Chapter 9 filings are not common. From there were Chapter 9 bankruptcies filed nationwide, with 13 filed in FY The majority of the cases in the last 40 years have been for utility districts and not sovereign government entities. The purpose of Chapter 9 is to provide a financially-distressed municipality protection from its creditors while it develops and negotiates a plan for adjusting its debts.
Reorganization of the debts of a municipality is typically accomplished either by extending debt maturities, reducing the amount of principal or interest, or refinancing the debt by obtaining a new loan.
As the number of participants in a bankruptcy increases, the task of deciding how much different creditors should get repaid becomes more complicated. Westfall Township, Pennsylvania, home to about 2, people, declared bankruptcy in after losing a lawsuit to New Jersey real estate developers David and Barbara Katz. The city would also raise property taxes and delay the repayment of other debts.
Bankruptcy proceedings were more complicated in Vallejo, California, which is on the northern end of San Francisco Bay. In , the city lost around one-quarter of its revenues as local sales taxes and real estate development fees collapsed. Vallejo suddenly found itself unable to pay all of its bills. The City Council voted unanimously to file for bankruptcy. In its bankruptcy filing, the city estimated it had between 1, and 5, creditors.
Vallejo argued that its bankruptcy should include the option of reducing employee wages and benefits, and changing working conditions, if necessary, without union consent. The judge agreed and, in doing so, expanded what types of debt could be reduced in bankruptcy.
This was, and remains, controversial. The city emerged out of bankruptcy solvent but struggling. But no creditor would walk away unscathed. Wages, pensions and health care for city employees were all cut. The bigger the city, the more complicated and expensive the bankruptcy. It also makes the process of picking winners and losers more complex and something that can involve testing the limits of bankruptcy law. When these limits expand, just what going bust means can change dramatically.
Things that once seemed untouchable, like pensions, can become vulnerable in bankruptcy courts. With many budgets in tatters, the prospect of growing numbers of city bankruptcies looms. Distressed cities will have to figure out what the process means for them. It is rarely possible to predict what any city will decide.
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