Small City

Even Municipalities Have Money Troubles

October 27th, 2015 by Bunch & Brock

Small City

At first glance, the most populous city in Michigan and a tiny home rule-class city in Northern Kentucky wouldn’t seem to have much in common. Dig a little deeper and you’ll find that financial emergencies resulted in both municipalities’ seeking the protection of Chapter 9 bankruptcy. In December of 2013, Detroit, Michigan, was declared bankrupt due to its $18.5 billion debt and the impracticality of negotiating with its thousands of creditors. One year later, the city successfully exited the bankruptcy and embarked on a plan to cut $7 billion in debt as well as reinvest $1.4 billion over a 10-year period to improve city services.

Hillview, Kentucky, became the first American city to file for bankruptcy since Detroit, after it unsuccessfully appealed a court ruling ordering it to pay $11.4 million in damages to a company over a land deal that didn’t work out. Listing liabilities between $50 and $100 million and assets between $1 million and $10 million, city officials submitted a restructuring plan refinancing the municipal budget. The plan is currently pending approval by the bankruptcy court.

Over the past 35 years, 54 cities, towns, and counties have sought court protection from their creditors through Chapter 9. Hundreds more rulings have been sought by lesser known municipalities, such as special tax districts, hospital districts and municipal utilities. As with Hillview, municipalities in California, Idaho and Pennsylvania have cited being unable to satisfy legal judgments as the main reason for needing protection. The unregulated atmosphere of public pensions and their growing shortfall in funds (estimated to be between $1 trillion and nearly $4 trillion nationwide) is a looming problem for many municipalities.

Before a municipality can declare Chapter 9 bankruptcy, it must establish its eligibility under state law. Georgia prohibits municipal bankruptcy; 15 states allow municipalities to file on their own; and the remaining states have varying conditions that must be met before filing. Created in 1937, Chapter 9 is intended to give municipalities the option of seeking court protection in the event of fiscal crises and to ensure that basic government functions can continue while the debt is restructured.

Bankruptcy approval depends on the municipality’s being able to show that it is insolvent, it has made a good-faith attempt to negotiate a settlement with creditors, and it is willing to devise a plan to resolve its debts. Filing for bankruptcy can give municipalities some much needed breathing room from serious budget problems, but it also can damage the municipality’s reputation and raise the likelihood of a credit rating downgrade (resulting in higher future borrowing costs).

If you represent a Kentucky municipality that is facing a fiscal crisis and are contemplating filing a Chapter 9 bankruptcy, it is advisable to seek the counsel of a bankruptcy lawyer. The KY municipal bankruptcy attorneys at Bunch & Brock have more than 35 years of experience helping all types of debtors determine the best course of action for their situation. To get started, or if you have any questions about this topic, call us at 859-254-5522. You can also reach us by filling out this online form.