The prospect of significant municipal entity defaults and bankruptcies has gathered recent attention in the market and media. This is not surprising, given extreme economic pressures on municipalities brought on by lower tax revenues, reduced federal and state assistance, higher unemployment, large and often underfunded employment obligations and the continued demand for services. Predictions of mass municipal bond defaults by certain well-known professionals (e.g., banking analyst Meredith Whitney’s forecast on the Dec. 19, 2010, episode of CBS’ 60 Minutes that there would be 50 to 100 of them in 2011), along with the well-publicized potential bankruptcies of Harrisburg, Pa., and Jefferson County, Ala., have served to intensify discussion. Given these forces, municipalities and municipal-owned or supported entities (such as hospitals and utilities), as well as those affected by them (including vendors, employees, bondholders and financial insurers), would be well-served to understand the Chapter 9 option. This article seeks to provide a primer on Chapter 9 and, for illustrative purposes, how it compares to more familiar Chapter 11 business bankruptcies. See also Robbin Rahman and Matt Hindman, “Struggling cites may find succor in Chapter 9,” NLJ, Nov. 29, 2010.
When compared to corporate reorganizations, there have been relatively few municipal bankruptcy cases filed since the enactment of municipal bankruptcy laws in the 1930s. This, however, should not serve as an indictment for the utility of Chapter 9. The lower rate of municipal-related filings may largely be attributed to the fact that counties, cities and towns — unlike businesses — have traditionally had the power to adjust their balance sheets by raising taxes and/or reducing services. If, however, as some commentators suggest, such traditional powers cannot fix many of the problems facing today’s municipal entities, Chapter 9 may become more frequently utilized or at least threatened as leverage.
