So far, this blog has been focusing on governments’ assistance to citizens and companies. Yet, another key dimension of the COVID-19 economic crisis is the intergovernmental dimension—how are national/federal levels supporting states and local levels of government? I will be discussing this dimension in this post, as well as in later ones. --------------------------------------------------------------------------------- Last week Senate Majority Leader Mitch McConnell (R-KY) noted that states that have been hit hard by the Coronavirus should not expect to be bailed out; rather, they should seek bankruptcy protection. This prescription has not only been unpopular among many US governors, but would also require changes in the US bankruptcy code. This entry discusses some basic points about the somewhat obscure Chapter 9 of the US Bankruptcy Code. What should you know? To start with, 49 US states are required to have balanced budgets (Vermont being the exception). Yet, in light of current challenges, complying with the balanced budget rule has proven to be especially challenging. Second, states in the US are not allowed to file for bankruptcy. Therefore, in order for state bankruptcy to become a reality, both federal chambers must pass legislation to authorize this course of action. For instance, Illinois (a state facing major fiscal pressures) is currently asking for a federal bailout in part because states are not allowed to file for bankruptcy. The case of Puerto Rico is somewhat unique as a special process (see PROMESA Law) to restructure the island's debt was approved by Congress and included the creation of a Financial Oversight Board ("la junta"). When it comes to governmental units, since 1946, only municipalities (e.g., cities, towns, villages, towns) can file for bankruptcy (see, for example the cases of Detroit and Orange County). In contrast to Chapter 11 which gives protection to corporations, Chapter 9 was specifically designed for municipalities in the context of the Great Depression. This process “allows local governments to continue public service provision while working with all creditors simultaneously to negotiate a debt adjustment plan” (Yang and Yulianti 2019: 5). Even if bankruptcy law is one of the few instances in which the federal level is involved in local finances, states still have to approve a localities’ request to file for bankruptcy. Still, there are variations across states-- as of 2016, twenty-one states do not allow local governments to file for bankruptcy, and the remaining states place restrictions on localities (Pew Charitable Trusts 2016). In addition, the municipality has to demonstrate that: a) it is insolvent (does not have enough money to pay creditors and serve constituents), and b) that it has negotiated with creditors in “good faith.” Yet, bankruptcy is a rare and extreme course of action, even if there was an increase in the frequency of bond defaults and bankruptcy during the Great Recession. From 1965 until 2015, only 63 cities, towns, or counties sought Chapter 9 protection; and on average, there were 1.3 defaults per year between 1970 and 2007, and 5 defaults per year between 2008-2014 (Spiotto, Acker, and Appleby 2016: 28) (also see Yang and Abbas 2019). Beyond bankruptcy, how do localities face financial emergencies? The next post will discuss this issue.
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Mariely Lopez-Santana is a Political Scientist and an Associate Prof. at the Schar School of Policy and Government at George Mason University. In the last two decades she has spent much time studying, teaching, and writing about employment policy. She is working on a book project on state intervention and municipal distress. Categories
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