Tag Archives: Vallejo California

Tightening Municipal Bankruptcy Laws

There have been 629 municipal bankruptcies in the US since 1937. Some of the most recent include: Vallejo California, Central Falls Rhode Island, Boise County Idaho, and as of last week, Harrisburg Pennsylvania.

As a result of these recent filings, municipal bankruptcy, or Chapter 9 of the U.S. Bankruptcy Code, has become an increasingly important topic in the policy community and a few states have taken action towards tightening up and/or clarifying their municipal bankruptcy laws.

Rhode Island passed legislation earlier this year that:

takes the decision to file for receivership out of the hands of the community and gives it to the state Department of Revenue. It also replaces the existing state budget review commission system, set up in the 1990s, with a new three-step process of increasing oversight

Just last week, California Governor Jerry Brown signed legislation that changes how cities file for bankruptcy:

After the law takes effect in 90 days, municipalities in the most-populous state will have to submit to a neutral review of their finances, or demonstrate a fiscal emergency, before seeking Chapter 9 bankruptcy protection in federal court.

Given that future municipal bankruptcies are imminent, legislative actions aimed at tightening up and clarifying the current bankruptcy laws may be beneficial. However, Chapter 9 should not be seen as the solution or as an easy way out of a tough situation. As Michael Viscount and Josh Klein rightly argue:

Chapter 9 is a tool for a municipality to restructure its finances in an orderly fashion — but it is not a substitute for political will, which is required to tackle the difficult fiscal problems surrounding us…. Municipal bankruptcy will not eliminate any of the hard choices that must be made to restructure governmental obligations successfully.

Waiting until a municipality is on the brink of bankruptcy is fiscally irresponsible. Politicians and policy makers need to stop waiting until it is too late and begin taking the necessary steps towards creating policy environments that promote fiscal stability.