticketing. >> fdr didn't think public sectors made any sense. >> collective bargaining is

different for public workers because their boss is really on their side. >> she writes extensively on the problems. >> it's not like you are a boss of ford. they don't want to pay the union members too much because it comes out of their own prophets. that's not true of government. >> furthermore fdr wrote public employees like police, firefighters and teachers would be unthinkable and intolerable. it was within a couple decades as democratic airs decided the political upside of public sector unions was worth of risk. the eureka moment happened right here in new york city. in 1958 democratic mayor robert wagner who's u.s. senator iron he cancally authored the wagner act granted municipal workers. three years later the public unions organized to reelect him.

wagner's unexpectedly strong showing caught the attention of another democrat worried about reelection. president john f. kennedy. >> he carried wagner to victory. he issued an executive order allowing unionization of federal employees. state local governments picked it up as a cue. you have rapid growth from there on of public sector unions across the country. >> the story of fred seigel of manhattan institute does the unions almost invariably work to elect democrats. >> unions get pay increases, pension i think creases healthcare increases. the union takes some of the money that gets from the city and invests in local elections. they elt elect people who give unions what they want. >> you can't act without their

cooperation. th >> that is because when elected officials didn't cooperate the public sector unions fdr warned about declares the unthinkable strikes. the most memorable case the summer of 1975 when new york was close to bankruptcy. sanitation workers let garbage pile up in the streets while laid off police march and shut down the brooklyn bridge. unions demonstrated their clout nationally when they helped senator ted kennedy mount a surprisingly strong primary challenge to a sitting democratic president they didn't like. jimmy carter. >> public sector unions become the get out at vote machine the democratic party machine. >> carter was renominated but he lost to ronald reagan who had the support of at least one public sector union the air traffic controller. that wouldn't last. months later the controllers rejected a government contract

offer. they went on strike. but that was not allowed under federal law. president reagan fired them all. >> we cannot compare the labor management with the private sector with government. government has to decide without government reason for being. >> it is not surprising public unions ally with democrats as providence rhode island fire department union president paul dowdy. >> if you look generally at the republican party they believe in a smaller government. as a government worker i don't necessarily agree with that. >> by the 2008 election a former community organizer with long ties to one of the largest government employee unions of all was setting the stage for an epic battle over these organizations and their clock. a financial crisis would

catapult their man to the white house. but it would also bring those dire warnings about public sector unions from fdr's era back into focus. >> in 2009 public employee unions ee clipped the membership of private sector unions. >> thank you very much. see you a little bit later. >> go across the country to one of the union towns that just filed for bankruptcy. [ male announcer ] let's say you need to take care of legal matters.

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>> many see the public sector unions could bankrupt cities and states. it's happening right now in california. let's take a trip down route 66.

on old route 66 san bernardino was the last stop before la. with three freeways and a major railroad station it was the ideal hub linking los angeles and long beach out to the rest of the country. san bernardino sim poll li symbolized the promise it held for middle class america. it was loetcation of the first mcdonalds. it is a short fall of $36 million over a quarter of the entire budget unable to find enough cuts to close the gap san bernardino on august 1st filed for bankruptcy. >> you have called this a stain on the city. >> patrick morris a democrat has been mayor of san bernardino since 2006. >> how did san bernardino get

into this? >> it was a perfect storm economically when it hit in 2000. the bottom fell out. >> in that perfect storm morris says san bernardino property values dropped by 65 percent. 7 car dealerships shuttered and the city lost 10's of millions of dollars instead real estate and income tax receipts. >> we do not have long-term debt we have major cash issues. >> every city in california since the great recession. >> mike morrell had portions of san bernardino. he rejects morris perfect storm analogy. series of unexpected factors came devastated in the city. >> they had five years warning on this train coming down the tracks. >> that's the preferred med fore

a frait train fueled by public salaries and benefits. it hit town right on schedule. >> 75 percent of the budget goes to fire and police officers. they are not going to be able to pay those pensions nor are they going to be able to pay the salaries. >> we have historically been generous on labor contracts. >> generous indeed. in 2010 a police sergeant made 317,000 dollars in a city where the average household income is less than 40,000 dollars. it's not just top salaries that brought down san bernardino it's the average one. >> san bernardino firefighters are making 130,000 dollars a year police around 95 thousand with generous pensions as well.

if anybody said we are not going to belie to be able to save this down the road. >> it is at a time when (inaudible) >> it has meant in good times and bad that san bernardino public unions had a powerful impact on politicians. politicians they help elect. morris says that's just the way it is. >> in a blue collar city as old as we are unions have a presence in terms of funding for candidates and city council and they are present at the table during labor negotiations. >> those negotiations in some cases have bound san bernardino to pay employees just as much even after they retire. >> that is not going to work. it's not going to work. you cannot retire people at the age of 50 years with literally full pay and bridge their health benefits until medicare. >> salaries and benefits you are saying has to be renegotiated. >> you bet.

>> why that is that not happened? >> it will happen under the guidance of chapter 9. >> in other words bankruptcy court. public sector unions are saying not so fast. they point to state precedent that suggests their pensions are untouchable. however morris is former judge believes in this unprecedented crisis the courts will allow them to modify some of their contracts. he is dealing with the day-to-day trials of the city gone belly up. >> you are paying cash for things. >> cash and carry. a>> a vendor may try to bring the equipment back. >> that is a daily thing. >> we deal with it daily. oo booingsy -- bankruptcy in t short term is the easier thing to do but long-term you effect lending conditions how longing conditions and jobs.

>> that morrell says will make things worse for the already beleaguered citizens of san bernardino. >> were there other options? >> there is always other options. the city could have had massive cuts in services when you are looking at a city that already cut 20 percent of the staff. that is a difficult choice to make. >> san bernardino's mod everyone mi modern nis tick class done in 19d 72 was something this town was looking to the future. the last stop today however the last stop to route 66 may be on its last legs. coming up the biggest local government bankruptcy in u.s. history. it is not in california. after the break. are you okay, babe? i'm fine. ♪ ♪

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stidious librarians quality. emily skinner, each day was fueled by thorough preparation for events to come. well somewhere along the way, emily went right on living. but you see, with the help of her raymond james financial advisor, she had planned for every eventuality. ...which meant she continued to have the means to live on... ...even at the ripe old age of 187. life well planned. see what a raymond james advisor can do for you. >> live from america's news headquarters i am krak boss well. thousands have been ordered to leaf their homes as a wildfire

approaches. the fire began midday saturday. it is burning through an area of north of sacramento. firefighters say 3500 homes are threatened four have been destroyed. lightening strikes may have sparked that blaze. a bullseye for nasa as the rover curiosity has tblasts the first martian rock today. they are banl liesing the composition of mars' rocks. they are determining whether or not the planet most lie earth could have supported life. rover landed on mars after traveling 3 r5 4 million miles. craig boswell now back to fox news reporting cities going broke. >> now the biggest local government bankruptcy of all. $4 billion. it took some doing.

greed and incompetence and good old fashioned corruption to flush that much money down the drain. >> jefferson county alabama population 670,000 and bankrupt to the tune of $4 billion. >> what words would you use to describe the financial situation of jefferson county? >> hopeless at this juncture. >> hopeless? >> hopeless. >> jimmy steve vines is the district 3 commissioner. he was elected after the price sis began. >> how did the whole thing go off? >> they attempted to build a cadillac when a chevrolet would have worked just as well. >> it is not a tail about cars but sewers and the sort of mess that seeks when lobing politicians with big ideas looking for wall street banks looking for big beef.

a financial hole. it begins in 1996. the sewer system was leaking raw sewage into rivers and streams. they signed a consent decree to fix the problem. the cost was huge estimated at between 250 million and about a billion dollars. >> where did the county get the money to under take this massive project? >> went there and it was under written and sold as a good investment. >> the county spent 2 million on improvements and repairs. he had the nickname taj mahal of sewer system. >> this is emblem matic of problems system has. >> he has been in charge of running the sewer system since 2008. >> the building we are in what does it do? >> it is a pump station.

it was built in 2004. soon after problems began. >> 35 million in repairs. >> what did it cost originally? >> 50 million. >> you had to spent 35 million to repair it? >> to put it in regular operating position. >> what went wrong. >> they didn't operate on budget they used local engineers to manage a problem that required a lot more expertise than what was here. >> some of the sewers that were green lighted were not included in the consent decree? >> it was told if you build it they will come. >> what they call half idea to raise revenues he wanted to build a river sewer under the river to get to the areas that would be developed. when they got to the point the out cry from groups was so loud they killed the project outright leaving jefferson county with a tunnel to nowhere and millions of dollars added to the already ballooning debt. >> the county wouldn't be able to make payments on the bond

they went back to wall street looking to refinance. >> original debt service reported $2.3 billion. they said well we can go to a variable rate interest and add derivatives to that to synthetically make that lower. these new instruments wall street generated were so complicated that this average person even the finance person couldn't understand. >> he said it exploded jefferson county's debt without any one realizing it. >> we were over extended by 85 percent. the folks that insured our bond should have known better. >> it allowed ledgers to have payment in full. >> we were unable to pay.

the county is in debt over $4 billion. we are in bankruptcy. largest bankruptcy in the history of the local government in the united states. >> did wall street really takeevtake jefferson county for a ride here? >> i believe they did. >> a criminal investigation of the sewer deal found that was the case. but wall street got a lot of help from a lot of people with their hands out. >> we had people who went to prison. commissioners employees and contractors. >> that included former commissioner and mayor lange ford sentenced to 50 years for accepting thousands of dollars of gifts from the bankers. gary white 10 years from accepting bribes. former commissioner mary buckalu pleading guilty for lying about gifts she accepted. chris mcnair now serving five years for bribe before i to solicit bribes. bond under righter jp morgan

settled paying the county $6 million. the fcc 25 million and giving $650 million in fees. the bank alleged to prescribe friends of the county commissioners. >> there was mal fees son in the swapts et cetera. >> the president and ceo of assured guarantee which reassured some of the sewer bonds says the sins of wall street and corrupt politicians shouldn't get them off the hook. >> what really steams fred reeka deal that would have avoided bankruptcy. bondholders offer to forgive a little more than the sewer damage if state lawmakers raise taxes to help pay the rent. they are accused. assured guarantee may have to pay up.

>> i was your best friend for years. >> at a certain point when you can't make your financial obligation and the settlement was getting further away instead of closer to us we had no choice. >> is it a cautionary tale? >> absolutely is. you have to live within your means. >> lou dobbs from the fox nis network. lou, i interviewed insured tv he said his cap was going to be fine. if there was a lot of fault would it be like a domino effect in a worse case scenario. if it reached the con tague begun levels, hypothetical that would be the climate. >> lou as always. setting i side the implications of the ee coconomy. how bad can a municipality be for people who live there? worse than you can probably image.

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4ri6 here pretty much life and death. >> if the officers disappear the ba gang bangers will be here in a heartbeat. >> since 2010 the city has had to slash a quarter of the police force since the leaders borrowed more than the wall street can pay. it promised unions more than it could deliver. police are now unable to respond to many 191 calls and that meant more crime serious crime says the mayor. >> we see the violence rights and frankly the homicide. >> it is a horrible thing to see. >> fred seigel of the manhattan institute has written extensively about cities like stock done going broke. >> it is a city in the midst of terrible terrible social break down. not just fiscal collapse but ocean collapse. ed w the two are intertwined.

>> he is also an inland sea port connected to san francisco bay by 78 mile channel. navy base anchored a vibrant 20th century blue collar economy. by the 1990s many of the factories were gone. it wihad become place to avoid. ann johnson was on the city t n council then. >> the council and mayor said we need to fix this problem in the heart of our city. >> with tax payer's money and seemingly limitless ability to issue bonds he tried to spend his way back to prosperity. >> they will be remade and gent fied as far as the greater bay area. 150 million for an 11-seat arena, $37 yaet marina next door

to town homes. >> at the same time your city employees were getting generous package and pay for benefits. >> there was a failure in leadership. they felt the money would continue to roll in the property values would continue to wise. >> that in 2008 stock market crash. real estate prices plunged. at the same time property and sales tax revenue went off a cliff. but when the city went to staff and benefit and pension packages the union not only insisted it launched an ad campaign that johnson took as a threat. >> stop with the police department put up billboards with a sign that says saekd most

dangerous city. >> what about the blood spattered running tal hee? it was to let them know this was going to cause crime or havoc in the city. >> when you don't have the money you don't have the money. last february shocking defaulted. they declared bankruptcy. wheen while folks we poke to sensed for them life in stockton was likely to get worse. >> when we return fixing a city that's broke. two democratic mayors trying to get it done. can they pull it off?

this hour we have told you about cities brupted >> we told but cities bankrupted and lives scat shalt erred by greed and corruption. can any one turn those towns around? meet two democratic mayors who are trying and apparently making progress even cutting union pensions and benefits. >> the private is sector is doing fine. where we are seeing weaknesses in our economy have to do with state and local government. >> both parties worry about cities going broke. but they seldom agree with how to fix the problem. >> i am sure that the president of the united states is not getting talking points from the big government union bosses in washington. >> the mayors on the front line invest on both sides of the issue and more democratic mayors in particular are torn between their parties most powerful supporters and the realities of their city's budgets says manhattan institute. >> the public sector is bumping

up against other liberal interests. it is not enough money for basic services and roads. >> that is the case in san jose, california. chuck reed took office in 2007. >> what role did the public sector unions and their contracts really play in the fiscal crisis? >> most were by increasing salaries and pension benefits. those came out of the 90s in the go go years when we had money. >> can you give me an idea of what money we are talking about? >> the average cost of police officer and firefighter was $200,000 a year? >> we cut everybody's pay by 10 percent with me all of the way down. everybody took a 10 percent pay cut. but that's still left a $150 million deficit. it was time for a desperate measure or as it became known, measure b. >> what exactly was that?

>> measure b was a measure to allow voters to decide whether or not they were going to opinion bus services or bring down the cost. voters had to approve first. that's not a slam dunk in a counsel pee that voted for obama since 2008. reid pushed his case hardy mondayizing him. >> one of the sfrat gees was hard in an abandoned city. people have been acusted from irrelevant doors. >> have you heard the story they have been verbally abused and treated with scorn. the facts are difficult and the facts are we cut services over and ore and ore again in order to fund very extensive benefits.

last noon despite strong opposition 70 percent of san jose voters the same number in 08 voted for measure b. reid got his victory the same day. scott walker easily surprised a union led recall challenge. the san jose democrat bristles at the comparison. >> they try to draw a bare lel between san hoe day and washington. he wants to accept cuts while walgreens have protected some of the bargaining rights. >> their solution was much different than san jose. hundreds of hours they are still an important part of what we have to deal with. >> in providence rhode island the mayor another democrats feels the same way. he took office in 2011. >> i came in to office expecting the deficit not one of the

magnitude that we found. >> he acted quickly all 194 providence teachers they could lose their jobs come summer. eventually he struck an agreement with the teachers union that saved almost all of their jobs and ten's of millions of dollars. police and fire unions got them to agree to big cuts as well. >> i can't do this without you. >> paul is president of the firefighters. >> if you have any solution of things that will help i will do almost anything. that was over a sandwich. >> they knew they had to deal with him says a financial officer. >> the union members said if we don't vote for this we may get a lot worse if the student goedz bankrupt. we would rather give back a little now than a lot later. >> the unions have not come around to that way of thinking

back in san jose. >> no part of it will be implemented. >> instead firefighters and police have sued claiming measure b is unconstitutional. reid is standing firm. >> what is the one thing that keeps you up at night? >> long-term fiscal impacts. spend the money if you have it. if you don't have it don't spend it. >> wall street is the spender of modern finance. behind me is federal hall. that's when national government first met after the constitution was ratified. one of the framer's gravest concerns was the nation could be profoundly weakened if debts run up by the state were not handled in a responsible way. not everyone agreed about what to do then. issues are differen today but two poor ideas of the founders still apply.

first out of control debt can destroy a country's own destiny. second even more crucial in crisis the exceptional character of the american people is the most important asset we possess. that's our program. i am bret baier. thank you for watching. how does this thinwork? oh, i like it! [ garth ] sven's small business earns 2% casback on every purche, every day! woo-hoo!!! so that ten security gators, right? put them on my spark card! why settle for less? testing hot tar... great businesses deserve the most rewards! [ male announcer ] the ark business card from capital one. choose unlimited rewards with 2% cash back or double miles on every purchase, every day! what's in your wallet? here's your invoice. but last year my daughter was checking up on me. i wasn't eating well. she's a dietitian and she suggested i try boost complete nutritional drink to help get the nutrition i was missing. now i drink it every day, and i love the great taste.

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