You might think there is option 4--municipal bankruptcy--but that is just option 2 and 3 combined.
Building buildings somewhere else will not fix your neighborhood.
I don't really think those are the only three choices, though. The government can fail and be replaced with a new one that will shape things up. Then it'll be replaced by another that thinks it's too big and well off to fail, squander it, and fail. That's the typical cycle.