What if your city files for bankruptcy?
- Congress enacted bankruptcy legislation for municipalities in the 1930s.
- Since 1980, there have been 270 municipal bankruptcies.
- Once a city is bankrupt, it can cut costs, increase revenue or both.
Municipal bankruptcies are nothing new, but several recent landmark filings have transformed Chapter 9 of the U.S. bankruptcy code for municipal reorganization from a relatively obscure body of law into a hot topic. Residents of struggling cities are wondering what the possibility of bankruptcy means for them.
"We've had cities go bankrupt in the past, but usually those are isolated events that occur because the city lost a big lawsuit or had a local catastrophe," says Franklin C. Adams, a bankruptcy lawyer in Riverside, Calif. "What's different and quite troubling is that larger economic conditions seem to be the cause, and we haven't seen that since the Great Depression."
Congress enacted federal bankruptcy legislation for municipalities in the 1930s. Since 1980, there have been 270 muni bankruptcies, according to data from the U.S. court system. Last year, 13 municipalities filed for bankruptcy protection, according to Reuters. But the recent filings have been noteworthy.
- Jefferson County, Ala.: The county filed last November, citing more than $4 billion in debt. In terms of dollar amount, the filing is the largest civic bankruptcy in U.S. history, according to The Huffington Post.
- Stockton, Calif.: The city filed for bankruptcy at the end of June, becoming the largest American city, in terms of population, to seek protection from creditors under Chapter 9. City officials estimate that Stockton, which has just fewer than 300,000 residents, could owe creditors as much as $1 billion, according to CBSNews.com.
- Harrisburg, Pa.: The city has an estimated $400 million in debt, and a judge rejected that city's bankruptcy petition because it violated state law, according to CNNMoney.com.
- San Bernardino, Calif.: Just a month after Stockton, this Southern California city announced its decision to file bankruptcy. It had more than 200,000 residents. The move has prompted many to worry that other cities might follow suit, according to CBSNews.com.
What is Chapter 9?
In many ways, a Chapter 9 filing is akin to Chapters 11 and 13 of the bankruptcy code, which deal with business and personal reorganizations, respectively. Under all three scenarios, debtors get a reprieve for paying creditors while they propose and implement a restructuring plan. But unlike private citizens and companies, municipalities are sovereign entities, which present an unusual wrinkle, Adams says.
"Realistically, the court doesn't have as much power to force the city to do anything," Adams says. "So, unlike other provisions of the bankruptcy code where the creditors have a vote on the reorganization plan, the city has a lot more latitude."
Once a municipality is bankrupt, it can cut costs, which usually means fewer services such as firefighting, garbage collection and library branches, according to the Los Angeles Times. Or it can increase revenue by raising taxes. Usually, it's a combination of both, Adams says. But real change is often a matter of political will.
What happens to services?
"Municipal bankruptcies usually mean a reduction in the size, scope and quality of services because that's where the biggest costs are," says Adams.
For instance, in San Bernardino, public safety agencies account for 75 percent of that city's budget, according to the Los Angeles Times.