For over five years I frequently blogged about municipal bankruptcy (from Stockton to Detroit, from here to here). Municipal (Chapter 9) bankruptcy permits municipalities, as commonly understood, and also any other State-created subdivision (counties, tollways, sewerage districts, etc.), to restructure their debts under the auspices of the bankruptcy court. But only if specifically permitted by the State.
Placing an insolvent municipality under the jurisdiction of the bankruptcy court forces all parties (the municipality and its creditors (trade creditors, lessors, bondholders, employees, retirees, etc.)) to come together and reach a "consensus" on what should be done; in other words, how much of a haircut each sort of creditor will get. And then this consensus--the plan--is approved by the court and binds everyone. Of course, not all creditors sit around the campfire and sing kumbaya. A few object to the plan and the court will rule one way or the other but eventually a deal is done.
For more than you want to know about some of the ins and outs of municipal bankruptcy you can read my Chapter 9 trilogy of:
But what about the States themselves? Can an insolvent State itself seek to restructure its debts under Chapter 9? In short, no. Congress limited Chapter 9 to municipalities, broadly understood, which does not includes the States.
While there has always been some academic debate about expanding Chapter 9 to include States (David Skeel here), and some arguments that States do not need Chapter 9 (Stephen Lubben here), Senate majority leader Mitch McConnell brought the question to public notice here In short, as everyone knows, the U.S. economy has suffered greatly due to the effects of the corona virus and efforts to slow its spread. The Congress passed the CARES Act, which authorized the expenditure of many billions of dollars in direct and indirect support to taxpayers and businesses. Funds available to the States, however, were limited to reimbursement for costs incurred directly in connection with the virus, and not for the economic effects of the virus and responses to it.
The virus-related economic effects on the States are huge. Tax revenues are plummeting and a host of state and local expenditures are rising. Not surprisingly, the States (at least some of them) have asked for a share of the next round of federal money. And equally unsurprisingly, congressional responses have split along party lines. Thus, Senator McConnell's comments should be seen as proposing an alternative to handing federal money to the states; let them file bankruptcy instead.
As I suggested to David Skeel, I think the odds of Congress amending the bankruptcy code to permit state bankruptcy shot from zero to 2%. In other words, it ain't gonna happen. But I have been wrong before.
For what it's worth, I believe that permitting States to restructure their debts (past, present, and--perhaps most important--future) in something like Chapter 9 is a good idea. This is especially true if the alternative is bailing out States with federal money. But I'll save to another day more about why I believe State-level bankruptcy could be a good thing.
Placing an insolvent municipality under the jurisdiction of the bankruptcy court forces all parties (the municipality and its creditors (trade creditors, lessors, bondholders, employees, retirees, etc.)) to come together and reach a "consensus" on what should be done; in other words, how much of a haircut each sort of creditor will get. And then this consensus--the plan--is approved by the court and binds everyone. Of course, not all creditors sit around the campfire and sing kumbaya. A few object to the plan and the court will rule one way or the other but eventually a deal is done.
For more than you want to know about some of the ins and outs of municipal bankruptcy you can read my Chapter 9 trilogy of:
Municipal Bankruptcy: When Doing Less Is Doing Best (here);
Who Pays the Price: The Necessity of Taxpayer Participation in Chapter 9 (here); and
Who Bears the Burden? The Place for Participation of Municipal Residents in Chapter 9 (here)
While there has always been some academic debate about expanding Chapter 9 to include States (David Skeel here), and some arguments that States do not need Chapter 9 (Stephen Lubben here), Senate majority leader Mitch McConnell brought the question to public notice here In short, as everyone knows, the U.S. economy has suffered greatly due to the effects of the corona virus and efforts to slow its spread. The Congress passed the CARES Act, which authorized the expenditure of many billions of dollars in direct and indirect support to taxpayers and businesses. Funds available to the States, however, were limited to reimbursement for costs incurred directly in connection with the virus, and not for the economic effects of the virus and responses to it.
The virus-related economic effects on the States are huge. Tax revenues are plummeting and a host of state and local expenditures are rising. Not surprisingly, the States (at least some of them) have asked for a share of the next round of federal money. And equally unsurprisingly, congressional responses have split along party lines. Thus, Senator McConnell's comments should be seen as proposing an alternative to handing federal money to the states; let them file bankruptcy instead.
As I suggested to David Skeel, I think the odds of Congress amending the bankruptcy code to permit state bankruptcy shot from zero to 2%. In other words, it ain't gonna happen. But I have been wrong before.
For what it's worth, I believe that permitting States to restructure their debts (past, present, and--perhaps most important--future) in something like Chapter 9 is a good idea. This is especially true if the alternative is bailing out States with federal money. But I'll save to another day more about why I believe State-level bankruptcy could be a good thing.
Hi great reaading your blog
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