Cash-starved cities increasingly look to dangerous, rarely used Chapter 9
Ever heard of Chapter 9 bankruptcy?
If so, you’re in the minority: very few know that cities and other municipal entities have recourse to bankruptcy protection, if state law allows–and 26 don’t. For them, special provisions must be made. Unlike Chapter 7 and Chapter 13 bankruptcies, Chapter 9 filings–although rare–can create a damaging, rippling, chain of events, including matters of life and death.
Specific statute required in 26 states
According to a column at Bloomberg.com from early in the year: “States can’t enter Chapter 9 bankruptcy, and 26 of them prohibit their municipalities from filing, according to Knox and Levinson. ‘A municipality in those states must seek enactment of a specific statute particular to it authorizing the filing. It goes without saying that a floundering municipality faces an uphill battle in such states.’
“That hasn’t stopped municipalities from talking about it more than they have since 1994, when Orange County, California, suffered through the country’s biggest municipal bankruptcy. Bondholders have to worry if it’s more than just talk.”
According to a Dec. 27 story in The New york Times, an “old working-class city almost surrounded by Detroit” is “pleading with the state to let them declare bankruptcy, a desperate move the state is not even willing to admit as an option under the current circumstances.”
Making it until March–maybe
City leaders are looking to Chapter 9 as a last-resort measure, having slashed the budget so drastically that if winter storms exhaust state funds for snow plowing city streets, the city will have no money left to address the problem.
” ‘We can make it until March 1 — maybe,’ … said [William J. Cooper, the city manager] of Hamtramck’s ability to pay its bills.”
“The state is concerned that if they say yes to one, if that door is opened, they’ll have 30 more cities right behind us,” Mr. Cooper said, as flurries fell outside his City Hall window. “But anything else is just a stop gap. We’re going to continue to pursue bankruptcy until the door is shut, locked, barricaded, bolted.”
Bankruptcy, increasingly common among corporations and individuals, remains rare for municipalities. Local leaders who want to win elections find it unappealing and often have other choices for solving financial woes. Besides, states have a say in whether a municipality may pursue bankruptcy at all, and they have every reason to avoid such an outcome, not least of all for fear of a creating a ripple effect that could cripple the municipal bond market and drive up the cost of borrowing.
Yet with anemic property tax revenues and forecasts of more dire financial times ahead, some experts and elected leaders fear that more localities may have to at least consider bankruptcy.
Issues of life and death
A municipal bankruptcy can hurt more than bond sales and residents who get deprived of city services. City pensioners may be cut off, as has happened in Prichard, Alabama–which in October made its second Chapter 9 filing since 1999. According to an area newspaper, the Press-Register:
Mayor Ron Davis, who just two years ago helped the city pay off its creditors from the 1999 bankruptcy, blamed the latest financial crisis in part on a flawed municipal pension plan. The filing came a day before Davis and the city Finance Director Rex Williams were slated to be deposed by attorneys representing the pensioners in a lawsuit filed in August.
With the filing, that testimony will be put on hold, along with any other litigation pending against the city.
“After careful review of all of our options, bankruptcy protection seems to be the only solution left at this time,” Davis said in a statement released Tuesday afternoon. “Over the past 50 years, the pension plan was amended by the Legislature more than fifteen times, and always the economic burden on the City was increased. This has been a long-term problem that was unfortunately inherited by this administration.
“After several lawsuits filed by pensioners, it has forced us to come to this decision, one that will protect the city and its residents,” Davis’ statement added.
According to The New York Times, in a Dec. 22 story, the city has quit making pension payments to 150 former city workers. “Since then, Nettie Banks, 68, a retired Prichard police and fire dispatcher, has filed for bankruptcy. Alfred Arnold, a 66-year-old retired fire captain, has gone back to work as a shopping mall security guard to try to keep his house. Eddie Ragland, 59, a retired police captain, accepted help from colleagues, bake sales and collection jars after he was shot by a robber, leaving him badly wounded and unable to get to his new job as a police officer at the regional airport.
“Far worse was the retired fire marshal who died in June. Like many of the others, he was too young to collect Social Security. ‘When they found him, he had no electricity and no running water in his house,’ said David Anders, 58, a retired district fire chief. “He was a proud enough man that he wouldn’t accept help.’ ”
To be continued: Some even talk of creating a ‘Chapter 8′ to allow a state to declare bankruptcy.
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Whatever you do, before making major, life-changing financial decisions, consider consulting a trained, experience attorney. If you think your home is a candidate for a short sale, be sure to ask your attorney about it–it could greatly affect your standing and strategy for starting over.
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