Before Harrisburg, the last city in the United States to declare bankruptcy was Central Falls, Rhode Island, in late July. Other U.S. cities that have recently declared bankruptcy include Vallejo, California and Prichard, Alabama. Chapter 9 of the U.S. bankruptcy code allows municipalities to use bankruptcy to restructure debts, and negotiate settlements with creditors and employee unions, and formulate a plan to get back to fiscal solvency without halting vital city services and functions. Hefty consequences, including damaged credit ratings and increased borrowing costs for the city, and its county and state, can linger as a result of a bankruptcy.
A city must act under a state authorization in order to declare bankruptcy, which is already being called into question in Harrisburg. The Pennsylvania law cited as authorization is the 1987 Financially Distressed Municipalities Act, aka. “Act 47” which set up a state-level program to help cities get out of fiscal stress, but left the decision to go into bankruptcy up to the local government with a few conditions. Harrisburg entered the state’s Act 47 program in early 2010 after failing to meet debt obligations associated with the incinerator; however, the city council subsequently rejected the financial management plan proposed by the state. The city council then filed for bankruptcy unilaterally, (which has been called illegal by the Mayor and Solicitor of the city) coming amid a bill currently going through the state legislature that will allow for a state takeover of cities, like Harrisburg, that rejected an Act 47 plan. Whether or not the bankruptcy filing holds up in federal court remains to be seen.
Here in Michigan, municipal fiscal stress is governed largely under the controversial 2011 Local Government and School District Fiscal Accountability Act, aka “Act 4”, which replaced a 1990 law by increasing the power of the state level Emergency Financial Manager (EFM) over a fiscally distressed city. Under Michigan law, only the state appointed EFM may file for bankruptcy on a city’s behalf. This played out in 2010 when the city of Hamtramck tried to unilaterally file for bankruptcy, but was stonewalled by outgoing governor Jennifer Granholm.
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