Local Governments Rarely File for Bankruptcy

Across the country, tens of thousands of cities, counties, towns, and villages issue municipal debt. But since 2001, general-purpose local governments have filed for bankruptcy protection under Chapter 9 of the U.S. Bankruptcy Code just 31 times. The number of entities that made the decision remains small even though local governments face rising spending—on pensions, health care, and infrastructure, for example—and slowing revenue growth. Since Detroit filed for bankruptcy in 2013—the largest municipal bankruptcy in U.S. history—the only other jurisdiction to have done so is Hillview, Kentucky, in 2015. Other recent bankruptcy filings include San Bernardino, Stockton, and Mammoth Lakes in California in 2012.

Special-purpose local government entities—such as districts for fire protection, health care, and schools—filed for bankruptcy 92 times since 2001. Hospital or health care districts account for a slightly higher share of bankruptcy filings than general-purpose local governments. And although education services special districts can file for bankruptcy in some states, only one—the Texas Association of Public Schools Property and Liability Fund, in October—has filed for bankruptcy in the last 16 years.

Local governments can file for relief under Title 11, Chapter 9, Section 109(c) of the U.S. Code only if they meet four eligibility requirements: specific authorization from the state, insolvency, a desire to create a plan for debt adjustment, and an inability to negotiate with creditors outside of the bankruptcy process. Only 27 states authorize at least some local governments to declare bankruptcy. Of these, some have added additional conditions or limitations on declaring bankruptcy, including approval from a state agency or official before filing or declaring a financial emergency. Some states limit the types of governments allowed to file for bankruptcy, for example allowing only tax districts to do so.

Mary Murphy is a director and Matthew Cook is a senior associate with The Pew Charitable Trusts’ project on state and local fiscal policy.

Endnotes

1. Pew researchers gathered Chapter 9 bankruptcy filings from the Public Access to Court Electronic Records (PACER) database as of December2017. Researchers limited data collection to 2001 or later because some cases filed before then are sealed or archived by the court and do not show up in the PACER database. Researchers excluded the five Puerto Rico Chapter 9 bankruptcy filings in the database because those cases are being dealt with through Title III of the Puerto Rico Oversight, Management, and Economic Stability Act. Researchers also excluded any mistaken filings, test filings, or transfers in the database. The number of filings includes cases that were later dismissed. Two cities—Moffett, Oklahoma, and Washington Park, Illinois—have filed for bankruptcy twice since 2001.
2. Christiana McFarland and Michael A. Pagano, “City Fiscal Conditions,” National League of Cities (2017), http://nlc.org/sites/default/files/2017-09/NLC%20City%20Fiscal%20Conditions%202017.pdf.
3. According to the Census Bureau, 33 types of special-purpose districts exist. Census Bureau, “2012 Census of Governments: Organization Component Estimates,” https://factfinder.census.gov/faces/tableservices/jsf/pages/productview.xhtml?src=bkmk. The category “Other Special Purpose Districts” includes special-purpose districts that deal with education services, fire protection, highways, and sewerage, among others. Five special-purpose districts—Lake Lotawana Community Improvement District in Missouri; Natchez Regional Medical Center in Mississippi; Palm Drive Health Care District and West Contra Costa Healthcare District in California; and Suffolk Regional Off-Track Betting Corp in New York—have filed for bankruptcy twice since 2001.
4. Uscourts.gov, “Chapter 9—Bankruptcy Basics,” accessed Sept. 15, 2017, http://www.uscourts.gov/services-forms/bankruptcy/bankruptcy-basics/chapter-9-bankruptcy-basics.
5. James E. Spiotto, Ann E. Acker, and Laura E. Appleby, Municipalities in Distress? How States and Investors Deal With Local Government Financial Emergencies (Chicago: Chapman & Cutler LLP, 2016).