A Brief Overview of Municipal Bankruptcy

Stephen Lisauskas
Stephen Lisauskas

Stephen Lisauskas is an experienced municipal financial leader who has worked as the executive director of the Springfield Finance Control Board and the deputy town administrator of Natick, Massachusetts. Over the course of his career, Stephen Lisauskas has become familiar with many areas of municipal finance, including municipal bankruptcy.

Chapter 9, Title 11, is a unique bankruptcy filing available only to municipalities. The filing was designed to assist financially compromised municipalities in restructuring their debt.

In most cases, Chapter 9 bankruptcy allows a municipality to either extend debt maturities (as a means of reducing the principal or accrued interest) or entirely restructure the debt with the help of a new loan. The most important distinction between Chapter 9 bankruptcy and other types is that municipalities cannot be forced to liquidate assets to satisfy creditors. Such an act would violate the Tenth Amendment to the US Constitution and would leave a municipality with little infrastructure to support itself or its citizens, essentially rendering a filing useless.

There are a number of notable Chapter 9 filings in the history of the United States. The city of Detroit recently filed for bankruptcy to the tune of $18 billion, the largest such filing in the nation’s history.

The Detroit Municipal Bankruptcy

Detroit Municipal Bankruptcy  pic
Detroit Municipal Bankruptcy
Image: news.yahoo.com

Stephen Lisauskas has spent his career helping municipalities avoid bankruptcy and reorganizing local government to increase efficiency. In his work helping to turn around the finances of municipalities such as Springfield Massachusetts, Stephen Lisauskas has managed to help communities avoid bankruptcy. However, there are municipalities across the United States that have not managed to avoid declaring bankruptcy; Detroit filed for bankruptcy in 2013.

The right of a municipal government to file bankruptcy only applies to those municipal governments authorized by their state to file for bankruptcy. This authorization may come from a specific state laws, or by an officer of the government specifically empowered to determine whether a municipality may declare bankruptcy. Since 1937 there have been 665 municipal bankruptcies, of these 51 have occurred since 2010. This marked increase in the rate of municipal bankruptcies may be attributed to the increase in unfunded liabilities, especially pension liabilities, and the economic recession. Detroit is by far the largest municipal bankruptcy in US history with an estimated debt of $18-20 billion.

Detroit filed for bankruptcy on July 18th, 2013 after it became clear that the city was insolvent, with nearly a third of its outgoing payments to pensions. While the city was initially ruled ineligible to declare bankruptcy by a Michigan court, this decision was reversed in October. The Detroit bankruptcy is expected to result in a $7 billion loss to its creditors.