Top Causes for Municipal Stress: Is Chapter 9 Bankruptcy A Viable Option?

By: Laura Day DelCotto

I recently attended a session where state officials, judges and bond attorneys discussed some of the reasons that they have encountered as to why municipal entities suffer financial struggles.  The point was made that while governmental distress is plainly different from the private sector in numerous ways, many of the causes can be the same.  They just take longer to surface.  The top reasons given by the panel include:

1. Decline in population.    Detroit is a prime example, going from over 2 million residents to less than 700,000.  This decreases property values as well as property and other local tax revenue streams.  

2. Retiree Obligations.  Unfunded pensions and “OPEB” obligations (“Other Post-employment Benefits”)  plague every level of federal, state and local governments across the US.   They often make up huge amounts of an annual budget and cash flow.

3. Too much indebtedness.   Some governmental entities have simple taken on too much debt, and have funded deficits with debt for years upon years of services provided and projects undertaken.

4. One time project debts.   Examples include courthouses, hospitals, stadiums, and other big-ticket projects.  Maybe undertaken when times were better but now the debt service can’t be funded.  

5. School District Issues.    Many local school districts are troubled, often due to requisite federal and state mandates for providing services for special-needs students which impact annual budgets and might be net-losers on pure cash flow basis.

6. Corruption.    “Corruption” at the management level can include everything from true actual fraud and our traditional understanding of “corruption” to plain incompetence, failure to recognize and address a problem, or conflicts between keeping jobs/salaries of management to the detriment of taxpayers.  

7.  Imposed Changes in Laws.   Jefferson County AL was faced with a state legislature that enacted laws which moved certain local revenue streams into state revenue streams.  With many state-level problems, this could become a bigger reason as states raid local coffers.

8. Politics is Often Reactive and Slow-moving.   Most elected officials do not want to be the ones to have the mess happen ‘on their watch.’  While this may be human nature, it creates ongoing and deeper problems.  The decision-making process is more cumbersome and there may be gridlock.

Filing a Chapter 9 proceeding is costly, but it certainly gets everyone to the table to work towards confirming a Plan which will address all the issues holistically, as opposed to efforts which piecemeal and band-aid ongoing financial problems for which there are no easy solutions.  Providing for the health, safety and welfare of citizens is the fundamental purpose of governmental entities.  When essential services are at risk, wise elected officials will step up to the plate to make tough choices for the benefit of those citizens they purport to serve.  

About DelCotto Law Group

DelCotto Law Group is Kentucky’s asset protection law firm known for its commitment to the lifetime success of its clients. With offices located in Lexington, Louisville and Danville, DLG serves Kentuckians with complicated financial matters, especially in the areas of bankruptcy, complex litigation, and estate planning. For more information about filing bankruptcy or DelCotto Law Group, please call (859) 231-5800 or email info@dlgfirm.com.

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