While consumers and businesses look to weather the economic downturn, many cities and municipalities are also seeking to avoid severe financial distress. A recent report by the National League of Cities found that cities are only in the early stages of registering the effects of the nation's economic downturn, and that the ability of cities to meet their financial needs will only worsen through 2010 and beyond. Spending pressures on municipalities and cities, according to the report, stem from declining local economic health, rising costs of providing services, public safety and infrastructure costs, and employee-related costs for health care, pensions and wages. Like businesses, tightened credit markets have made it increasingly difficult for municipalities to maintain debt-funded projects, particularly for infrastructure, and have resulted in higher debt costs.
Though there have been fewer than 600 municipal bankruptcies since chapter 9 became law in the 1930s, some cities, towns and municipalities that have received a financial shock amidst the economic downturn are increasingly considering bankruptcy as an option. In contrast to consumer or business bankruptcies, chapter 9 does not contain a provision in the law for liquidation of the assets of the municipality and distribution of the proceeds to creditors. Additionally, the Tenth Amendment limitation on federal powers (including the power to create and govern municipalities) means that in a chapter 9 case the bankruptcy court has very little involvement, if any, with the operation of a municipality. Click here to read the eligibility requirements of a municipality to file under chapter 9 of the Bankruptcy Code.
A panel of bankruptcy experts shares their insights on the chapter 9 process and their thoughts on whether a potential wave of chapter 9 filings is likely in the near future.