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I'm outraged by this and I hope more people are too.

I am, too, but it sounds to me like the city is on the verge of bankruptcy. I could be wrong, but assume I'm not for a second.

Would it be better to take those people's houses in order for the city to remain solvent or allow them to keep their houses and have the city's services stop? That means no garbage collection, no running water, no sewer. And since the city zoning didn't require extra land for a septic field, there's probably no way to install a septic system after the fact. So those houses would probably become condemned in reality once the city collapsed. But they managed to take everyone else down around them first.

Now, I could be wrong. And a better solution would probably be annexing surrounding areas, but state law might not allow that, or there may be no unincorporated surrounding area to annex.

It sounds like a tough decision, and probably each choice stinks. But this one protects more people than the other. Maybe.
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Bitt Faulk