The Detroit skyline at sunset.
The recent high-profile bankruptcy filings by Detroit and a handful of other local governments around the country have renewed state and local policymaker interest in strategies to prevent future financial crises as well as in the choices states face about whether to intervene to help distressed cities and counties.
Starting with Vallejo, California, in 2008, a string of municipal Chapter 9 bankruptcies shook Prichard, Alabama; Central Falls, Rhode Island; Jefferson County, Alabama; Detroit; and Stockton and San Bernardino, California. Detroit was the largest municipal bankruptcy in U.S. history, and Jefferson was the largest county bankruptcy.1 In the wake of this wave, policymakers have an opportunity, similar to the one that followed New York City’s near default in 1975, to update and expand laws and policies clarifying states’ role in monitoring and intervening in financial crises of local governments.
The Detroit skyline at sunset.
Understanding what happened in Detroit and other recent Chapter 9 filings is critical to preventing future bankruptcies and the years of pain that can accompany them: service reductions, employee layoffs, cuts to public pensions, bond investment losses, property tax increases, millions of dollars in legal fees, infrastructure decay, and loss of population. As federal Judge Steven Rhodes said when he approved Detroit’s bankruptcy plan in 2014, the necessary adjustments “will cause real hardship. In some cases, it is severe.”2
The difficulties are one reason some analysts predict that there will not be a rash of filings in the coming years, even though many troubled cities are still struggling to balance revenue and spending following the last recession. A few cities—North Las Vegas, Nevada; Desert Hot Springs, California; and Atlantic City, New Jersey—are on the precipice, but no city has filed for bankruptcy since Detroit did so in July 2013. Detroit ended its bankruptcy in December 2014, leaving San Bernardino as the only city with an unresolved Chapter 9 filing.3
Until now, lawyers and financial analysts have conducted most post-bankruptcy analyses, focusing on the effect on investors who buy and insure municipal bonds. But state and municipal leaders need to weigh broader impacts on residents and workers. This report offers important lessons from Detroit and other municipalities to help policymakers avoid future financial meltdowns and manage fiscal crises when they do occur. Among the lessons learned: