Although some in the media claim that municipal bankruptcy is becoming a trend, the data don’t support it. The trends that data show are that housing foreclosures, declining tax bases, and declining state pass-through revenues have negatively impacted the fiscal condition of some local governments. Local governments have also suffered from a lower rate of return on the investments that fund retiree pensions. Most local governments that face these fiscal stresses find they can manage their difficulties with conservative management and budgeting practices.
ICMA conducted a quick poll on bankruptcy through a recent e-newsletter. Of the 69 respondents, only four had considered filing for bankruptcy. Local governments responding had a variety of perspectives—ranging from “this is a California problem” to “our community is in excellent financial shape.”
Respondents who indicated their local government is doing well highlighted measures they had taken to offset fiscal challenges. Some have reduced personnel and postponed maintenance projects. Others have reduced services. Many reported difficulty in managing under fiscal constraints. A few pointed to renegotiating MOUs with unions to control costs. At least one questioned how local governments can get to the point of bankruptcy.
Given the small number of respondents, it is not possible to generalize about the data, but there appear to be regional differences. Localities that commented that they are in good fiscal shape tend to be in the Midwest.
An important factor related to bankruptcy that may often be overlooked is that states determine whether bankruptcy is an option for their local governments: 16 states specifically authorize municipal bankruptcies; seven states conditionally authorize municipal bankruptcies; three states with limited authorization; two states prohibit filing but Iowa has an exception; and the other 22 states are unclear or do not have specific authorization. [1]
Find out more about State and Municipal Bankruptcy, Municipal Bonds, and State and Local Pensions in this 2012 Fact Sheet.
[1] James E. Spiotti and Chapman and Cutler, LLP, “Municipalities in Distress?” 2012.
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