EAST CHICAGO, Ind. -- Flames flare out from pipes atop the oil refinery. You can smell the fuel miles away.
Once mighty steel mills block the waterfront and freight trains cut through neighborhoods.
Metal bars guard first-floor windows. Check-cashing businesses, with their neon signs, alternate with empty storefronts.
This is the place the financial markets consider Cranston's sister city.
For nearly a century, the steel mills and the refinery have driven East Chicago's economy. When times were good, mill workers would take their paychecks and stroll into stores that once lined Main Street.
The city spent, too -- building playgrounds, a public safety facility, even an underwater research tank for high school physics students.
And when the steel industry suffered in the late 1990s, so did the city.
Since 1998, more than 30 major U.S. steel companies have entered bankruptcy proceedings, including what was once East Chicago's second largest taxpayer, LTV Corp.
In the spring of 2001, LTV shattered the city's already fragile finances when it defaulted on its $16-million tax bill.
In less than a year, the city's bond rating, hovering just above junk- bond status, plummetted even lower.
Investors perceived no other community in the nation to be a larger credit risk, until two months ago when Cranston, Rhode Island's third largest city, joined East Chicago at the bottom.
However, Cranston's economy is strong. Developers are building office complexes, McMansions are sprouting on what was once farmland, and weekend shoppers are still hard pressed to find a parking spot in Garden City.
The city's budget problems stem from a long line of city leaders who spent more than they brought in, while failing to address the mushrooming problem of an underfunded police and firefighter pension system.
Administrations came and went. The problems just grew larger.
FOR THE LAST 31 years, it's been easy to tell who's in charge in East Chicago. The street sweepers, garbage trucks, Little League fields, and the uniforms of the City Hall maintenance staff all bear Mayor Robert A. Pastrick's name. This fall, the 75-year-old Democrat, will seek his ninth term.
He has seen the city through the good and bad times, including the years before LTV's downfall, when, in the words of his right-hand man, "Frankly, we got fat and lazy."
Things started going bad in 1999 when East Chicago spent $15 million more than it took in from taxes. The next year, it overspent by $35 million. The overspending depleted the city's large reserves and by the end of 2000, East Chicago had a $3.9 million accumulated deficit.
In addition, the city's unfunded police and firefighter pension liability had grown to more than $100 million.
East Chicago started to take drastic measures: a two-year hiring freeze, a 10-percent pay cut for its employees and a 25-percent reduction in staffing. The city went from 1,100 full-time employees to 820. Half were laid off and the other half left through attrition.
Cell phone usage was restricted. City cars were recalled and overtime had to be preapproved by City Hall.
"The most difficult thing clearly is reducing your cost of government operations," says Timothy W. Raykovich, special assistant to Mayor Pastrick. "It's a bitter pill to swallow. We tried to make it as painless as possible, but there's always pain."
The city did not cut services, Raykovich boasts. Management classes on efficiency were held, and the city found ways to do the same job with fewer people.
"We literally found a new way," Raykovich says, "and restructured every aspect of our government."
IN CRANSTON, there was some belt-tightening, but most of its cost-saving actions have been short-term solutions that will cost the city even more in the future. Debt and interest payments have been rolled over, from one loan to another, and, in exchange for salary concessions, most city employees were guaranteed raises in coming years and promised there would be no layoffs.
To balance the budget this year, Cranston took $15 million from its nearly insolvent pension fund, another short-term solution, and raised property taxes an average of 11 1/2 percent.
This year property taxes in East Chicago went up 49 percent.
Then, just as East Chicago started the long process of recovery, LTV's bankruptcy cut tax revenues for the the schools and the city by 15 percent.
That would be similar to Cranston losing the taxes paid annually by the Garden City shopping center 21 times over.
As if the loss of LTV was not enough, Ispat Inland Inc., the city largest steel mill and taxpayer, won a lawsuit challenging their property assessment. The company, which had a $30-million tax bill, received a $9.2 million credit in November for being overbilled in 1994. Inland is now appealing its assessments in subsequent years and other large companies in the city are talking about taking the same course of action.
Says Raykovich: "That's a big storm cloud waiting on the horizon."
THE INDIANA Legislature gave the city a 10-year interest-free loan from the state's rainy day fund to help East Chicago through its hard times. The legislature earmarked $5.5 million for the city, $8 million for the school district, $1.9 million for the sanitary district and $800,000 for the libraries.
(It wasn't the first time the state gave East Chicago a loan. When LTV ran into difficulties in 1987, the state provided a similar $14 million interest-free loan, which was paid off in 1999.)
Raykovich said if the city hadn't made significant budgetary cuts first, ". . . the legislature would not listen to us. You really have to reduce the cost of government."
The state also helped East Chicago borrow money. Because the city's credit rating makes it nearly impossible to borrow independently, East Chicago has turned to the Indiana Bond Bank. The organization, backed by the full faith and credit of the state, was formed in 1984 so municipalities could pool their short-term loans to get better interest rates.
Most commonly, governments use the bond bank to borrow money at the start of their fiscal year to tide them over until taxes are collected.
Last year, East Chicago borrowed $11 million -- at 3.5 percent interest -- for that reason. If they could borrow money on their own, Raykovich says, the rate could be as high as 11 percent.
In Rhode Island, the only thing the state has offered Cranston is advice.
EAST CHICAGO hopes a casino can make up for its financial losses.
Next to Inland's 1,900-acre steel mill, on the shore of Lake Michigan, Harrah's Entertainment Inc. decided six years ago to convert a riverboat into a casino.
The ringing of buzzers and the clang of coins pours out of speakers in the hallways, bathrooms and the parking garage. Before visitors even reach the riverboat, senses detect the casino is ahead.
Escalators whisk visitors from the slot machines to the poker tables to the roulette wheels. There are 4,500 square feet of gaming space in the four-story boat.
It has taken a few years for the customer base to grow, but in 2001 -- the last year of available data -- the turnstiles spun almost 3 million times. More than 70 percent of the visitors came from the greater Chicago area.
That year, the city received about $19 million in property, wagering and other taxes from the casino.
Indiana law allows each municipality to negotiate what it wants, besides property taxes, from a casino operating within its borders. East Chicago got a percentage of the wagering tax and admission tax, plus computers, police cars, a fire engine and highway improvements to the casino.
The city's schools get a chunk of the casino's property taxes, but very little of the other revenue.
This upsets School Supt. John Flores, who is openly critical of the casino agreement crafted by City Hall. The agreement earmarks money for education, but it goes to a nonprofit organization, which, in turn, distributes the money to several educational groups, including the school district.
"Education could be just about anything," Flores says. "The money does not pay salaries or provide for other critical needs."
The school district has the poorest student population in the state -- more than nine out of 10 qualify for federally-subsidized lunches.
The superintendent also criticizes a 10-year, partial property tax abatement that Mayor Pastrick gave the casino for a new 15-story, 293-room hotel. The mayor's staff says the tax break is worth the economic development and that the money will be used to build new homes in the city's ailing harbor neighborhood.
Flores says the tax break just further hurts the schools.
Teachers, aides, administrators and custodians have been fired. The department has cut special music programs in the elementary schools. While enrollment held steady, the teaching staff has decreased. Classes used to be capped at 21 students. Now, some classes have as many as 28.
Harrah's executives say they are proud of their role in East Chicago. They mention money given to local charities and scholarships, and they prominently display their code of commitment to prevent underage gambling and not to cash unemployment or welfare checks.
The facility employs 1,800 people, 30 percent from East Chicago. Minorities account for 65 percent of the staff and 60 percent are female, according to General Manager Joseph A. Domenico.
The casino offers home-ownership assistance to East Chicago residents who have worked for Harrah's for at least a year. The company will give the employee an outright gift of up to $5,000 for the downpayment.
Since 2000, 29 employees have taken advantage of the program, according to Harrah's director of community relations, Edward L. Williams.
Harrah's also backs up to $5 million in loans from local banks for its East Chicago employees' mortgages.
"It's an excellent endorsement for the banks to loan money to people who don't have credit," Williams said. "Without the endorsement, this city would be almost a ghost town."
LOUIS VASQUEZ is watching his grandson wrestle at East Chicago Central High School on a wintery Thursday night. High on the gymnasium's bleachers, he comments on the school's sports legacy and the history of the city in which he has lived most of his life.
His father emigrated from Mexico in 1919 to work at Inland's steel mill. After he graduated from high school, he, too, went to the mill. Vasquez, 79, has since retired. His eldest son now works in the mill.
Having three generations of steel workers in East Chicago is a vanishing way of life.
In the last two decades, jobs at Inland have fallen from 25,000 to 7,300.
Many of those who still have jobs -- and have done well -- have moved south to more suburban neighborhoods.
The few businesses remaining on Main Street soon followed.
Vasquez and his son, Louis Vasquez Jr., 52, remember the days when Main Street was bustling. Now they go elsewhere to shop.
"There's really nothing," Louis Vasquez Jr. says. "All we've got around here now is Walgreens, gas stations and the [casino] boat."
While taxes are a concern, the younger Vasquez is more worried about quality of life.
In 1999, 2000 and 2001 there were a total of 35 murders in the city. Vasquez said he wants to keep his son away from the drugs and gang violence.
"Right now, it's not a great place to be," he says. "They've got to focus on crime. The kids can't take over the streets."
He wants a different life for his 14-year-old son Steven.
Despite its problems, Cranston is still a surburban mecca. Building permits are still being issued and the city has had to construct a new school to accommodate elementary students in the western part of the city.
In East Chicago, the Vasquez family and many others are looking for a way out.
Members of the Vasquez family have spent 83 years working in the mills. It's not likely the tradition will continue.
Louis Vasquez Jr.'s oldest son is a college senior, training to be a physical thearapist. For his youngest, he says wrestling is the ticket out of East Chicago.
