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Bankruptcy option for local governments

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With state and local governments around the country facing dire financial straits, bankruptcy is at times an option. Three cities in California filed for bankruptcy in two weeks in June-July 2012.[1] Five municipal entities sought protection in 2010 compared with 10 in 2009.[2] Some are estimating that states face a total debt of $2 trillion and say that up to 100 cities could be facing municipal bankruptcy.[3]

Bankruptcy Options

Local government entities have filed for bankruptcy protection under Chapter 9, Title 11, United States Code, which is available only to municipalities. Not all state permit such action by their municipalities, although some are considering adding it.[4] Approximately half of states allow cities to seek bankruptcy protection, which is considered a measure of last resort because it can raise cities’ borrowing costs.[1]

Congress added Chapter 9 to the bankruptcy code in 1937 to allow municipalities to seek protection, and since then approximatley 640 government entities have filed for Chapter 9 protection.[1] Since 1980, 45 cities, towns, villages and counties have filed for Chapter 9 bankruptcy.[5]

No state has defaulted since the Great Depression.[6] Some, including Newt Gingrich, have suggested that legislation should allow states to file for bankruptcy as a result of which trade unions would be forced to agree to cuts in benefit. If they refuse to agree, the bankruptcy judges could impose cuts.[7][8] Those in support of such legislation argue that it would clear the way for financially strapped states to reduce costs before they go belly up, and should be regarded as a preemptive move that could preclude the need for massive federal bailouts.[7] State and union officials vow to fight the bankruptcy initiative, which they fear would undermine state autonomy and be used to reduce promised benefits to government workers.[7]

Filed for Bankruptcy

Stockton, California became the largest city to file bankruptcy when it did so on June 28, 2012.[1] After slashing more than $90 million in spending in recent years to a point where city officials said further cuts would endanger public safety,[9]

Mammoth Lakes, California filed for bankruptcy protection on July 3, 2012.[1] The city has sought legal advice on municipal bankruptcy after the appellate court upheld a $30-million judgment against the town for breach-of-contract which leaders are unsure how to pay.[10]

San Bernardino, California became the third California city to file for bankruptcy in two weeks when it filed on July 11, 2012.[1] The city filed because it faced a budget shortfall of $45 million and annual deficits over the next five years despite cutting the workforce by 20 percent and negotiating $10 million in annual concessions from employees in each of the prior three years.[1]

Harrisburg, Pennsylvania's city council voted 4-3 to file for Chapter 9 bankruptcy protection on October 11, 2011.[11] The council members in favor of filing under Ch. 9 hoped it would give the city some relief from lawsuits against it i light of the city's $300 million debt crisis tied to a project to revamp its incinerator.[12] City Council President Gloria Martin-Roberts said filing for bankruptcy would only create more lawsuits against the city.[11] As of October 2011, the city's debt burden was five times its general-fund budget.[13]

Central Falls, Rhode Island A June 17, 2011, report by Moody’s Investors Service said that the city’s pension plan is expected to run out of assets by October without additional funding or significant concessions from both current workers and retirees. After retirees failed to accept cuts in pensions and benefits, the city filed for bankruptcy on Aug. 1, 2011.[11]

Vallejo, California filed for Chapter 9 bankruptcy protection in May 2008.[14] It submitted its bankruptcy exit plan to the court on Jan. 18, 2011, and the plan focused on scaled-down employee benefits and pensions included in the city's proposal are being closely watched by many municipalities whose budgets have been pressured by rising costs and declining revenues as a result of the recession.[15] In response to the Vallegjo bankruptcy filing, California Gov. Jerry Brown signed a bill in October 2011, requiring that municipalities in California will have to submit to a neutral review of their finances, or demonstrate a fiscal emergency, before seeking Chapter 9 bankruptcy protection in federal court.[16]

Boise County, Idaho filed for bankruptcy on March 2, 2011. It did so to seek protection from its creditors because of an inability to pay a multimillion-dollar judgment after it lost a federal lawsuit against it.[17]

Facing Bankruptcy

Those governments that are currently considering declaring bankruptcy include:

  • Scranton, Pennsylvania[18]
  • San Diego, California[19]
  • Hamtramck, Michigan[20]
  • Jefferson County, Alabama If Jefferson County filed for bankruptcy, it would be the largest municipal bankruptcy in U.S. history. In March 2011, the county announced a turnaround strategy that includes a series of financial audits, management improvements and spending cuts.[21] The plan was not sufficient after the Alabama Supreme Court ruled a jobs tax unconstitutional. The jobs tax in 2010 generated $70 million, approximately 33 percent of the county's total operating revenue and 44% of the county's discretionary budget. As a result of losing the tax, the county board approved $12.3 million in budget cuts, including significant layoffs that could impact 40% of the county workforce.through The layoffs would begin June 27, 2011, and last at least the end of the county's fiscal year, which ends Sept. 30, 2011.[22] The county has been working to stave off bankruptcy for three years. The prospect of bankruptcy became more likely in March 2011 when the Alabama Supreme Court ruled that a local occupational tax is unconstitutional. Losing the tax will leave the county with a revenue shortfall that is about a third of its operating budget.[23]
  • Central Falls, Rhode Island faces Chapter 9 bankruptcy if recommendations by the state-appointed receiver are not successfully implemented.[24] Moody's Investment Service downgraded Central Falls' $20.8 million of debt to Caa1, pushing the city's bond rating deeper into junk bond status and the city closer to bankruptcy. The Moody's report referenced the city's $80 million unfunded pension obligation, which led Rhode Island to appoint a receiver last year to over see the city's finances. The city's public safety pension plan could run out of money by October unless funding is added or concessions are made.[25]
  • Bell, California may consider filing municipality bankruptcy, following the release of information on a number of financial woes the city is experiencing.[26]
  • Gary, Indiana which has reportedly been considering bankruptcy as a way to deal with its bleak financial condition.[27]
  • Flint, Michigan When the State Administration Board removed the city's application for a $20 million bond from its meeting agenda on Feb. 15, 2011, city officials worried they would be unable to make the city's $1.5 to $2 million payroll every two weeks and said they were open to bankruptcy or state takeover.[28]

Considering Bankruptcy Due to Pensions

  • Prichard, Alabama The financially troubled suburb of Mobile turned to bankruptcy court in October 2009 when it "simply ran of money to pay its pension obligations.[2]
  • Chicago, Illinois's Mayor Daley said while he was in office in 2010 that he believed bankruptcy was an option for its pension plan when urging pension refrom in the state.[29]

Considered Bankruptcy

Harrisburg, Pennsylvania debated filing under Chapter 9 in 2010 when it was unable to make $282 million of payments on bonds, but then-Governor Edward G. Rendell gave the city a $3.3 million advance. "We couldn't stand by and let the city default," Rendell said, claiming that a default by Harrisburg could raise borrowing costs in the state.[2] On June 13, 2011, the state offered the city a rescue plan instead of recommending bankruptcy. The state put the city under its under its Act 47 law in December 2010 and in June 2011, and the rescue and recovery plan was part of the law. The plan recommended a wage freeze and the sale of the incinerator that caused fiscal problems.[30] The report also recommends streamlining services, downsizing government and increasing certain property taxes if necessary. The report said that the city "teeters uncomfortably on the verge of bankruptcy that could be triggered at any moment by parties outside its control."[31]

Washington Park, Illinois, filed for bankruptcy, but a federal bankruptcy judge ruled on December 23, 2010, that the municipality does not have authority under state law for such relief because it was not specifically authorized by an Illinois law, governmental officer or other requisite state-empowered organization to file for such relief.[32]

Opposing Bankruptcy

Some mayors at the U.S. Conference of Mayors in January 2011 said they planned to do all they could to avoid defaults and bankruptcy and emphasized pension reform as key to shoring up their finances.[33]

Los Angeles Mayor Antonio Villaraigosa said he would not even use the word "bankruptcy," a reversal from his predecessor, Richard Riordan, who had said that Los Angeles was on track to declare bankruptcy before 2014.[33]

References

  1. 1.0 1.1 1.2 1.3 1.4 1.5 1.6 The Washington Post "Another California city, another bankruptcy as San Bernardino joins Stockton, Mammoth Lakes" July 11, 2012
  2. 2.0 2.1 2.2 The Wall Street Journal “Chapter 9 Weighed in Pension Woes” Dec. 23, 2010
  3. Red State, As $2 Trillion Debt Threatens 100 Cities in 2011, AFL-CIO Attacks NJ’s Christie, Dec. 20, 2010
  4. Bond Buyer “Indiana May Allow Chapter 9” Dec. 30, 2010
  5. MLive.com "Municipal bankruptcy filings rare; elimination of some bond debt could cause economic ripple" Feb. 15, 2011
  6. The New York Times "Mounting Debts by States Stoke Fears of Crisis" Dec. 4, 2010
  7. 7.0 7.1 7.2 Pensions and Investments "Gingrich seeks bill allowing state bankruptcy to avert bailout" Jan. 10, 2011
  8. Financial News "Newt Gingrich moves against state pensions" Jan. 10, 2011
  9. Reuters "No release of details of Stockton bankruptcy talks" July 6, 2012
  10. The Los Angeles Times "Mammoth Lakes fears financial ruin after legal judgment" Jan. 10, 2011
  11. 11.0 11.1 11.2 The Patriot News "Harrisburg City Council votes 4-3 in favor of Chapter 9 municipal bankruptcy protection" October 11, 2011
  12. MSNBC.com "Pennsylvania state capital files for bankruptcy protection" October 12, 2011
  13. National Journal "Harrisburg, Pa., Votes to File for Bankruptcy"October 12, 2011
  14. Businessweek “Bankruptcy: For Cities, There Are Downsides” Dec. 29, 2010
  15. [The Wall Street Journal "City Drafts Bankruptcy Exit" Jan. 18, 2011]
  16. Businessweek "Brown Signs Bill to Limit California’s Municipal Bankruptcies" Oct. 10, 2011
  17. The Wall Street Journal "Small Idaho County Files for Bankruptcy" March 3, 2011
  18. The Fiscal Times "Scranton's Fiscal Mess May Lead to Bankruptcy" July 11, 2012
  19. Voiceof SanDiego.org “A Primer on Municipal Bankruptcy” Dec. 9, 2010
  20. The New York Times “Michigan Town Is Left Pleading for Bankruptcy” Dec. 27, 2010
  21. Reuters "Exclusive: Alabama county devises road map for debt crisis" March, 2011
  22. The Wall Street Journal "Alabama County Girds for Deep Civil-Servant Layoffs " June 16, 2011
  23. The Wall Street Journal "Bankruptcy Threatens County" March 30, 2011
  24. [The Bond Buyer “Absent a Fix, Rhode Island City Will Face Chapter 9” Dec. 17, 2010]
  25. Business Insider "Credit Downgrade Pushes Rhode Island Town Closer To Bankruptcy" June 20, 2011
  26. BankruptcyHome.com "California city may soon need to file for bankruptcy" Jan. 10, 2011
  27. BankuptcyHome.com "Indiana governor supports municipal bankruptcy filings" Dec. 28, 2010
  28. MLive.com "Flint City Councilman Dale Weighill: Some on council willing to explore state takeover, municipal bankruptcy" Feb. 15, 2011
  29. 'Global Economic Analysis, "Chicago's Mayor Daley Discusses Bankruptcy For City Pensions" Dec. 11, 2010
  30. Reuters "Penn. issues rescue plan for indebted Harrisburg" June 13, 2011
  31. The Wall Street Journal "Pennsylvania Releases Harrisburg Act 47 Financial Recovery Plan" June 13, 2011
  32. The Chicago Tribune “Judge throws out Ill. village's bankruptcy case” Jan. 10, 2010
  33. 33.0 33.1 "As US cities struggle, mayors say no to bankruptcy" Jan. 19, 2011