Talk all you want about Chapter 7 bankruptcy. Discuss the possibility of Chapter 13. Hold a meeting to debate the merits of Chapter 11. But whatever you do, dare not speak about Chapter 9.
Chapter 9 is the place cities and counties go to seek shelter from creditors while they get their financial house in order. It’s rarely used. It’s last resort. It’s taboo. But, says the Wall Street Journal, the economic slump…
…is forcing debt-laden cities, towns and smaller taxing districts throughout the U.S. to consider using Chapter 9. As their revenue declines faster than expenses, some public entities are scrambling to keep making payments on municipal bonds. And that is causing experts to worry about the safety of securities traditionally considered low risk.
Just speaking of Chapter 9 invites questions from rating agencies, according to a recent report from Fitch:
“The more bankruptcy is publicly discussed as an option for financial relief, the more its tarnish wears off, increasing the likelihood of its actual use,” Fitch said.
The Journal highlights Pennsylvania’s capital city of Harrisburg. Harrisburg is speaking of Chapter 9:
…”Bankruptcy is inevitable,” Mr. Miller says. “We are in a terrible bind.” A budget passed Saturday by Harrisburg’s city council didn’t include any funds to cover (its) debt payments, according to the city clerk’s office.
Harrisburg Mayor Linda Thompson, a Democrat elected in November, opposes a bankruptcy filing and has presented an emergency plan that includes selling some of the city’s assets.
Harrisburg’s controller says the city can’t have a fire sale of assets like parking decks because they generate revenue. He says the city can’t raise taxes: “They’re already very high. If we did, people would just leave. It’s cheaper to move out to the suburbs.”
So it could be Chapter 9 for Harrisburg. Some states don’t even allow their municipalities to file Chapter 9. Pennsylvania does but tries to avoid it at all costs. A few years ago, the state took over the finances of Pittsburgh instead of considering Chapter 9. The state still oversees the Pittsburgh’s budget.
But states have their own budget nightmares. There seems to be little end in sight to this mess.
…many experts fear that a surge in municipal bankruptcy filings is unavoidable. “The day of reckoning is coming,” says Michael Pagano, dean of the University of Illinois at Chicago’s College of Urban Planning and Public Affairs.
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