Cash-strapped cities seek creative, risky ways to stay afloat

June 27, 2012: Pedestrians cross a street near the Bank of Stockton in Stockton, Calif. (AP)

In difficult fiscal times with property taxes down, some local communities are searching for creative financing and other tricks in order to plow ahead with the basic business of government.

Take Poway, Calif., roughly 20 miles from San Diego. The city's school district borrowed $105 million to build multipurpose classrooms and renovate schools, and doesn't have to pay back principal or interest for 20 years.

But there's always a catch, which Poway's school district and any other cash-strapped cities looking for a fast fix will feel in due time. What may be much more painful to swallow is what it will cost when payment is due -- in Poway's case, more than $1 billion.

The Poway deal has already prompted concern from a local taxpayers group.

"Poway told us and promised us that their entire bond would cost a certain amount and what happened today was that price tag essentially doubled. And it is costing more than what we were originally told it would cost," Chris Cate of the San Diego Taxpayers Association told Fox 5 in San Diego.

Poway's hardly the only city looking for creative ways to stay afloat.

The recession has left cities such as Stockton, Calif., stuck seeking bankruptcy protection after borrowing millions during good economic times and finding itself deep in debt.

Scranton, Pa., temporarily slashed the salaries of its employees to minimum wage, and is now moving forward with a plan to borrow up to $18 million from a hedge fund to cover this year's budget gap.

One expert says in the case of Poway, its borrowing may scare off businesses and families considering locating there.

"Important to understand is that the real risk here is not to even today's taxpayers -- it is to future taxpayers and it's a very big risk because the cost of paying this back is so great that it's really based on appreciation of property values," Steve Malanga of the Manhattan Institute, said.

A spokesman for the National League of Cities says there is no reason to panic.

"As to the school district, more municipal borrowing doesn't mean that we will see more defaults decades into the future or in the near future, for that matter. ... Cities are making the hard decision to cut services and lay off staff to balance their budgets," Gregory Minchak told Fox News.

A spokesperson for the Poway Unified School District did not respond to a request for comment.