MUNICIPAL FINANCIAL DISTRESS

Municipal Financial Distress



Municipal Financial Distress

Local fiscal crises are by no means a negligible phenomenon. In the last 30 years a significant number of the nation's cities have suffered from serious financial strain, and several large and important cities (such as New York, Philadelphia and Miami) have even experienced a full-blown crisis (where they did not have sufficient resources to finance basic public services). In this paper I discuss the legal remedies developed over the years to address local insolvency (the creditors' remedies, Chapter 9 of the bankruptcy code and state financial boards), and I explain the logic and limits of each remedy. The analysis suggests that the remedy of state financial boards is the most effective response to a local crisis. I describe (using both theoretical arguments and examples of actual cases) the advantages of this remedy, and I explain how I believe it should be successfully implemented in legislation. Using the case study of North Carolina, I show that such legislation can improve local fiscal health and facilitate huge savings on interest rates on a regular basis.

Local Governments are primary providers of public services in the United States. We all receive various types of services from our localities, and our day-to-day lives very much depend on the localities' smooth and efficient functioning: we attend public schools, walk and drive the streets, drink clean water, enjoy the protection of the police and fire departments, look at the beauty of public parks and so on. So what happens when a local government's fiscal condition deteriorates and it becomes insolvent? What should we do when a locality no longer has sufficient resources to finance the public goods that we all consume and need.

However, notwithstanding the subject's importance, at least from a legal perspective municipal insolvency is still very much an uncharted area. There is hardly any legal writing about municipal financial crises, and researchers have not sufficiently explored how the legal system deals (or should deal) with this problem. Those scholars who have addressed this issue have mostly focused on one specific remedy to the local crisis — Chapter 9 of the bankruptcy code (the municipal bankruptcy chapter). They have assumed (either explicitly or implicitly) that municipal insolvency (like corporate insolvency) should be dealt with through bankruptcy law, and have neglected other (better and more common) solutions to the problem. In this paper I set out to start filling this ...