Municipal Bankruptcy Filings a Murky Prospect
With how the recession seems to affect every aspect of life, it seems almost trite to talk about economic stresses. But hey, one more time can’t hurt.
The WSJ published an article yesterday on the dilemmas faced by municipalities when considering bankruptcy. While deciding whether or not to file is already a complicated process for individuals or businesses, for local governments the outcome is almost entirely unknown. David Wessel writes:
There is no obvious mechanism for state and local governments to resolve the coming collision between competing claims of taxpayers, retirees (both current and future) and bondholders.
A bit of history: Amid collapsing municipal finances in the Depression—in Detroit, 36% of the taxes were delinquent in 1932 and 76% of tax revenue that arrived went to debt service—Congress allowed cities and towns, municipal utilities and the like (though not states) to go into bankruptcy.
Several Supreme Court decisions and congressional amendments later, the threshold for a municipal filing is much higher than for companies, judges’ role more limited and the process largely untested. Bridgeport, Conn., was blocked from filing under Chapter 9 in 1991 because a federal court said it wasn’t truly “insolvent,” a test companies don’t have to meet.
The author concedes that there are few instances of local governments filing for bankruptcy, and that most experts do not expect to see an increase. But this does raise the question of what options cash-strapped local governments have to effectively manage their debt while still continuing to provide services to their constituents.
Certainly bankruptcy isn’t a preferable option, but when a municipality has to pay off its debt burden for, say, a construction project that is years behind schedule and far over budget, what services can it afford to cut? How can it increase revenue without placing a massive tax burden on residents? Regional consolidation would be one step to help make local governments more financially secure and cut their expenditures.