GARDNER, Mass.-A sign welcomes visitors to "historic" downtown Gardner, Mass., but history is one of the few things this city of about 20,000 residents has going for it these days.
While it still proudly calls itself "Chair City," the heyday of fine-furniture manufacturing is long past and unemployment stands at about 11 percent. This blue-collar community about 60 miles west of Boston is grappling with a local economy that is generating less tax revenue for basic services and a state government drained by the Great Recession with less money to spread to its municipalities.
Gardner is typical of countless cities and towns around the country compensating with reduced services. Older children no longer have school buses. Public library hours have been slashed. Waits are longer at the assessor's office because of fewer staff. Layoffs also have hit the public works department, and local teens can no longer be hired in the summer to spruce up parks and playgrounds.
"I'm supposed to be doing more, with a heck of a lot less," said Mayor Mark Hawke, a Republican whose city is receiving less state money than it got a dozen years ago, yet has been saddled by the state with more responsibilities, known as local mandates.
His lament is a familiar one in cities and counties across the country. Gardner's woes come amid a fiscal squeeze unlike any in modern history and are emblematic of the rough road ahead for local governments.
Governors and legislators in many states - themselves struggling with gaping budget holes - are slashing local aid and proposing to push even more duties down the government ladder in a dramatic restructuring of the relationship between states and their local governments.
The financial strain has some city and county officials searching for ways to alter promised pension and health care benefits. Some analysts are forecasting a rise in municipal defaults, in which local governments are unable to pay the principal or interest on the bonds they have issued. When that happens, their credit ratings typically drop and it becomes more costly in the future for governments to finance improvements to roads, buildings and other projects. For the public, that could mean cuts in services or tax increases.
In just over two months, investors pulled $25 billion out of municipal bonds because of fears of defaults. Concerns intensified after Meredith Whitney, an influential financial analyst who heads her own firm, recently forecast the possibility of 50 to 100 municipal bond defaults worth hundreds of billions of dollars this year.
Other analysts believe such a scenario is unlikely, but they acknowledge there could be an increase in government defaults and bankruptcies.
From 1970 to 2009, there were just 54 defaults out of 18,000 municipal entities tracked by ratings agency Moody's. The agency has estimated 10 to 15 municipal defaults are possible this year, although they are more likely to occur in small towns than larger cities.
"Most cities are not talking about insolvency," said Richard Ciccarone, chief research officer for McDonnell Investment Management in Oak Brook, Ill., which monitors a database of government finances.
Since the San Francisco Bay area city of Vallejo declared bankruptcy in 2008, it has shaved costs by closing fire stations and reducing funding for senior centers, libraries and public works.
Even setting aside the possibility of insolvency, the coming years could put to the test the historical American assumption that local government is the best form of government.
Unlike their federal and state colleagues, local officials don't have the luxury of passing the buck to someone below them. When the dollars run short, they must raise taxes, cut services or consider filing for bankruptcy protection. State and local governments cannot run deficits.
The figures are bleak:
• More than half the 335 counties and 646 cities analyzed by McDonnell Investment had deficits in their general funds in 2009, a trend that appeared to hold true in 2010. Audits showed 12 percent of counties, 16 percent of cities and 22 percent of school districts had less than a month's worth of money in their general funds, a precariously low level.
• For eight consecutive quarters, downgrades of municipal bond ratings have exceeded upgrades, according to Moody's Investors Service. And that trend is likely to continue in 2011 as local governments face "unprecedented financial strain," said Anne Van Praagh, Moody's vice president and senior credit officer.
• Eighty-seven percent of cities were less able to meet their fiscal needs in 2010 than in the previous year, according to a survey by the National League of Cities. And nearly two-thirds of surveyed counties said they anticipated revenue shortfalls this fiscal year, according to the National Association of Counties.
Local governments already have made the relatively easy budget cuts, such as limiting library hours, reducing park maintenance or trimming grants to local arts programs. Now the cuts are affecting the everyday lives of residents more directly.
In January, Camden, N.J. laid off nearly half of its police force and about one-third of its firefighters to offset falling tax revenue and diminishing aid from the state. Police Chief Scott Thompson said officers no longer will respond to minor traffic accidents and will not take reports on small thefts or property damage complaints.
A police union warned in a full-page newspaper ad that Camden will become a "living hell." Residents are trying to fill the gap. The anti-crime volunteer group Guardian Angels says it will patrol Camden, just as it has done in Newark, N.J., since police were laid off there last November.
In the Bayless School District in suburban St. Louis, students now must walk to school - or catch a ride from parents - after the school board ended bus service. The cut came after Missouri Gov. Jay Nixon eliminated almost half the state's school transportation aid.
"It was a cut that while painful, avoided more damaging cuts like layoffs or increased class sizes," Bayless school board President Jeff Preisack said.
When Illinois delayed payments to medical providers because of a multibillion-dollar budget shortfall, the Vermillion County Health Department got a loan to stay afloat. Then, with the state more than $600,000 in arrears, the county decided to lay off half its staff and halt all services funded with state general revenue. Gone is the free clinic for sexually transmitted diseases and family planning, which served about 3,000 people. Also axed was a medical case management program for children in the foster care system.
While the severity of the financial crunch varies greatly from one city to another, local government officials point to a common cause for their financial woes: revenue from sales and property taxes, the pillars of local government finances, have fallen while costs to provide services and pay for government retirees keep rising.
Retiree costs are particularly problematic in states where politically powerful public employee unions wield broad power over health insurance and pension plans. Boston Mayor Thomas Menino said his city's $2.3 billion budget is being "crippled" by health care costs, hindering the city's ability to improve schools and neighborhoods.
In a recent report, The Massachusetts Business Alliance for Education said health care costs for school districts rose by $1 billion from 2000 to 2007, four times the rate of inflation and outstripping by $300 million the increase in state aid to public education during the same period.
In New York, where residents are among the most heavily taxed in the nation, newly elected Gov. Andrew Cuomo has proposed, and the state Senate has approved, an annual 2 percent cap on property tax growth. Some municipal officials say such a cap would be disastrous unless accompanied by other changes. A task force of mayors has proposed that the state declare a financial emergency, impose a one-year freeze on public sector wages and require all local government employees to pay a share of their health insurance costs.