Editor's Note: The following article, "Bridging the Gap: Receivership and the Absence of Discipline in Chapter 9," won the prize for second place in the Sixth Annual ABI Bankruptcy Law Student Writing Competition. The author, Randall Thomas, is a student at New York University School of Law. In addition to recognition and publication of his article in the Business Reorganization Committee Newsletter, Mr. Thomas receives a cash award of $1250, sponsored by Jenner & Block LLP, and a one-year ABI membership.
Municipal bankruptcy is a remedy premised on the theory that excessive debt can thrust a city into a fiscal maelstrom. Applying an unsustainable percentage of municipal revenues toward debt and obligations often leads cities to the tipping point: The city cannot raise taxes without causing citizens to leave for greener pastures, yet it has insufficient capital to pay for the essential public services necessary to retain taxpayers.[1] Although chapter 9 was promulgated to provide cities and political subdivisions with the bankruptcy mechanisms available to private entities, its power is often diminished by the retention of pre-bankruptcy governance.
Appointment of a receiver during fiscal distress can provide municipalities with a solution by allowing a politically disinterested outsider to make unpleasant decisions and, if necessary, lead the city into bankruptcy.[2] The ability of an appointed receiver to bridge the gap of power between pre-bankruptcy governance and chapter 9 is presently underutilized and can provide municipalities with a streamlined, comprehensive path to fiscal solvency not often found in municipal bankruptcies.
Part I broadly describes the chapter 9 process and highlights the influence of constitutional tension in developing present-day municipal bankruptcy statutes. Part II identifies the mechanisms of chapter 9 not found in other chapters of the Bankruptcy Code and explains how these disparities create problems in applying chapter 9. Part III explores principles of state-imposed receivership and considers why a combination of receivership and chapter 9 may be capable of resolving many of the issues encountered in municipal bankruptcy. Part IV examines the recent bankruptcies of Vallejo, Calif., Central Falls, R.I., and Detroit, and reflects upon the extent to which receivership did or could have benefitted these municipalities.
Part I: Chapter 9 Bankruptcy Fundamentals
The history of chapter 9 is one of constitutional tensions at both state and federal levels and uncertainty as to the appropriate roles state and federal governments should play in municipal debt restructuring.[3] Federal legislation permitting debt relief for municipalities would appear to encroach upon state autonomy,[4] while any state legislation resembling bankruptcy laws would impinge the obligations of contracts.[5] The pressure to provide municipal debt relief during the Great Depression eventually compelled congressional action, and the first municipal bankruptcy laws were enacted in the mid-1930s.[6] Municipal bankruptcy law provided a welcome reprieve to distressed municipalities struggling with collective action and creditor holdout problems and facing waves of lawsuits against city officials at the time.[7]
The influence of these constitutional concerns helps explain the development of municipal bankruptcy after 1938: the narrow scope and limited court authority of municipal bankruptcy is intended to respect state sovereignty while the prohibitions of the Contracts Clause are avoided by the federal nature of bankruptcy legislation.[8] Unfortunately, the deference required in treading between state and federal dominions produced a labyrinthine set of statutes underutilized because of their simultaneous brawn and incapacity.[9]
The scarcity of municipal bankruptcies during the last century may be largely attributable to the obstacles of filing under chapter 9, particularly the prerequisite of state authorization. Section 109(c)(2) provides that a municipality must be specifically authorized to file either by state law or by a governmental officer or organization empowered by state law to authorize such a filing.[10] Requiring a municipality to seek the approval of its state prior to filing is a product of the constitutional concerns discussed above and ensures that chapter 9 does not violate the Tenth Amendment.[11] Twenty-six states presently have statutes specifically authorizing chapter 9 filings.[12]
Part II: A Unique Approach: Chapter 9 vs. Chapter 11
Although similarities abound between the chapter 11 and chapter 9 processes, municipalities differ from private debtors in several material ways.[13] With rare exceptions, creditors cannot seize the property of municipalities in satisfaction of a debt, nor can bankruptcy courts or creditors challenge a municipal government’s management of the estate. Finally, garnishment of future income streams is unavailable in municipal bankruptcy, making debt-readjustment negotiations even more uncertain.[14]
Three rationales have traditionally been cited in justifying bankruptcy permissions for private entities, not all of which are applicable to municipalities.[15] First, bankruptcy allows debtors to overcome the collective-action problem presented by multiple self-interested creditors.[16] Second, allowing an entity to restructure can preserve going-concern value and prevent short-term illiquidity problems from escalating into insolvency.[17] Finally, bankruptcy offers a fresh start, allowing debtors to proceed without the economic drain caused by untenable debt service.[18]
Not all of these rationales adequately vindicate the use of chapter 9 for municipalities in distress, however. Collective-action problems present in non-municipal bankruptcies arise because the debtor has a limited common pool of assets and an anticipated inability to generate revenue.[19] The power to tax and therefore generate revenue independent of marketplace conditions means that municipal debtors are not subject to the constraints of a finite pool of assets.[20] Additionally, the bulk of municipal property is acquired for public use and cannot be seized by creditors, precluding the race-to-the-courthouse phenomenon observed in private bankruptcies. Finally, municipalities cannot be liquidated and therefore have no going-concern value.
A fundamental remedy for chapter 11 creditors is the retention of security on collateral and preservation of a secured claim if the debtor eventually liquidates. Chapter 9, however, cannot offer creditors the ability to realize the proceeds from the sale of secured collateral. Notwithstanding several anomalous early nineteenth century cases characterizing municipalities as quasi-private organizations, [21] most property held by political subdivisions is characterized as public property, held in trust for the public and exempt from appropriation.[22] Consequently, a creditor’s principal remedy in the event of default – the right to seize assets to satisfy debts – is lost when dealing with municipalities.
Chapter 9 permits debtors to retain substantially greater control than does chapter 11, impairing creditors’ ability to impose spending constraints.[23] The substantial loss of control experienced by chapter 11 debtors shifts a portion of management authority to creditors and the judiciary, a divestiture of power intended to ensure that bankrupt entities manage the estate prudently and cease actions that may further debilitate the assets of the estate.[24] Municipal officials may not have their authority modified or diminished by courts in chapter 9 bankruptcy.[25] The power of a municipal debtor’s governing body to make decisions about how and where to spend funds, including allocations inconsistent with the priority rules existing for chapter 11 debtors, is one of the greatest disparities between private and municipal bankruptcies.[26]
Principles of federalism and the separation of powers prevent bankruptcy courts from restricting a municipality’s discretion to allocate capital.[27] Unfortunately, retention of power by the pre-bankruptcy administration can prevent the municipality from fully availing itself of the chapter 9 adjustment mechanisms.[28] Pre-bankruptcy management may lack the political will to take steps necessary for a successful reorganization, increasing the likelihood that a locality will suffer from debt and contract overhang after emerging from chapter 9.[29]
Part III: Receivership Plus Chapter 9
Financial distress in a municipality is often the result of mismanagement of city resources by elected officials, and maintaining the political status quo usually precludes a distressed municipality from realizing the full benefit of the fresh start that chapter 9 offers. Receivership statutes have traditionally been implemented by states to reform balance sheets and renegotiate contracts without having to resort to chapter 9. Consequently, many receivership statutes do not directly authorize a receiver to lead a municipality into bankruptcy.[30] Because municipalities require state permission to file chapter 9, states can easily create a framework for receivership by conditioning the ability of a municipality to seek bankruptcy protection upon a receiver’s approval.[31] The receiver’s power to file for bankruptcy can be subject to the approval of certain state entities, or require that certain indicators of dire insolvency be met prior to filing.[32] Once a receiver is appointed, however, the former administration of the distressed municipality should not have the ability to interfere with any decisions being made as to whether a chapter 9 petition is filed.
Unfortunately, the bankruptcy regime inevitably worsens moral hazard issues by giving a municipal government a mechanism through which obligations can be avoided.[33] The moral hazard of debtor self-interest often arises when public officials are allowed to file chapter 9 on behalf of their municipalities, as municipal officials may prefer to direct resources to their own interests instead of balancing a municipal’s finances if they expect that a bankruptcy or state rescue is inevitable.[34] If a municipal government knows that the city can be taken into chapter 9, the polity may lack incentive to remedy any fiscal irresponsibility, instead believing that any addition to the debt predicament will be resolved in bankruptcy anyway.[35]
Receivers can be vested with the authority to increase local taxes, privatize services, renegotiate collective bargaining agreements, and trim myriad unnecessary municipal services, undertakings unavailable to bankruptcy courts and often unattractive to pre-bankruptcy governance. Receivers are limited, however, in their ability to renegotiate unmanageable debt burdens. One significant benefit of bankruptcy unavailable in receivership is the automatic stay, which operates to halt substantially all efforts to collect debt from the municipality immediately upon filing the chapter 9 petition.[36] Outside of bankruptcy, creditors may be unwilling to commit to a debtor’s reorganization in the hope that strategically holding out will yield a greater payment on claims.[37] These collective action problems require that a municipal receiver have the authority to employ chapter 9 to coerce creditors into supporting a reasonable restructuring plan.
Resource adjustments can facilitate a municipality’s adaptation to a new economic climate reflecting fewer sources of revenue or increased liabilities. Municipalities, however, may prefer to use bankruptcy to allocate the costs of an improvident investment to creditors rather than suffer the discomfort of resource adjustments.[38] These debt-avoidance tendencies are short-sighted and can potentially cost a municipality access to capital markets further down the road. Receivers are specifically tasked with untangling the municipality’s predicament and making choices that will set a municipality on a fiscally prudent course, even if it requires paying for regrettable investments.
Due to Tenth Amendment limitations, bankruptcy courts have insufficient authority to guide the outcome of a chapter 9 bankruptcy.[39] Courts can reject or confirm a municipality’s debt-readjustment plan, but have no power to force a revised plan upon a municipality.[40]
The incapacity of a bankruptcy court to compel a municipality to hike taxes in order to have a reorganization plan approved creates a significant statutory gap, leaving the court powerless to employ one of a municipality’s distinctive features: the ability to increase taxes and generate additional revenue to service debt.[41] The prohibition of bankruptcy courts’ interference in governmental affairs of a municipality prevents courts from instructing municipal governments to reduce present expenditures as well, effectively establishing priority of current spending over past debts. Receivers armed with the capacity to bring a municipality into chapter 9 can accomplish what courts cannot; robust receivership statutes will afford a receiver sufficient authority to effectively reform municipal policy and renegotiate debt through a chapter 9 proceeding.
Chapter 9 provides a powerful debt-relief mechanism for distressed municipalities but should only be considered for seriously distressed cities, as the long-term effects of municipal bankruptcy can be severe and unforgiving.[42] The threat of creating adverse municipal credit markets further contributes to the paucity of municipal bankruptcies, as states fearful of increasing the cost of capital for other municipalities often refuse to permit chapter 9 bankruptcies.[43] If states were to permit unregulated bankruptcy, municipalities might opportunistically seek chapter 9 protection too frequently, leading creditors to demand higher interest rates.[44] This scenario, however unlikely, can partially explain the reluctance of states to allow chapter 9 filings. More likely, however, is that states understand that the cost of capital for all municipalities in a state will increase if creditors believe that the state will sanction municipal bankruptcies. To alleviate creditor apprehensions, state receivership legislation is often enacted to assuage creditor fears that municipal bankruptcies will be endorsed by the state. A state willing to use receivership statutes operates as a quasi-guarantor, signaling to creditors that certain mechanisms are in place to avoid chapter 9 bankruptcies.
Beyond receivership and bankruptcy, distressed municipalities may occasionally be pushed into a third direction grimmer than any of the previously discussed approaches to fiscal difficulty: disincorporation or dissolution. Municipal bankruptcy commentary typically focuses on the options available to the city, disregarding the fact that municipalities rise and fall in the shadow of the state in which they incorporated. States enjoy plenary power over municipalities, and a reallocation of municipal power is contained within the ambit of options available to states in dealing with insolvent municipalities.[45] A state can commandeer an insolvent municipality outside of bankruptcy, and the filing of a chapter 9 petition does not alter the nonbankruptcy rights of the state.[46] Objections to receivership often portray the state’s temporary removal of municipal officials as a forbidden intrusion into the democratic processes of the municipality.[47] Appointment of a receiver, however, would be more appropriately understood as an option exercised by the state in lieu of liquidation.
Precise drafting of receivership legislation is crucial to fending off challenges by municipal officials and ensuring effective implementation of a receivership process. Ideally, a receiver should not be an elected official, should be an expert in public finance, and should assume the authority of the municipal governance upon appointment. [48] Further, states should have narrow, specific triggering conditions that bind the state to implement receiverships based on nondiscretionary determinations, so as to preclude accusations of bias or selective application of the receivership statutes.
The implementation of strict, objective, and uniformly applicable criteria prior to the appointment of a receiver is essential, as it allows the state to take control of a distressed municipality at a predetermined time without allegations of political bias or ulterior motives.[49]
Some states rely on a battery of specific financial indicators, the presence of which signals the occurrence of an incipient financial crisis.[50] Other states, such as Louisiana, require state action upon the concurrence of several executive offices that a municipality is in fiscal distress.[51] Unambiguous or discretionary indicators are problematic as they fail to give a municipality’s government sufficient notice of an impending takeover.
Receiver authority should be broad and must effectively usurp from the local government the power to raise taxes, reduce expenditures, abolish services and departments, make new service contracts and liquidate municipal assets.[52] An effective receivership statute will include a formal suspension of the legal authority of elected officials, preventing them from interfering in the receiver’s activities.[53] Ideally, receivership statutes will permit the assumption of all responsibilities of the previous municipal administration for the duration of the receivership, revoking any substantive authority of elected officials.[54] Finally, to avoid the difficulties created by genuine power-sharing between a receiver and local government, the fiscal administrator’s authority needs to be clearly delineated, separate from, and superior to the authority of local officials.[55] Insufficient grants of authority lead locally elected leaders to believe that they should, by mandate of election by their constituency, continue to exert traditional authority. This type of power dispute undermines the functionality and purpose of receivership statutes at a time when clear lines of authority are necessary.
Part IV: Specific Applications: Chapter 9 Specimens Since 2000
Vallejo, Detroit and Central Falls represent three disparate state approaches to handling distressed municipalities, each yielding different results. California allowed Vallejo to utilize the chapter 9 process without the appointment of a receiver, whereas Rhode Island and Detroit appointed a receiver and emergency manager, respectively, to guide the municipality through bankruptcy. Central Falls paid off bondholders in full, while Vallejo gave bondholders 50 cents on the dollar.[56] Detroit’s debt-adjustment plan is still being contested, but will likely include a combination of pension cuts, public-service reductions and bond markdowns.[57] A state’s decision to enact receivership legislation should be guided by several factors, including the extent to which the state has reason to believe that contagion fears may actually materialize in neighboring cities, whether the state would prefer to honor pension obligations or bond debt, and the state’s faith that municipal officials will take the actions necessary to help ensure an effective restructuring.
Vallejo filed California’s second-largest municipal bankruptcy in May 2008 after two years of unsuccessfully attempting to renegotiate public employee pensions and salaries.[58] In exchange for permission to terminate burdensome collective bargaining agreements, the Vallejo bankruptcy court required that the city’s debt-readjustment plan distribute losses equitably among all general creditors.[59] Vallejo emerged from bankruptcy in 2011 with a debt-adjustment plan that included renegotiated collective bargaining agreements, reduced payments to bondholders by as much as 50 percent, and reduced health care obligations.[60] Vallejo did not, however, reduce its pension obligations.[61]
Central Falls, R.I., petitioned the state legislature for permission to file for chapter 9 protection following a downgrade of the city’s bond debt to junk status in May 2010.[62] The state declined, instead choosing to appoint a receiver, a product of legislation promulgated specifically in response to the Central Falls dilemma and legislative fears of contagion.[63] Despite tax increases, renegotiated union contracts and elimination of public services, the Central Falls receiver eventually filed for bankruptcy in August 2011.[64] The city’s debt-readjustment plan included tax increases and pension cuts combined with legislation giving bondholders a statutory lien on tax receipts, which ensured that bondholders would receive full payment.[65] Even though Central Falls’s receiver eventually brought the city into bankruptcy, he was able to eliminate departments, renegotiate union contracts and increase taxes prior to filing a petition in chapter 9, all actions that the pre-receivership governance would not be inclined to do. Through this restructuring the receiver was able to reduce the pool of creditors and claims prior to entering bankruptcy, valuable concessions that gave Central Falls greater leverage in chapter 9.
Detroit appointed emergency manager Kevyn Orr in March 2013 who, in an act considered inevitable by many, recommended to the governor and state treasurer that Detroit file a chapter 9 petition in July 2013.[66] Orr resorted to chapter 9 after negotiations with the city’s bondholders, pensioners and varied other creditors failed to culminate in a feasible non-bankruptcy restructuring plan.[67] In leading Detroit through bankruptcy Orr is vested with the authority to end collective bargaining agreements, cut pensions, dismiss public officials, sell assets and reduce obligations to unsecured creditors, all acts that pre-bankruptcy governance likely would not have pursued. Unlike Central Falls, Detroit’s adjustment plan would discount bond debt and reduce pension obligations, a move that may impede the city’s access to capital markets in the future.[68]
Conclusion
Cities can become trapped when the cost of debt service begins to outstrip the rates at which a municipality is able to generate revenue through taxes and free up capital with reasonable budget reductions, forcing them to allocate ever-increasing proportions of annual budgets toward debt service. This downward spiral is precisely the situation chapter 9 is meant to address, allowing municipal debtors some period of breathing room and a fresh start. Unfortunately, the retention of pre-bankruptcy governance through bankruptcy, the inability of the bankruptcy court to interfere with the government processes of the municipality, and the unwillingness of municipal officials to make politically unpopular choices combine to preclude municipalities from realizing the full reformative potential of chapter 9.
Appointing a receiver to a municipality in financial distress avoids the traditional failures of chapter 9 and places a disinterested individual in charge of making municipal decisions regarding taxes, elimination of employees and services, and future spending policies. Vesting the receiver with chapter 9 authority provides significant leverage in renegotiating obligations, and provides the receiver with valuable automatic stay and cramdown mechanisms if suitable results cannot be obtained outside of bankruptcy. Receivership legislation does not ensure that resorting to chapter 9 won’t eventually be necessary; rather, it provides a municipality with a temporary specialist tasked with guiding the city toward solvency and long-term sustainability.
[1] Michelle Wilde Anderson, Dissolving Cities, 121 Yale L.J. 1364, 1384 (2012); Ianthe Jeanne Dugan & Kris Maher, Muni Threat: Cities Weigh Chapter 9, Wall St. J. (Feb. 18, 2010) (Harrisburg, Pennsylvania City Controller describing a dilemma wherein tax increases would spur citizen flight, additional debt is unattainable, and selling city property would deplete future revenue).
[2] See infra Part III for discussion of the benefit of a nonpartisan receiver in making politically unpopular decisions.
[3] See generally Michael W. McConnell and Randal C. Picker, When Cities Go Broke: A Conceptual Introduction to Municipal Bankruptcy, 60 U. Chi. L. Rev. 425 (1993).
[4] Ashton v. Cameron County District, 298 U.S. 513, 531 (1936) (holding that extending bankruptcy benefits to political subdivisions of a state would be an unconstitutional encroachment into state powers).
[5] Michael W. McConnell, Contract Rights and Property Rights: A Case Study in the Relationship Between Individual Liberties and Constitutional Structure, 76 Cal. L. Rev. 267, 268 (1988) (“[T]he contracts clause of Article I, Section 10, prohibits laws ‘impairing the Obligation of Contracts.’ This provision applies only to the states. The federal government may impair the obligation of contracts without constitutional restraint….”).
[6] McConnell & Picker, supra note 3, at 428.
[7] Anna Gelpern, Bankruptcy, Backwards: The Problem of Quasi-Sovereign Debt, 121 Yale L.J. 888, 923 (2012); McConnell & Picker, supra note 3, at 430-32.
[8] McConnell & Picker, supra note 3, at 428.
[9] Mike Maciag, “How Rare Are Municipal Bankruptcies?,” Governing the States and Localities (Jan. 24, 2013) (Only 13 localities sought bankruptcy protection over the past five years); American Bankruptcy Institute, Chapter 9 Quarterly Filings, www.abiworld.org/statcharts/Ch9filings.pdf (there were 65 chapter 9 filings from 2000-2008).
[10] 11 U.S.C. § 109(c)(2); also see In re City of Harrisburg, 465 B.R. 744 (Bankr. M.D. Pa. 2011) (affirming the constitutionality of a state statute restricting the ability of municipalities to file for chapter 9 protection).
[11] U.S. Const. Amend. X; Juliet M. Moringiello, Specific Authorization to File Under Chapter 9: Lessons from Harrisburg, 32 Cal. Bankr. J. 237, 244-45 (2012). Because the very existence of a municipality requires state endorsement, allowing a municipality to seek protection in a federal court without state approval would contravene the Tenth Amendment, reserving all powers to the states that are not specifically granted to the federal government.
[12] H. Slayton Dabney, Jr., et al., Municipalities in Peril: The ABI Guide to Chapter 9, 95-111 (American Bankruptcy Institute, 2010); Moringiello, supra note 11, at 247.
[13] See 11 U.S.C. § 901 (incorporating 16 provisions found in chapter 11).
[14] But see R.I. Gen. Laws § 45-12-1 (statute granting bondholders statutory liens on tax receipts).
[15] See generally Adam J. Levitin, Bankrupt Politics and the Politics of Bankruptcy, 97 Cornell L. Rev. 1399, 1433 (2012).
[16] Thomas H. Jackson, The Logic and Limits of Bankruptcy Law 10-19 (1986). Bankruptcy precludes two problematic nonbankruptcy creditor responses to debtor distress: the race-to-the-courthouse event and the free-riding phenomenon whereby a creditor attempts to “outlast” other creditors in hopes of a greater payoff.
[17] Levitin, supra note 15, at 1433.
[18] Id.
[19] Jackson, supra note 16.
[20] Kevin A. Kordana, Tax Increases in Municipal Bankruptcies, 83 Va. L. Rev. 1035, 1106-07 (1997) (a municipal debtor must make a decision “between paying the price for defaulting (which may be minimal, due to risk-shifting) and making itself a less desirable place in which to live, work, invest, and do business by raising taxes to pay its bondholders off in full.”).
[21] City of Trenton v. New Jersey, 262 U.S. 182, 191-92 (1923); Kaufman v. City of Tallahassee, 94 So. 697 (1922).
[22] Meriwether v. Garrett, 102 U.S. 472, 513 (1880).
[23] Christine A. Klein, Water Bankruptcy, 97 Minn. L. Rev. 560, 600 (2012); Bankruptcy Basics, Admin. Office of the U.S. Courts, Bankr. Judges Div. (2012) (“The role of creditors is more limited in Chapter 9 than in other cases. There is no first meeting of creditors, and creditors may not propose competing plans. If certain requirements are met, the debtor's plan is binding on dissenting creditors. The Chapter 9 debtor has more freedom to operate without court-imposed restrictions.”).
[24] See 11 U.S.C. § 363(b) (requiring a hearing and judicial permission for decisions out of the ordinary course of business).
[25] 11 U.S.C. § 903 (“This chapter does not limit or impair the power of a State to control, by legislation or otherwise, a municipality of or in such State in the exercise of the political or governmental powers of such municipality, including expenditures for such exercise….”); 11 U.S.C. § 904 (“[T]he court may not, by any stay, order, or decree, in the case or otherwise, interfere with: (1) any of the political or governmental powers of the debtor; (2) any of the property or revenues of the debtor; or (3) the debtor's use or enjoyment of any income-producing property.”).
[26] McConnell & Picker, supra note 3, at 462 (a bankruptcy court “may not order reductions in expenditure, sale of property, renegotiation of contracts, or increase in taxes”).
[27] McConnell & Picker, supra note 3, at 435.
[28] See generally Levitin, supra note 15, at 1417.
[29] Id.
[30] See, e.g., La. R.S. 39:1351 et seq. (Louisiana fiscal administrator statutes conditioning the authority of a fiscal administrator to file chapter 9 upon the approval of the legislative auditor, attorney general and state treasurer).
[31] Kordana, supra note 20, at 1045.
[32] See, e.g., La. R.S. 39:1351(A)(2)(a).
[33] McConnell & Picker, supra note 3, at 426.
[34] Id.
[35] Steven L. Schwarcz, A Minimalist Approach to State "Bankruptcy," 59 UCLA L. Rev. 322, 325 (2011).
[36] 11 U.S.C. § 362(a) (incorporated in chapter 9 by 11 U.S.C. § 901(a)); see also 11 U.S.C. § 922.
[37] Steven L. Schwarcz, Global Decentralization and the Subnational Debt Problem, 51 Duke L.J. 1179, 1219-20 (2002).
[38] Clayton P. Gillette, Fiscal Federalism, Political Will, and Strategic Use of Municipal Bankruptcy, 79 U. Chi. L. Rev. 281, 283 (2012); Eric H. Monkkonen, The Local State: Public Money and American Cities 69-77 (1995) (observing that late nineteenth-century municipalities that had overinvested in railroad aid could often afford to avoid default but chose instead to impose the cost of unwise investments on creditors).
[39] See supra Part II for discussion of how the Tenth Amendment influenced the development of chapter 9.
[40] Collier on Bankruptcy § 900.01(1) (Alan N. Resnick & Henry J. Sommer eds., 16th ed. 2011); Lauren M. Wolfe, The Next Financial Hurricane? Rethinking Municipal Bankruptcy in Louisiana, 72 La. L. Rev. 555, 567 (2012) (“The presiding judge's duties consist of approving the initial petition, confirming the proposed debt readjustment plan, and overseeing the implementation of the approved plan.”).
[41] Kordana, supra note 20, at 1038.
[42] Wolfe, supra note 40, at 556 (explaining municipal bankruptcy’s threat of lasting economic damage and adverse effects on neighboring cities).
[43] Carolyn Jones, “Vallejo's bankruptcy ends after 3 tough years,” San Francisco Chronicle (Nov. 1, 2011) (“Real estate agents were required to disclose the city's status to buyers, and national media pointed to Vallejo as a nightmare scenario for cash-strapped cities everywhere.”).
[44] Kordana, supra note 20, at 1067; George G. Triantis, Secured Debt Under Conditions of Imperfect Information, 21 J. Legal Stud. 225, 237 (1992) (suggesting that exploitative chapter 9 tendencies by some municipalities could become a self-fulfilling prophecy, with all municipalities engaging in “the expected riskier investment strategy in order to recapture the value lost through the devaluation of the firm's debt.”).
[45] Richard M. Hynes, State Default and Synthetic Bankruptcy, 87 Wash. L. Rev. 657, 701-702 (2012) (suggesting that a state’s explicit chapter 9 authorization is an exercise of the state’s right to change the political dynamic within a municipality).
[46] Id.
[47] See generally Lyle Kossis, Examining the Conflict Between Municipal Receivership and Local Autonomy, 98 Va. L. Rev. 1109, 1119 (2012).
[48] M.C.L.A. § 141.1218 (“The emergency financial manager shall be chosen solely on the basis of his or her competence….”).
[49] Michelle Wilde Anderson, Democratic Dissolution: Radical Experimentation in State Takeovers of Local Governments, 39 Fordham Urb. L.J. 577, 616 (2012) (“broad statutory language, let alone open discretion, is an invitation for real and perceived unfairness in the state's selection of struggling municipalities needing intervention”).
[50] A threshold amount of aggregate local deficit, for example, could subject a municipality to state supervision and possibly the appointment of a receiver.
[51] La. R.S. 39:1351(A)(2)(a) (“state action is triggered when it is determined by the unanimous decision of the legislative auditor, the attorney general, and the state treasurer … that a political subdivision is reasonably certain to not have sufficient revenue to pay current expenditures … or to fail to make a debt service payment”).
[52] Anderson, supra note 49, at 584.
[53] See, e.g., R.I. Gen. Laws Ann. § 45-9-20.
[54] Anderson, supra note 49, at 600 (recommending the suspension of charter provisions relating to matters such as elections, public meetings, form of government and staffing requirements).
[55] Id. at 618.
[56] Jane Wells, A New Chapter for Vallejo, CNBC (July 28, 2011), available at www.cnbc.com/id/43932782.
[57] Nathan Bomey, Matt Helms and Joe Guillen, “Judge Approves Bankruptcy Documents: Now Creditors Get to Vote,” Detroit Free Press (May 5, 2014).
[58] Carolyn Jones, “Vallejo votes to declare Chapter 9 bankruptcy,” San Francisco Chronicle (May 7, 2008); Helen Avery, “Judgment Day Nears for the Benighted States,” Euromoney (Sept. 1, 2010) (Prior to Stockton’s bankruptcy, Vallejo was the largest California city ever to file chapter 9).
[59] In re City of Vallejo, 403 B.R. 72 (Bankr. E.D. Cal. 2009); David A. Skeel, Jr., States of Bankruptcy, 79 U. Chi. L. Rev. 677, 703 (2012).
[60] Wells, supra note 56.
[61] Vallejo was unquestionably insolvent and needed assistance in some form upon filing for bankruptcy; however, without a parallel system of financial analysis and debt assessment, it is difficult to suggest in hindsight that another system, such as receivership, would have been preferable. Simply put, once a municipality begins its recovery, whether through receivership, bankruptcy or both, it is problematic to imagine that a counterfactual scenario would have yielded a greater benefit for the community.
[62] Abby Goodnough, “One More Job Lost in the Recession: The Mayor's,” The New York Times (Feb. 22, 2011); Moreau v. Flanders, 15 A.3d 565, 570 (R.I. 2011).
[63] Katherine Newby Kishfy, Preserving Local Autonomy in the Face of Municipal Financial Crisis: Reconciling Rhode Island's Response to the Central Falls Financial Crisis with the State's Home Rule Tradition, 16 Roger Williams U. L. Rev. 348, 377-82 (2011); R.I. Gen. Laws § 45-9-7. The Rhode Island receivership statutes allow the state director of revenue to appoint a municipal receiver in the event of a fiscal emergency and permit the receiver to file a petition under chapter 9.
[64] Jess Bidgood, “Plan to End Bankruptcy in Rhode Island City Gains Approval,” The New York Times (Sept. 6, 2012) (Vallejo’s readjustment plan imposed a 4 percent property tax increase in each of five post-bankruptcy years).
[65] Id. The readjustment plan imposes a 4 percent property tax increase in each of the next five years.
[66] Nathan Bomey, Brent Snavely and Alisa Priddle, “Judge Rules Detroit Eligible for Historic Chapter 9 Bankruptcy, Says Pensions Can Be Cut,” The Detroit Free Press (Dec. 3, 2013). See Michigan Public Act No. 436 (2012).
[67] See In re City of Detroit, Mich., 504 B.R. 97 (Bankr. E.D. Mich. 2013).
[68] See Mary Williams Walsh, “Detroit Bankruptcy Deadline May Be Missed, Imperiling State Funds,” The New York Times Dealbook (May 15, 2014).