Cle Elum, a picturesque community in central Washington state, has been embroiled in a long-term land development dispute. After a lengthy legal proceeding, the city was directed by the courts to pay City Heights Holdings $25.9 million in damages.
In reality, the city of about 2,200 cannot afford to pay the developer this eye-watering sum. With account garnishment coming into play, the city acted quickly to declare bankruptcy. While the move keeps the lights on, sewage flowing and wages paid for now, residents are worried about what happens next.
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“It’s a wonderful rural town, just a wonderful place,” resident Shawn Daly told KOMO News, "To tell you the truth, it’s like a bad dream.”
A city in bankruptcy leaves unanswered questions for residents
“We bought out here with the hopes of this being a good investment and space. And if they’re bankrupt, I mean, I don’t know how that’s going to affect our investment and just everything here in general,” Kyle Green told Fox 13 Seattle.
“It’s a little scary,” Green added.
The need to declare bankruptcy didn’t happen overnight. It all started when the city entered into a land development contract with City Heights Holdings (CHH) more than a decade ago. When the deal went south, the developer and the city attempted to reach an agreement but could not.
Essentially, the financial pressure on the city can be traced back to an arbitrator’s decision requiring the city to pay CHH $22.2 million at 12% interest, a total of $25.9 million.
After receiving this notice, the city began to negotiate with the developers in earnest to avoid bankruptcy. According to a press release from the city, it made “increasingly generous” offers over a three-month mediation process. But, ultimately, the developer rejected the city’s offers, meaning the city remained on the hook to pay the damages.
In a statement to Fox 13, Sean Northrop, founder and CEO of Trailside Group, which operates CHH, said his team was surprised by the bankruptcy filing after a draft resoultion was proposed on July 20. He wrote, in part, "Instead, the city abruptly went silent — then filed for bankruptcy. This leaves a critical question unanswered: If the city genuinely intends to continue ‘good faith negotiations,’ why didn’t it respond to the mediator’s draft before initiating a bankruptcy filing? And if it found any part of the agreement unworkable, why not say so?"
With a city budget of around $5 million, Cle Elum’s mayor said there simply wasn’t room to keep up with the debt payments.
“We felt like we had to take this step in order to, you know, stop the clock," Mayor Matthew Lundh told KOMO News.
After bankruptcy, garnishment is off the table, which gives the city enough leeway to keep essential services running.
“We have to be able to make payroll. We have to be able to, you know, keep water and sewer going," Lundh said.
The decision to declare Chapter 9 bankruptcy was reached when the Cle Elum City Council voted unanimously in favor of the move. But, this doesn’t remove the city’s financial obligation to CHH. Instead, it allows a Bankruptcy Court to step in and approve a more sustainable resolution, likely with lower payments that allow the city to continue operating.
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Moving forward with a city in bankruptcy
Understandably, many residents are concerned about this ongoing situation.
“The bankruptcy thing is a bit worrisome for the residents here, myself included,” Holly Tolen, who lives and runs a business in the town, told Fox 13 Seattle.
Residents have a host of concerns that range from possible tax increases and job security to property values and municipal services.
“I don’t know how it’s going to affect them. I don’t know how, you know, how are they going to survive? Are they going to be having extra taxes?" Daly told KOMO News.
Municipal bankruptcy is relatively rare. But when they happen, it can spell trouble for residents.
When a city or town declares bankruptcy, it usually needs to increase its income, lower its spending or a combination of both. Any of these changes can negatively impact residents. Generally, residents might see a combination of increased taxes, higher service fees and reduced benefits for workers.
These changes can impact the quality of life in the community. For example, if workers receive fewer benefits, it might be difficult to attract top-performing paramedics or police officers, which could mean lower-quality service for residents.
So far, Cle Elum officials have shared their expectation of maintaining city services and keeping up with the payroll. But, it’s too early to determine how this decision will play out in the wallets of residents.
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This article provides information only and should not be construed as advice. It is provided without warranty of any kind.
