Reviving cities: Legal remedies to municipal financial crises

Boston University Law Review

Volumn 88, Issue 3, 2008, Pages 633-684

  Kimhi, Omer ^a  

^a HEBREW UNIVERSITY OF JERUSALEM   (Israel)

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EID: 46849101785     PISSN: 00068047     EISSN: None     Source Type: Journal    
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References (415)

1. In re City Of Bridgeport, 129 B.R. 332, 335 (Bankr. D. Conn. 1991). In 1991, Bridgeport, one of the largest cities in Connecticut, suffered from a severe financial crisis, and filed for bankruptcy under chapter 9 of the Bankruptcy Code.
2. Id. at 333.
3. According to a survey conducted by Beth Honadle in 2003, about a hundred local governments have suffered from a financial crisis in recent years. See Beth Walter Honadle, The States' Role in U.S. Local Government Fiscal Crises: A Theoretical Model and Results of a National Survey, 26 INT'L J. PUB. ADMIN. 1431, 1463-1470 (2003).
4. Honadle's conclusion about the prevalence of local fiscal crises is also consistent with the writings of several other scholars who have dealt with this subject. See, e.g., Anthony G. Cahill & Joseph A. James, Responding to Municipal Fiscal Distress: An Emerging Issue for State Governments in the 1990s, 52 PUB. ADMIN. REV. 88, 88 (1992) ("Relatively less attention, however, has been given to what is an increasingly common phenomenon: municipalities of all sizes which, for a variety of reasons, are failing on a regular basis to balance revenues and expenditure flows.");
5. see also WILLIAM J. PAMMER, JR., MANAGING FISCAL STRAIN IN MAJOR AMERICAN CITIES: UNDERSTANDING RETRENCHMENT IN THE PUBLIC SECTOR, at xiii (1990) (explaining that, according to several studies, a significant portion of the nation's cities were experiencing some degree of financial strain in the 1970s, and this trend continued (albeit to a lesser extent) in the 1980s and 1990s).
6. MARTIN SHEFTER, POLITICAL CRISIS/ FISCAL CRISIS: THE COLLAPSE AND REVIVAL OF NEW YORK CITY, at xiii (1985) ("Indeed, these [municipal fiscal crises] occur with sufficient regularity that fiscal crises should be regarded not as aberrations, but as an integral part of American urban politics.").
7. See, e.g., Lawrence P. King, Municipal Insolvency: The New Chapter IX of the Bankruptcy Act, 1976 DUKE L.J. 1157, 1175;
8. Kevin A. Kordana, Tax Increases in Municipal Bankruptcies, 83 VA. L. REV. 1035, 1040 (1997);
9. Michael W. McConnell & Randal C. Picker, When Cities Go Broke, A Conceptual Introduction to Municipal Bankruptcy, 60 U. CHI. L. REV. 425, 450 (1993);
10. Steven L. Schwarcz, Global Decentralization and the Subnational Debt Problem, 51 DUKE L.J. 1179, 1190 (2002);
11. Frederick Tung, After Orange County: Reforming California Municipal Bankruptcy Law, 53 HASTINGS L.J. 885, 907 (2002);
12. Barry Winograd, San Jose Revisited: A Proposal For Negotiated Modification of Public Sector Bargaining Agreements Rejected Under Chapter 9 of the Bankruptcy Code, 37 HASTINGS L. J. 231, 235 (1985).
13. One exception to the legal community's general disregard of state financial boards is a note published in Harvard Law Review in 1996.
14. Note, Missed Opportunity: Urban Fiscal Crises and Financial Control Boards, 110 HARV. L. REV. 733, 735-45 (1996) [hereinafter Missed Opportunity]. However, even this note mentions the lack of legal research on this subject, indicating that "[t]o date, no one has undertaken a systematic study of financial control boards as a genre of state institutional responses to urban fiscal crises."
15. Id. at 734 n.8.
16. See discussion infra Part IV.
17. See discussion infra Part IV.B.
18. 4 ANTIEAU ON LOCAL GOVERNMENT LAW § 64.19 (Sandra M. Stevenson ed., 2d ed. 2007).
19. In many states, local governments are required to establish property tax rates that will yield the same amount of revenue given current assessed values as collected in the prior fiscal year, and these municipalities are barred from adopting rates that will generate more revenue unless they act in accordance with special procedures. RONALD C. FISHER, STATE AND LOCAL PUBLIC FINANCE 330 (1996).
20. Tax collection efforts are highly effective because property tax debts become a lien on the real property. 4 ANTIEAU ON LOCAL GOVERNMENT LAW, supra note 8, § 64.27[3].
21. The property cannot be sold without paying the property taxes in full, and even if the owner of the property does not sell it, the municipality can execute on the property and get the tax debt back. Id. § 64.27[4].
22. A major component of local government finance is labor costs, which are relatively stable and thus highly amenable to future planning. See FISHER, supra note 9, at 151.
23. See id. at 268-85.
24. See supra note 2 and accompanying text.
25. An exception would be, for example, a small town with a few dozen residents which faces an unexpected financial shock, such as the loss of a personal injury lawsuit or a natural disaster. An example of such a case is the city of Bay St. Louis, which lost a personal injury lawsuit and was ordered to pay the plaintiff $375,000. The city could not afford to pay the plaintiff and filed for bankruptcy. See ADVISORY COMM'N ON INTERGOVERNMENTAL RELATIONS, BANKRUPTCIES, DEFAULTS, AND OTHER LOCAL GOVERNMENT FINANCIAL EMERGENCIES 8-10 (1985).
26. David R. Morgan & Robert E. England, Explaining Fiscal Stress Among Large U.S. Cities: Toward an Integrative Model, 3 POL'Y STUD. REV. 73, 73-74 (1983).
27. Id. at 73;
28. see also Larry C. Ledebur, City Fiscal Distress: Structural, Demographic and Institutional Causes, in Problems of Urban America: Hearing Before the H. Comm. on Gov't Reform, 102d Cong. 230, 232 (1991) (report of the National League of Cities);
29. HELEN F. LADD & JOHN YINGER, AMERICA'S AILING CITIES: FISCAL HEALTH AND THE DESIGN OF URBAN POLICY 3-6 (1989).
30. LADD & YINGER, supra note 15.
31. Id. at 291.
32. See TERRY N. CLARK & LORNA C. FERGUSON, CITY MONEY: POLITICAL PROCESSES, FISCAL STRAIN, AND RETRENCHMENT 85-91 (1983);
33. PEARL M. KAMER, CRISIS IN URBAN PUBLIC FINANCE: A CASE STUDY OF THIRTY-EIGHT CITIES 40-43 (1983).
34. See KAMER, supra note 18, at 41-43;
35. see also CLARK & FERGUSON, supra note 18, at 90.
36. KAMER, supra note 18, at 129-31.
37. CLARK & FERGUSON, supra note 18, at 85-91;
38. KAMER, supra note 18, at 40-43.
39. Natalie R. Cohen, Municipal Default Patterns: An Historical Study, 9 PUB. BUDGETING & FIN. 55, 55 (1989).
40. On the effect of macroeconomic parameters on the municipal bond market, see generally Bradley T. Ewing, Economic Forces and the Municipal Bond Default Risk Premium, 23 MUN. FIN. J. 17, 17 (2002).
41. PAMMER, supra note 2, at 5;
42. see also JAMES M. HOWELL & CHARLES F. STAMM, URBAN FISCAL STRESS: A COMPARATIVE ANALYSIS OF 66 U.S. CITIES 4-6 (1979) (analyzing the fiscal health of sixty-six mid-sized American cities, and concluding that older industrial cities are the most likely to be in financial trouble);
43. IRENE S. RUBIN, RUNNING IN THE RED: THE POLITICAL DYNAMICS OF URBAN FISCAL STRESS 5-7 (1982);
44. Katherine L. Bradbury, Anthony Downs & Kenneth A. Small, Some Dynamics of Central City-Suburban Interactions, 70 AM. ECON. REV. 410, 411 (1984).
45. See KAMER, supra note 21, at 25-30.
46. These effects were a major cause of New York City's fiscal crisis. See Donna E. Shalala & Carol Bellamy, A State Saves a City: The New York Case, 1976 DUKE L.J. 1119, 1119-20.
47. See KAMER, supra note 18, at 26, 28.
48. Id. at 28.
49. Id. 19 Id.
50. Anne Marie Vassallo, Note, Solving Camden's Crisis: Makeover or Takeover?, 33 RUTGERS L.J 185, 189 (2001).
51. Kamer reports that in the 1960s the five northern cities she studied failed to annex surrounding territory, whereas seven of the ten southern cities and seven of the ten western cities she studied did annex formerly suburban cities and thereby gained 380,000 residents. During the 1970s, the Northern cities again failed to annex surrounding territory, but Southern cities annexed approximately 360 square miles, thereby gaining 320,000 residents. KAMER, supra note 21, at 27.
52. See Honadle, supra note 2, at 1463-70.
53. 4 ANTIEAU ON LOCAL GOVERNMENT LAW, supra note 8, §§ 64.01, 64.03.
54. Cf. id. § 64.03 (observing that "[s]ome state legislatures have conferred upon local governments the power to tax properties and events outside the local limits," or have allowed "local governments to create joint economic development districts which could levy and impose income taxes").
55. See FISHER, supra note 9, at 273-74.
56. See generally JOHN E. PETERSEN, WAYNE STALLINGS & CATHERINE L. SPAIN, STATE ROLES IN LOCAL GOVERNMENT FINANCIAL MANAGEMENT: A COMPARATIVE ANALYSIS (1979) (analyzing nine different states and finding moderate to high levels of state involvement in local financial management in most of those states).
57. LADD & YINGER, supra note 15, at 8-9.
58. For an in-depth analysis of unfunded state mandates, see Edward A. Zelinsky, Unfunded Mandates, Hidden Taxation, and the Tenth Amendment: On Public Choice, Public Interest, and Public Services, 46 VAND. L. REV. 1355, 1359 (1993).
59. Ledebur, supra note 15, at 242.
60. Id.
61. Robert P. Inman, How To Have a Fiscal Crisis: Lessons from Philadelphia, 85 AM. ECON. REV. 378, 380-83 (1995) (comparing Philadelphia's per-resident federal and state aid to that of other cities). Inman shows that, just like other cities, Philadelphia lost significant federal aid during the 1980s.
62. Id. However, whereas state aid to other cities rose to offset this decline, Philadelphia did not enjoy the same increase.
63. Id. Philadelphians gained only $0.61 for each dollar increase in per-resident state aid gained by other cities.
64. Id. Thus, on balance the city's position deteriorated.
65. See, e.g., JOAN K. MARTIN, URBAN FINANCIAL STRESS: WHY CITIES GO BROKE 129 (1982) (arguing that many local fiscal problems derive from managers' manipulations of local accounting procedures).
66. Id. ("Some structural constraints definitely cause very large deficits, but accumulating deficits come from accounting manipulations perpetrated by management.").
67. Id.
68. See, e.g., MARTIN, supra note 41, at 47-52;
69. PAMMER, supra note 2, at 8-9.
70. For example, officials might use debt proceeds to help the city pay for ongoing (noncapital) expenditures, recognize revenues the locality still hasn't collected, or not take into account already accrued expenditures. See, e.g., STAFF OF THE SEC. & EXCH. COMM'N, REPORT ON TRANSACTIONS IN SECURITIES OF THE CITY OF NEW YORK, ch. 1, at 188 (Comm. Print 1977).
71. PAMMER, supra note 2, at 8.
72. MARTIN, supra note 41, at 45-52.
73. Id. at 53.
74. Id. at 45.
75. Id. at 46-47.
76. Id. at 129.
77. Reza Baqir, Districting and Government Overspending, 110 J. POL. ECON. 1318, 1347 (2002);
78. Roberto Perotti & Yianos Kontopoulos, Fragmented Fiscal Policy, 86 J. PUB. ECON. 191, 194 (2002);
79. Roberto Ricciuti, Political Fragmentation and Fiscal Outcomes, 118 PUB. CHOICE 365, 369 (2004);
80. Nouriel Roubini & Jeffrey D. Sachs, Political and Economic Determinants of Budget Deficits in the Industrial Democracies, 33 EUR. ECON. REV. 903, 922 (1989) ("Our main finding is that multi-party coalition governments, especially those with a short expected tenure, are poor at reducing budget deficits.");
81. Mark Hallerberg & Jürgen von Hagen, Electoral Institutions, Cabinet Negotiations, and Budget Deficits in the European Union 9 (Nat'l Bureau of Econ. Research, Working Paper No. 6341, 1997), available at http://www.nber.org/papers/w6341.pdf;
82. Guntram B. Wolff, Fiscal Crisis in U.S. Cities: Structural and Non-Structural Causes 17 (Ctr. for European Integration Studies, Working Paper No. B28, 2004), available at http://www.zei.de/download/zei_wp/B04- 28.pdf ("Increased fragmentation is found to be positively associated with the level of property taxation and there is some evidence for increased spending as well.").
83. Perotti & Kontopoulos, supra note 52, at 192.
84. Id. at 192-93.
85. Id. at 195.
86. Id.
87. Id.
88. Assuming n is the number of different groups participating in the budgetary process, then each group internalizes 1/n of the costs of its demands. In a fragmented community, as n increases, 1/n decreases, and so each group internalizes the repercussions of its demands to a lesser extent. The total expenditure, therefore, increases. Id.;
89. Barry R. Weingast, Kenneth A. Shepsle & Christopher Johnsen, The Political Economy of Benefits and Costs: A Neoclassical Approach to Distributive Politics, 89 J. POL. ECON. 642, 653 (1981);
90. Wolff, supra note 52, at 5-7 (presenting a model of municipal demand for public goods, in which there is no heterogeneity of preferences).
91. The example is taken from Wolff, supra note 52, at 5.
92. See id.
93. The effects of the budgetary pressures may not be severe in cases in which the mayor enjoys the support of an absolute majority of the local residents. In these cases the mayor can prioritize the different demands and has the power to resist pressures to spend more than the locality can afford. Usually, however, and especially in fragmented localities, the mayor does not govern alone and needs to form a coalition to take power. Therefore, politically, the mayor is obligated to comply with the demands of different groups, even those demands the locality cannot afford. The mayor needs to sustain a coalition, and he or she may do so even at the expense of the locality's long-term financial health. Indeed, empirical evidence shows that large coalitions and (for nations) large cabinet sizes tend to result in larger deficits and lack of fiscal control. See Ricciuti, supra note 52, at 381-83.
94. Ricciuti provides a review of the empirical literature regarding political fragmentation. Id. at 366-68;
95. see also Wolff, supra note 52, at 17 ("Increased fragmentation is found to be positively associated with the level of property taxation and there is some evidence for increased spending as well").
96. Cf. Riciutti, supra note 52, at 370-71 (discussing the influence wielded by interest groups and opposition members in parliaments and the effects of that influence on fiscal policy outcomes).
97. Indeed, the more interest groups there are in a locality, the more likely it is the locality will enter a financial crisis. See Wolff, supra note 52, at 38-39.
98. "As the head of New York's sanitation union once declared: 'We have a natural advantage that no [private sector] union has. We can elect our employers."' Pietro S. Nivola, Apocalypse Now? Whither the Urban Fiscal Crisis, 14 POLITY 371, 376 (1982).
99. Id. at 384.
100. Id. at 375.
101. Perotti & Kontopoulos, supra note 52, at 196-97.
102. See Riciutti, supra note 52, at 369.
103. Perotti & Kontopoulos, supra note 52, at 196.
104. See id. Perotti and Kontopoulos cite Hallerberg and von Hagen, who emphasize the importance of sequencing the different stages of the budgetary process.
105. See Mark Hallerberg & Jürgen von Hagen, Sequencing and the Size of the Budget: A Reconsideration 6-11 (Ctr. for Econ. Policy Research, Working Paper No. 1589, 1997), available at http://www.cepr.org/pubs/dps/DP1589.asp; see also Baqir, supra note 52, at 1347 (discussing variations of forms of government at the city level).
106. See generally ESTER R. FUCHS, MAYORS AND MONEY: FISCAL POLICY IN NEW YORK AND CHICAGO (1992).
107. Id. at 5-6.
108. Id. at 6-7.
109. Id. at 242-50.
110. Id. at 251-61.
111. The rationale behind these remedies is that without the means to force debtors to repay their creditors, individuals and institutions would be unwilling to extend credit, and the lack of credit would damage the economy as a whole. See Lynn M. LoPucki, A General Theory of the Dynamics of the State Remedies/Bankruptcy System, 1982 WIS. L. REV. 311, 315-16.
112. See DAVID G. EPSTEIN, BANKRUPTCY AND RELATED LAW IN A NUTSHELL 38-59 (7th ed. 2002).
113. Most jurisdictions distinguish between "public assets," which are essential for performance of the localities' duties (and thus are not subject to execution), and "private [proprietary] assets," which are not essential for public purposes (and therefore are subject to execution). In practice, however, the tests courts use to distinguish between the different kinds of assets are extremely vague, and courts have found public characteristics in virtually every municipal asset. The vast majority of municipal assets, therefore, cannot be reached by the creditors. See ROBERT S. AMDURSKY & CLAYTON P. GILLETTE, MUNICIPAL DEBT FINANCE LAW: THEORY AND PRACTICE § 5.4.3, at 248-49 (1992);
114. McConnell & Picker, supra note 4, at 432-33.
115. 17 EUGENE MCQUILLIN, THE LAW OF MUNICIPAL CORPORATIONS § 49:44, at 397 & nn.9-10(3d ed. rev. 2004).
116. Id. §49:44, at 394 & n.1.
117. See Bd. of Councilmen v. White, 6 S.W.2d 699, 701 (Ky. 1928);
118. American-La France & Foamite Indus., Inc. v. Town of Winnfield, 168 So. 293, 295 (La. 1936);
119. Lyon v. City of Elizabeth, 43 N.J.L. 158, 161-64 (1881);
120. Jeff B. Fordham, Methods of Enforcing Satisfaction of Obligation of Public Corporations, 33 COLUM. L. REV. 28, 29 (1933);
121. Note, Creditors' Remedies in Municipal Default, 1976 DUKE L.J. 1363, 1369.
122. AMDURSKY & GILLETTE, supra note 78, § 5.4.4, at 252;
123. Fordham, supra note 81, at 30-32.
124. Klein v. New Orleans, 99 U.S 149, 151 (1878);
125. Lee v. City of Fairfield, 145 So. 669, 671 (Ala. 1933).
126. Ellis v. Pratt City, 20 S. 649, 650 (Ala. 1896).
127. Capps v. Citizens Nat'l Bank, 134 S.W. 808, 810 (Tex. Civ. App. 1911);
128. see also Estate of DeBow v. City of E. St. Louis, 592 N.E.2d 1137, 1140-42 (Ill. App. Ct. 1992) (holding as a matter of public policy that a judgment creditor may not execute on city property to satisfy a debt).
129. The writ of mandamus is generally defined thus: [A] command, issuing from a court of competent jurisdiction, in the name of the state or sovereign, directed to some corporation, public or private, or an officer of it . . . requiring the performance of a particular specified duty which results from the official station of the party to whom the writ is directed, or from the operation of law. See 17 MCQUILLIN, supra note 79, § 51:2, at 700-01.
130. See AMDURSKY & GILLETTE, supra note 78, § 5.4.1, at 241;
131. A.M. HILLHOUSE, MUNICIPAL BONDS: A CENTURY OF EXPERIENCE 297 (1936);
132. Fordham, supra note 81, at 32.
133. HiLLHOUSE, supra note 87, at 280.
134. Id.
135. "The writ, when granted, directs the appropriate official to levy and collect taxes or to pay debt service out of funds already in the treasury." AMDURSKY & GILLETTE, supra note 78, § 5.4.1, at 241 (emphasis added).
136. See id. § 5.4.1, at 242-44.
137. See, e.g., Defoe v. Town of Rutherfordton, 122 F.2d 342, 344 (4th Cir. 1941);
138. Md. Cas. Co. v. Leland, 199 S.E. 7, 9 (N.C. 1938);
139. AMDURSKY & GILLETTE, supra note 78, § 5.4.1, at 244;
140. HILLHOUSE, supra note 87, at 279-80;
141. 17 MCQUILLIN, supra note 79, § 49:43, at 393.
142. Cf. AMDURSKY & GILLETTE, supra note 78, § 5.4.1, at 242-43 ("It is, of course, not depletion of the public treasury that is the ultimate concern of the courts. Up to the point of any statutory or constitutional tax limit, the treasury could be replenished by imposing additional taxes on the issuer's constitutents.").
143. Massachusetts and some other New England states went even one step further in placing the responsibility for the locality's obligations on the residents. These states allowed the creditors to execute the residents' private property in satisfaction of the local debts. However, this extreme remedy was rejected in most other states. AMDURSKY & GILLETTE, supra note 78, § 5.4.3, at 250-51.
144. The requirements set forth in Section 109(c) of the Bankruptcy Code are: (1) the debtor must be a municipality; (2) the debtor must be specifically authorized by the state; (3) the debtor must be insolvent; (4) the municipality has to show that it desires to effect a plan to adjust its financial obligations; and (5) the locality must show that it tried to negotiate a debt readjustment agreement with its creditors, or that such negotiations are impracticable. 11 U.S.C. § 109(c) (2000). To be a debtor under chapters 7 or 11, on the other hand, all a person need prove is that he or she resides or has a domicile, a place of business, or property in the United States. Id. § 109(a).
145. Id. § 109(c)(2).
146. To show its insolvency, the locality must show that it cannot pay its debts when they are due. Id. § 101(32)(C). McConnell and Picker criticize the insolvency requirement set forth in section 109(c), arguing that it postpones the bankruptcy filing while the city continues to incur more and more debt at increasing interest rates, which in turn burdens the municipal budget and ensures that each creditor will receive less in bankruptcy. McConnell & Picker, supra note 4, at 456-57.
147. An automatic stay means that the mere filing of a petition under chapter 9 acts as a procedural halt to all judicial proceedings against the municipality. No creditor can commence or continue any legal action to recover its debt, and no creditor can demand any payment from the debtor. 11 U.S.C. § 362(a)(1).
148. The automatic stay provided in chapter 9 has two legal sources. The first is section 362, incorporated into chapter 9 via section 901. 00 See 11 U.S.C. §§ 362, 901(a) (Supp. V 2005).
149. The second source is section 922, which broadens the protection afforded under chapter 9 to protect not only the debtor or municipality, but also "an officer or inhabitant of the debtor." Id. § 922(a)(1).
150. Id. §§ 301, 362(a)(6), 901(a).
151. Id. § 362(a)(1), (2) & (6).
152. See id. § 941 ("The debtor shall file a plan for the adjustment of the debtor's debts.");
153. id. § 943(b)(7) (requiring a reorganization plan to be both "in the best interests of creditors" and "feasible" to be confirmed);
154. id. §§ 901(a), 1128(b) (providing that a "party in interest" may object to the confirmation of the reorganization plan).
155. Under chapter 11 the exclusivity period is limited to 120 days, and afterwards the court may also accept plans from the creditors or other interested parties. Id. § 1121(b), (c). Under chapter 9, the exclusivity period is not limited in time, and so it continues as long as the municipality is in bankruptcy.
156. Id. § 941 (providing that "[t]he debtor shall file a plan for the adjustment of the debtor's debts," and making no reference to the right of any other person to file such a plan). This distinction is connected to the special nature of the municipality as a debtor. Congress did not want the creditors to submit plans that might influence the internal condition in the locality.
157. See 6 COLLIER ON BANKRUPTCY ¶ 941.02 (Alan N. Resnick & Henry J. Sommer eds., 15th ed. rev. 2007).
158. Problems in the bargaining model also exist in corporate reorganizations. See generally Lucian Ayre Bebchuk & Howard F. Chang, Bargaining and the Division of Value in Corporate Reorganization, 8 J.L. ECON. & ORG. 253 (1992). The problems of corporate bankruptcy, however, are aggravated in the municipal context due to the absolute exclusivity a municipal debtor enjoys.
159. See 11 U.S.C. § 941.
160. Sections 1129(a) and 1129(b) are partially incorporated into chapter 9 via Section 901.
161. See 11 U.S.C. §§ 901(a), 1129(a), 1129(b) (Supp. V 2005).
162. See 6 COLLIER ON BANKRUPTCY, supra note 102, ¶ 943.03 ("While the section does not state that the court may confirm a plan only if all of these seven conditions are met, the strong implication is that the conditions are necessary to confirmation.").
163. See 11 U.S.C. § 901(a) (incorporating the approval requirements of subsections 1129(a)(2), 1129(a)(3), 1129(a)(6), 1129(a)(8), and 1129(a)(10) into chapter 9 of the Bankruptcy Code).
164. Douglas Baird argues that the absolute priority rule is the most important and powerful creditor protection mechanism in chapter 11. See DOUGLAS G. BAIRD, THE ELEMENTS OF BANKRUPTCY 66 (4th ed. 2006).
165. Id. at 69.
166. 11 U.S.C. § 1129(b)(2).
167. 6 COLLIER ON BANKRUPTCY, supra note 102, ¶ 943.03[1][f];
168. McConnell & Picker, supra note 4, at 464.
169. 11 U.S.C. § 944(b).
170. Id. § 930.
171. The court may not interfere with any of the debtor's political or governmental powers. Id. § 904.
172. Note that in order to confirm the plan, the bankruptcy court needs to be convinced the plan is in the best interest of the creditors, id. § 943(b)(7), but in many cases courts have confirmed plans even when the locality did not reach its maximum tax-levy capacity.
173. See, e.g., In re Sanitary & Improvement Dist. No.7, 98 B.R. 970, 974 (Bankr. D. Neb. 1989);
174. see also In re Mount Carbon Metro. Dist., 242 B.R. 18, 34 (Bankr. D. Colo. 1999) (refusing to confirm the plan on grounds other than the best interest of the creditors test). For a theoretical justification of this approach, see Kordana, supra note 4, at 1066-1105.
175. See William D. Baker, Chapter 9 Bankruptcy: A Haven for Central Arizona Project Irrigation Districts?, 27 ARIZ. ST. L.J. 663, 674-675 (1995).
176. An "insurance" rationale is often given for the fresh start policy in consumer bankruptcy. BAIRD, supra note 108, at 34-35;
177. see also DOUGLAS G. BAIRD ET AL., CASES, PROBLEMS, AND MATERIALS ON BANKRUPTCY 470 (3d ed., rev. 2001).
178. But see supra notes 91-92 and accompanying text.
179. See supra notes 18-22 and accompanying text.
180. See McConnell & Picker, supra note 4, at 470.
181. See Missed Opportunity, supra note 5, at 734.
182. Id. at 736-38.
183. Id. at 736-37.
184. Id. at 736 n.15 (noting that "in many instances, financial control boards have been created pursuant to special legislation passed in response to particular urban crises").
185. See Honadle, supra note 2, at 1461;
186. see also Actions Taken by Five Cities to Restore Their Financial Health: Hearing Before the Subcomm. on the Dist. of Columbia of the H. Comm. on Gov't Reform and Oversight, 104th Cong. 47 (1995) (report of Norma A. Noto, Congressional Research Service Analyst) [hereinafter Actions Taken by Five Cities];
187. David R. Berman, Takeovers of Local Governments: An Overview and Evaluation of State Policies, 25 PUBLIUS 55, 56-58 (1995).
188. See generally Philip Kloha et al., Someone To Watch Over Me, State Monitoring of Local Fiscal Conditions, 35 AM. REV. PUB. ADMIN. 236 (2005) (outlining the results of a fifty-state survey focusing on state methods of monitoring local governments). A more elaborate discussion of these statutes is provided infra Part IV:
189. Missed Opportunity, supra note 5, at 738.
190. See, e.g., Actions Taken by Five Cities, supra note 125, at 52-53.
191. See id. at 53.
192. See id. at 48. The Chicago School Finance Authority, for example, issued four series of bonds primarily to provide financial assistance to the Chicago School Board. The bonds were payable out of dedicated taxes levied on all taxable property in the city of Chicago.
193. Id. at 59. PICA, the financial board established for Philadelphia, also issued debt to raise cash for Philadelphia's operating costs. A PICA "authority tax" was approved in order to pay back the debt, and so the city paid for the debt service from its own resources.
194. Id. at 75. A similar financial arrangement took place in New York.
195. See ROBERT W. BAILEY, THE CRISIS REGIME: THE MAC, THE EFCB, AND THE POLITICAL IMPACT OF THE NEW YORK CITY FINANCIAL CRISIS 27-28 (1984).
196. See Missed Opportunity, supra note 5, at 738 ("In the area of financial reform, the principal duty of most FCBs is to aid the city's elected officials in developing and adhering to a balanced budget.").
197. Actions Taken by Five Cities, supra note 125, at 53. A more detailed discussion of some of the rehabilitation measures state boards can take is provided infra Part III.C.
198. See Missed Opportunity, supra note 5, at 740 (criticizing the generally temporary nature of financial control boards as leading to "short-term responses" to "perennial" fiscal crises rather than long-term reform).
199. See Actions Taken by Five Cities, supra note 125, at 49.
200. For analytical purposes, I study each possible risk bearer as if it bears the risk of the crisis alone.
201. Kordana also discusses the conceptual question of the efficient risk bearing of a municipal crisis. Kordana, supra note 4, at 1096-1105. However, he fails to examine the state as a risk bearer, and he presents the residents and the creditors as the only possible options.
202. See id.
203. See id. at 1067-69.
204. See id.
205. In case of a bailout, the state transfers funds to finance part of the local goods and services. The residents, therefore, do not internalize the full cost of the local goods, and so they have an incentive to over-consume. See Robert P. Inman, Transfers and Bailouts: Institutions for Enforcing Local Fiscal Discipline, 12 CONST. POL. ECON. 141, 142-44 (2001);
206. see also Timothy J. Goodspeed, Bailouts in a Federation, 9 INT'L TAX & PUB. FIN. 409, 418-19 (2004). Correspondingly, in case of bankruptcy filing, the municipality consumes local goods and services with debt proceeds, but it does not repay its creditors back in full.
207. See Kordana, supra note 4, at 1066 (discussing the moral hazard problem that chapter 9 of the Bankruptcy Code creates and arguing that reputation effects can mitigate this problem).
208. Inman, supra note 139, at 142-44, 154-55.
209. Cf. Clayton P. Gillette, Kelo and the Local Political Process, 34 HOFSTRA L. REV. 13, 14-15 (2005) (emphasizing the strength of the political process in the context of eminent domain).
210. See, e.g., Robert J. Barro, The Control of Politicians: An Economic Model, 14 PUB. CHOICE 19, 26-32 (1973) (analyzing the effect of popular electoral control on the incentives of political officeholders to act in the voters' interests).
211. See id. at 22-26 (explaining that, without adequate electoral controls to constrain their behavior, political officeholders have strong incentives to further their own self-interest at the expense of the public interest).
212. See Einer R. Elhauge, Does Interest Group Theory Justify More Intrusive Judicial Review?, 101 YALE L.J. 31, 35-41 (1991) (explaining that under group theory, all participants act to further their own self-interest, creating results that are not necessarily in the public interest).
213. MANCUR OLSON, THE LOGIC OF COLLECTIVE ACTION: PUBLIC GOODS AND THE THEORY OF GROUPS 9-16 (2d ed. 1971);
214. Elhauge, supra note 144, at 36-41;
215. see also Sam Peltzman, Toward a More General Theory of Regulation, 19 J.L. & ECON. 211, 211-13 (1976);
216. George J. Stigler, The Theory of Economic Regulation, 2 BELL J. ECON. & MGMT. SCI. 3, 10-13 (1971).
217. See discussion supra Part I. A.
218. The Laffer curve denotes the connection between the tax rate and the revenues that the government receives from taxes. The curve is named after the economist Art Laffer, who suggested that, although generally increased tax rates produce higher tax collections, there is a point where tax revenues start to decline notwithstanding the higher tax rates. High tax rates reduce the residents' incentive to generate revenues, and as a result the tax base shrinks. For further analysis of the Laffer curve concept, see generally James M. Buchanan & Dwight R. Lee, Politics, Time and The Laffer Curve, 90 J. POL. ECON. 816 (1982).
219. See discussion supra Part I.A.2.
220. In the municipal context, the Laffer curve (or the revenue hill) is especially low, because local residents can relatively easily move away from the locality and stop paying taxes. See Andrew F. Haughwout et al., Local Revenue Hills: Evidence from Four U.S. Cities 25-29 (Nat'l Bureau of Econ. Res., Working Paper No. 9686, 2003), available at http://ideas.repec.Org/ p/nbr/nberwo/9686.html (examining the tax rates of four cities, and finding that three out of the four cities were very close to the peak of their local Laffer curve).
221. Some examples include the provision of local residents' water supply, sanitation, police and fire protection, education, and recreational activities. See 6 ANTIEAU ON LOCAL GOVERNMENT LAW, supra note 8, § 82.01[1].
222. See In re City of Bridgeport, 129 B.R. 332, 335 (Bankr. D. Conn. 1991).
223. Florin Pasnicu, Fiscal Fiasco for Tiny Chelsea, Mass., CHRISTIAN SCI. MONITOR, Aug. 9, 1991, at A8;
224. Receivership Sought for Bankrupt City, UNITED PRESS INT'L, Sept. 6, 1991.
225. This terminology ("insurance") is taken from the analysis usually made with regard to individuals in consumer bankruptcy. See authorities cited supra note 117.
226. The situation in some ways also resembles the need for the limited liability provided to the shareholders of a company. Limited liability, which can be viewed as a kind of a shareholders' "insurance," is especially necessary when the shareholders are dispersed and do not have a great degree of
227. Cf. Frank H. Easterbrook & Daniel R. Fischel, Limited Liability and the Corporation, 52 U. CHI. L. REV. 89, 96-97 (1985) (arguing that limited liability is beneficial to shareholders because it allows for more efficient investment portfolio diversification, thus mitigating investors' risk).
228. As previously discussed, this "insurance" function is a goal of bankruptcy law. See supra Part II.B;
229. see also McConnell & Picker, supra note 4, at 470.
230. Cf. supra notes 117-120 and accompanying text.
231. Kordana, supra note 4, at 1096-1106. Kordana also makes the claim that, on average, creditors are wealthier than residents, and wealthier people tend to be less risk-averse on the margin. Due to the fact that creditors are less risk-averse than bondholders, they are superior risk bearers.
232. Id.
233. See Kordana, supra note 4, at 1067.
234. The vast majority of states are legally prohibited from engaging in deficit spending, which is common at the federal level, as a means of deferring the expense by carrying over a current budget deficit to a future year. FISHER, supra note 9, at 274-76.
235. PAMMER, supra note 2, at 16.
236. See infra Part III.C.
237. A more elaborate analysis of the state's powers in this context is provided infra Part III.C.
238. Cf.George G. Triantis & Ronald J. Daniels, The Role of Debt in Interactive Corporate Governance, 82 CAL. L. REV. 1073, 1080 (1995) ("[D]ebt is a potent and flexible [corporate] governance instrument and . . . banks are effective governance players.").
239. Cf. id. at 1082-1103 (discussing the role of bank creditors by using the threat of "exit" to deter and correct corporate mismanagement).
240. Cf. id.
241. In a private corporation, the creditors are often viewed as monitors of the corporate officials. Especially in small- and medium-size firms, banks provide the bulk of the firm's credit. Therefore they are able to exercise a great deal of control over the corporate policies, and can thereby discipline the corporate managers. See generally Randal C. Picker, Security Interests, Misbehavior, and Common Pools, 59 U. CHI. L. REV. 645 (1992) (focusing on secured creditors, and proposing secured credit as a response to creditor misbehavior).
242. See discussion supra Part I.
243. See discussion supra Part I.A.
244. See discussion supra Part I.B.
245. See discussion supra Part I.B.2.
246. BAILEY, supra note 130, at 18-20.
247. Id. at 20-21.
248. STAFF OF THE SEC. & EXCH. COMM'N, supra note 45, ch. 1, at 88-91, 186-91 (Comm. Print 1977).
249. Id. ch. 1, at 53-57.
250. Id. ch. 1, at 248.
251. Id. ch. 3, at 135-38.
252. For a more detailed discussion of the FCLG and its failure in the rehabilitation of New York City, see BAILEY, supra note 130, at 17-23.
253. See supra notes 162-68 and accompanying text. The creditors' efforts can be successful when the local officials have the powers to address the causes of the financial decline, and when the political system enables them to adequately respond to the economic circumstances at the root of the crisis. As we saw in the first part of this chapter, however, usually the reasons for financial crises (as opposed to less serious financial distress) are beyond the local officials' realm of control.
254. See supra Part I.A.
255. See discussion supra Part I.
256. See discussion supra Part I.A.
257. See discussion supra Part I.B.
258. See Hunter v. City of Pittsburgh, 207 U.S. 161, 178-79 (1907);
259. I ANTIEAU ON LOCAL GOVERNMENT LAW, supra note 8, § 13.01;
260. Richard Briffault, Our Localism: Part I - The Structure of Local Government Law, 90 COLUM. L. REV. 1, 6-9 (1990);
261. Gerald E. Frug, The City as a Legal Concept, 93 HARV. L. REV. 1057, 1080-1120 (1980);
262. Clayton P. Gillette, In Partial Praise of Dillon's Rule, or, Can Public Choice Theory Justify Local Government Law?, 67 CHI.- KENT L. REV 959, 963-68 (1991);
263. see also PETERSEN ET AL., supra note 36, passim (reporting on the role of states in the financial management of local government for the Department of Housing and Urban Development).
264. Most states have accepted some sort of constitutional amendment that allows local governments to independently regulate local affairs; these amendments are called home-rule amendments. Notwithstanding the home-rule amendments, however, the powers of local governments are still limited. First, these amendments usually allow local governments to regulate only in certain defined areas that are in general purely local: often, fiscal affairs, such as taxation or debt, are outside the localities' realm of authority. Second, states can still review localities' regulations, and they can pass statutes that will trump the local policies. In most cases, therefore, the state's supremacy has been preserved. For a closer look at local autonomy and home-rule amendments, see U.S. ADVISORY COMM'N ON I NTERGOVERNMENTAL RELATIONS, LOCAL GOVERNMENT AUTONOMY: NEEDS FOR STATE CONSTITUTIONAL, STATUTORY, AND JUDICIAL CLARIFICATION 1-3 (1993) [hereinafter LOCAL GOVERNMENT AUTONOMY];
265. David J. Barron, A Localist Critique of the New Federalism, 51 DUKE L.J. 377, 377 (2001) ("[T]hose who are attracted to ... localist orientation should be wary of the recent federalism revival. This revival focuses on protecting the autonomy of state and local governments by limiting the power of the central government.");
266. Briffault, supra note 181, at 9-18;
267. Frug, supra note 181, at 1116;
268. Terrance Sandalow, The Limits of Municipal Power Under Home Rule: A Role for the Courts, 48 MINN. L. REV. 643, 658-68 (1964).
269. See LOCAL GOVERNMENT AUTONOMY, supra note 182, at 14.
270. See LADD & YINGER, supra note 15, at 291.
271. See supra Part I.A. 1-2.
272. At the beginning of the 1990s in Washington, D.C., for example, almost half a million non-D.C. residents worked in the city, whereas only 300,000 D.C. residents were employed, including 70,000 residents who worked outside the district. This imbalance created enormous pressure on the city's budget, and was among the causes of the city's severe financial crisis in the mid-1990s.
273. Robert P. Strauss, The Income of Central City and Suburban Migrants: A Case Study of the Washington, D.C. Metropolitan Area, 51 NAT'L TAX J. 493, 512 (1998).
274. For theoretical explanations and empirical evidence for the reasons suburbs should help their central cities, see Andrew F. Haughwout & Robert P. Inman, Should Suburbs Help Their Central City?, in BROOKINGS WHARTON PAPERS ON URBAN AFFAIRS 45, 47 (2002), available at http://muse.jhu.edu/journals/brookings- wharton_papers_on_urban_affairs/v2002/2002.1henderson.pdf ("[W]hen city agglomeration economies are important and city fiscal institutions lead to inefficient allocations or require significant fiscal redistributions, there is a plausible case for suburb-to-city aid.").
275. In Cleveland, for example, there was an increase of local income tax from 1.5 percent to 2 percent; the Cleveland income tax is imposed also on non-residents working in the city. See Actions Taken by Five Cities, supra note 125, at 65. In Yonkers, state legislation established a 0.5-percent income tax rate for non-residents working in the city.
276. See id. at 81. Finally, in New York the state increased the transit fares in and out of the city.
277. See id. at 72.
278. I MCQUILLIN, supra note 79, § 2.28.
279. Id.
280. FUCHS, supra note 71, at 194.
281. Id. at 192-94.
282. Id. at 195-207.
283. Another measure only states can take in order to help distressed municipalities is annexation. Liberalizing their annexation policies helped southern states address local financial crises in the 1970s. KAMER, supra note 18, at 27. Studies show that in the 1970s northern cities in the so-called "snow belt" suffered from financial difficulties partly because their states did not enable them to annex surrounding territories.
284. Id. at 27-30. Southern cities (the sun belt), on the other hand, avoided those crises partly as a result of liberal annexation policies by their states.
285. Id. at 30-37.
286. FUCHS, supra note 71, at 192.
287. This is not to suggest that the state should increase the monetary aid to municipalities every time a municipality enters into financial distress. However, when a city becomes financially distressed because it does not receive its fair share of intergovernmental assistance (as in the case of Philadelphia, briefly discussed supra note 40), the state should interfere. In those cases it is only just that the state will equalize the amount of intergovernmental transfers to the distressed city.
288. See Inman, supra note 40, at 380, 383.
289. The best example is welfare services. It is widely agreed that state or federal governments can finance income redistributive services more effectively than local governments, because when local taxes finance these services affluent residents simply move to the suburbs. In other words, the scope for local redistributive programs is limited by the potential mobility of the residents, which tends to be greater the smaller the jurisdiction under consideration. See FISHER, supra note 9, at 586-92.
290. For example, as a result of the New York City crisis, the state assumed the costs of the higher education system and those costs of the state's courts system that were, prior to the crisis, borne by the city. See BAILEY, supra note 130, at 152-54.
291. See discussion supra Part I.B.
292. See discussion supra Part I.B.2.
293. Each decision maker (and the sector she represents) enjoys the full benefits of her budgetary demands, but she shares the costs of those demands with all the other decisionmakers (and the populations they represent). Therefore, the more groups there are in a locality, the greater the pressure the locality will be under to overspend.
294. See Perotti & Kontopoulos, supra note 52, at 195;
295. Wolff, supra note 52, at 5.
296. Perotti & Kontopoulos, supra note 52, at 196.
297. See discussion supra Part I.B.2.
298. Baqir, supra note 52, at 1347;
299. Hallerberg & von Hagen, supra note 52, at 9;
300. Perotti & Kontopoulos, supra note 52, at 196.
301. Hallerberg & von Hagen, supra note 52, at 19;
302. cf. Nouriel Roubini & Jeffrey Sachs, Government Spending and Budget Deficits in the Industrial Countries, 4 ECON. POL'Y 99, 114 (1989) ("[C]oalition governments will have a bias towards higher levels of government spending relative to majority party governments, as the various constituencies in the government undertake logrolling agreements to secure greater spending for their individual constituencies.").
303. Baqir, supra note 52, at 1347-51.
304. Two different groups of decision makers must make the decisions in the two stages; otherwise, the decisions in the second stage will affect the outcome of the initial stage. In other words, the size of the budget will be determined (through backwards induction) by the allocations the decision makers want to make in the second stage.
305. Torsten Persson & Guido Tabellini, Political Economics and Macroeconomic Policy 71-72 (1997), available at http://papers.ssrn. com/sol3/papers.cfm?abstract_id=57408&download=yes.
306. For additional empirical research supporting this assertion, see generally Alberto Alesina et al., Political Instability and Economic Growth, 1 J. ECON. GROWTH, 189 (1996);
307. Jürgen von Hagen, Budgeting Procedures and Fiscal Performance in the European Community, ECON. PAPERS No. 96, EUR. COMMISSION (1992);
308. Jürgen von Hagen & Ian J. Harden, Budget Processes and Commitment to Fiscal Discipline, 39 EUR. ECON. REV. 771 (1995).
309. See MILAN J. DLUHY & HOWARD A. FRANK, THE MIAMI FISCAL CRISIS: CAN A POOR CITY REGAIN PROSPERITY? 74 (2002);
310. Berman, supra note 125, at 56-57;
311. Honadle, supra note 2, at 1461.
312. The rehabilitation of New York City provides an example of this process. Prior to the creation of the Board (or as it was called in New York, The Emergency Financial Control Board), New York suffered from extreme political fragmentation. It was dominated by a large number of social and political groups, with no central authority to hold the various groups together. Martin Shefter, who studied the New York crisis, called this the "pluralist regime." SHEFTER, supra note 3, at 29-37.
313. The Board used its broad legal powers (including the authority to veto the city's expenditures and the power to negotiate labor agreements) to centralize the city's political environment, and it saved the city from financial calamity.
314. For an in-depth look at New York's rehabilitation process, see generally BAILEY, supra note 130.
315. This kind of Board was created to assist the city of Philadelphia in 1991. The Board approved a five-year financial rehabilitation plan and made sure that the city strictly adhered to the plan and did not spend more funds than the plan allowed. As Bernard E. Andersen, the Board's chairman, explained in a Congressional hearing: The city would then be required to submit monthly reports to the board, and the mayor then would be informed that he had 30 days to come up with a plan to balance the budget in the future, that is in the next quarterly report and every quarterly report after that. If over a period of 30 days, I believe, the variance [with the five-year financial plan] which was established or identified in a quarterly report was not corrected, then the board had the obligation to inform the State of this development and we had the authority to withhold tax revenues, State funds ... until such time as the variance was corrected. Financial Control Boards: Hearing Before the Subcomm. on the District of Columbia of the H. Comm. on Government Reform and Oversight, 104th Cong. 57 (1995) (statement of Bernard E. Andersen, Former Chairman, Pennsylvania Intergovernmental Cooperative Authority).
316. See supra Part I.B.2.
317. Cf. BAILEY, supra note 130, at 181-88 ("The fundamental goal of the crisis regime was to gain control over the context in which interest group politics occur. In so doing, it also created a policy arena in which only the most significant interests ... could play.").
318. In 1991, the city had an estimated $9 million deficit in its $48 million budget, and the state was already contributing almost fifty percent of the budget. More than a third of the city's residents earned less than $10,000 a year, and tax collections were dropping yearly. See Fox Butterfield, Insolvent Boston Suburb Faces Threat of Takeover, N.Y. TIMES, Sept. 8, 1991, at A18;
319. Receivership Sought for Bankrupt City, supra note 152.
320. See Ed Cyr, Thoughts on the Chelsea Receivership, 9 GOV'T FIN. REV. 23, 23 (1993).
321. Employees grossly abused overtime (indeed, the city spent five percent of its annual budget on overtime), labor contracts included minimum staffing clauses, department heads had life tenure, and departments were generally overstaffed and inefficient. See William Cox, Lessons of Receivership: The Legacy of Chelsea, 9 GOV'T FIN. REV. 21, 22 (1993);
322. Cyr, supra note 215, at 23;
323. Ted Hampton, Chelsea Receiver Trims Finances of a "Tough Town," BOND BUYER, June 16, 1992, at 6 (interview with James F. Carlin).
324. One example of Carlin's policy was the renegotiation of the firefighters' contract. Prior to the receivership, due to the firefighters' political power, Chelsea was one of the most fire-protected cities. It had four fully-functioning fire stations for an area of about 1.8 square miles. Hampton, supra note 216, at 6.
325. Each station was staffed 24 hours a day, and each firefighter enjoyed lucrative working conditions and benefits. Cyr, supra note 215, at 23.
326. Carlin, who did not have to worry about winning the next election, changed this costly situation. He managed to close down two of the stations and significantly decreased the cost of the firefighters' working conditions to the municipality. Cyr, supra note 215, at 23;
327. Hampton, supra note 216, at 6.
328. See Cyr, supra note 215, at 23.
329. Hampton, supra note 216, at 6;
330. see also William Claiborne, Bringing a Battered City Back from the Brink: Consensus-Building Process Inspires Citizen Involvement and a New Charter in Chelsea, Mass., WASH. POST, Sept. 7, 1994, at A3.
331. See H.R. REP. No. 95-595, at 263 (1977).
332. T HOMAS H. JACKSON, THE LOGIC AND LIMITS OF BANKRUPTCY LAW 2 (1986);
333. Douglas G. Baird & Thomas H. Jackson, Corporate Reorganizations and the Treatment of Diverse Ownership Interests: A Comment on Adequate Protection of Secured Creditors in Bankruptcy, 51 U. CHI. L. REV. 97, 98-101 (1984).
334. Douglas G. Baird, A World Without Bankruptcy, 50 LAW & CONTEMP. PROBS. 173, 183 (1987);
335. Matthias Kahl, Financial Distress as a Selection Mechanism: Evidence from the United States 29 (UCLA Anderson Graduate Sch. of Mgmt., Working Paper No. 16-01, 2002), available at http://repositories.cdlib.org/cgi/ viewcontent.cgi?article=1017&context=anderson/fin.
336. See Economic Distress in Our Cities: Bridgeport, Connecticut: Field Hearing Before the H. Comm. on Banking, Finance and Urban Affairs, 102d Cong. 161-62 (1992) (statement of Richard Blumenthal);
337. Ledebur, supra note 15, at 242-46.
338. See supra note 4 and accompanying text.
339. Colleen Woodell et al., U.S. Municipal Rating Transitions and Defaults, 1986-2003, 24 MUN. FIN. J. 49, 54-55 (2004).
340. Id. at 55;
341. see also DLUHY & FRANK, supra note 209, at 74;
342. Berman supra note 125, at 56;
343. David Litvack & Frank Rizzo, Municipal Default Risk, 21 MUN. FIN. J. 25, 32 (2000).
344. See generally BAILEY, supra note 130.
345. See generally Inman, supra note 40.
346. See generally DLUHY & FRANK, supra note 209.
347. See authorities cited supra notes 214-23.
348. See Rob Christensen, A Big Government Idea That Makes Conservatives Proud, NEWS & OBSERVER (Raleigh, NC), Jan. 12, 1998, at A3;
349. Alan Scher Zagier, Princeville's State of Crisis, NEWS & OBSERVER (Raleigh, NC), Dec. 15, 1996, at B1.
350. See generally Charles L. Jarik et al., Municipal Financial Distress: A Case Study of a Partnership Between the Village of Maywood and the Illinois Development Finance Authority, 25 URB. LAW. 995 (1993).
351. Kloha et al., supra note 126, at 240 (describing the results of a state survey regarding state approaches to local financial crises, which show that only fifteen states use formal "indicators to evaluate their local governments' fiscal positions" on a regular basis);
352. see also Anthony G. Cahill et al., State Government Responses to Municipal Fiscal Distress: A Brave New World for State-Local Intergovernmental Relations, 17 PUB. PRODUCTIVITY & MGMT. REV. 253, 254-55 (1994).
353. For example, Pennsylvania enacted the PICA Act to establish a State Board for Philadelphia, New York State enacted the Financial Emergency Act to establish a State Board for New York, and Massachusetts enacted the receivership act for Chelsea. See An Act Establishing a Receivership for the City of Chelsea, 1991 MASS. ACTS 679-86;
354. New York State Financial Emergency Act for the City of New York, 1975 N.Y. SESS. LAWS 1405-44 (McKinney);
355. Pennsylvania Intergovernmental Cooperation Authority Act for Cities in the First Class, 53 PA. CONS. STAT. ANN. § 12720.101-.709 (West 1991).
356. See Berman, supra note 125, at 57;
357. Kloha et al, supra note 126, at 236-37.
358. See Honadle, supra note 2, at 1461 (concluding from a survey on states' roles in local fiscal crises that states get involved after the crises occur and usually do not know about them beforehand; even when states do know of impending crises, they generally do not prevent them);
359. Kloha et al., supra note 126, at 252-53 (presenting a survey that shows that only seven states use a proactive approach in their legislation; among these states are North Carolina, New Jersey, Ohio, Pennsylvania, New Hampshire, Maryland, and Florida).
360. Daniel B. Rodriguez, Localism and Lawmaking, 32 RUTGERS L.J. 627, 648-62 (2001).
361. See Sheryll D. Cashin, Localism, Self-Interest, and the Tyranny of the Favored Quarter: Addressing the Barriers to New Regionalism, 88 GEO. L.J. 1985, 2023-25 (2000);
362. Margaret Weir, Central Cities' Loss of Power in State Politics, 2 CITYSCAPE: J. POL'Y DEV. & RES. 23, 36 (1996).
363. Chelsea, Massachusetts provides a good example. In Chelsea, both the Board of Aldermen and the unions lobbied in the state legislature to prevent the establishment of a receivership. They argued that the situation did not warrant such a drastic measure and expressed doubts about whether an "outsider," the receiver, could solve the city's problems. Brian McGrory, Chelsea Receivership Asked: Weld Takes Unprecedented Step for Fiscally Ailing City, BOSTON GLOBE, Sept. 6, 1991, at B1;
364. Brian McGrory, Legislative Panel Backs Chelsea Receivership, BOSTON GLOBE, Sept. 8, 1991, at B1.
365. For a survey of the indicators used by the different states, see Kloha et al., supra note 126, at 242-48 (describing six categories of indicators: revenue, expenditure, operating position, debt, unfunded liabilities, and community needs and resources).
366. For examples of specific sections in municipal insolvency statutes specifying the indicators, see NEV. REV. STAT. § 354.685 (2007);
367. OHIO REV. CODE ANN. §§ 118.022-.03 (LexisNexis 2007);
368. Municipalities Financial Recovery Act, 53 PA. CONS. STAT. ANN. § 11701.201 (West 1997).
369. For more sophisticated models for predicting forthcoming local fiscal crises, see Ken W. Brown, The 10-Point Test of Financial Condition: Toward an Easy-to-Use Assessment Tool for Smaller Cities, GOV'T FIN. REV., Dec. 1993, at 21, 21-23;
370. Robert Kleine et al., Monitoring Local Government Fiscal Health: Michigan's New 10 Point Scale of Fiscal Distress, GOV'T FIN. REV., June 2003, at 19, 20-23.
371. Municipal insolvency legislation also helps local governments protect their local autonomy. A state insolvency statute renders the criteria for the state's action more objective, forcing the state to prove the existence of these criteria before it intervenes in the local affairs. Cf Kloha et al., supra note 126, at 236-37 (highlighting the importance of the criteria states use to determine when to intervene in local financial affairs, since such interventions are "often controversial" and "may conflict with the norm of local autonomy"). This enables better judicial review of the state's actions, and decreases the chances of arbitrary interventions, perhaps motivated by the political agenda of state officials.
372. Cf. JOHN RAWLS, A THEORY OF JUSTICE 11 (rev. ed. 1999) ("Among the essential features of this situation is that no one knows his place in society, his class position or social status .... The principles of justice are chosen behind a veil of ignorance.").
373. I do not argue that a general municipal insolvency statute is legislated free of political interests. Municipal officials, local unions, and other interest groups certainly lobby with regard to these statutes, and the pressures from the different groups in the state do affect the outcome of the legislation. I do argue, however, that due to the generality of such a statute, ad hoc political considerations do not play as dominant a role in the state's decisions. Such a statute reflects the state's position on how to address municipal insolvency in general, and relates less to the political interests and circumstances of a particular crisis.
374. In Dennis Epple & Chester Spatt, State Restrictions on Local Debt: Their Role in Preventing Default, 29 J. PUB. ECON. 199 (1986), the authors developed a model to explain state restrictions on local debt. They argue that a default of one local government may affect the interest rates of other local governments in the state as well.
375. See id. at 200-01. As a result, local governments - those that do not wish to default - have an interest in maintaining their state's reputation in the enforcement of local debts.
376. Id. at 218. Since a debt limit reduces the number of localities that are prone to default, various local governments in the state benefit from the debt limit and support it. The same logic applies here. Proactive municipal insolvency legislation promotes the state's reputation for the enforcement of local debts. Such legislation thereby reduces the interest rates local governments have to pay, and benefits all local governments.
377. See, e.g., K. Lee Carter, Jr., State Oversight of Local Government Finance, in STATE AND LOCAL GOVERNMENT IN NORTH CAROLINA: THEIR EVOLUTION AND CURRENT STATUS 71, 71 (Charles D. Liner ed., 2d ed. 1995).
378. Mayraj Fahim, North Carolina Still Influences U.S. Local Government Finance, CITY MAYORS, Mar. 31, 2005, htrp://www. citymayors.com/finance/nc_finance.html.
379. North Carolina established the Commission under the Local Government Finance Act, N.C. GEN. STAT §§ 159-1 to -210 (2007).
380. "[During the Great Depression] more local governments in North Carolina defaulted on their debts than [in] any other state in the nation, except Florida." Fahim, supra note 247.
381. Carter, supra note 246, at 75.
382. The Commission consists of nine members: four ex-officio members (the state's treasurer, who also serves as chairman; the state auditor; the secretary of state; and the secretary of revenue), and five appointed members (three members are appointed by the Governor, one by the President pro tempore of the Senate, and one by the Speaker of the House). In addition, the Commission employs a staff of about thirty-five associates. The majority of the staff members are individuals with degrees in economics, business, or accounting. Id. at 75-76.
383. Richard P. Larkin & Jeff Schaub, State of North Carolina Local Government Commission: Credit Enhancement Program Review, FITCH IBCA TAX-SUPPORTED SPECIAL REPORT, Mar. 29, 1999, at 5, available at http://nira.go.jp/newsj/seisakuf/04/siryou/08. pdf [hereinafter Fitch Report].
384. The LGC's debt supervision is not limited to general obligation bonds; rather, it includes all types of debts, such as short-term notes, local revenue debt, and conduit debt. Carter, supra note 246, at 76-77.
385. Id.
386. Id. at 78.
387. Contrary to most municipal insolvency statutes, North Carolina's Local Government Finance Act does not specify any certain financial indicators that trigger the state's intervention. Compare Local Government Finance Act, N.C. GEN. STAT §§ 159-1 to -210 (2007), with authorities cited supra note 240.
388. The Act enables the Commission to take over a local government when a locality is likely to default, but it does not detail specific indicators for when a default is likely. N.C. GEN. STAT § 159-36.
389. The LGC, therefore, developed its own indicators. The LGC's indicators not only define when a default is likely, but they also detect signs of financial distress so as to predict forthcoming fiscal emergencies. According to the survey conducted by Kloha, Weissert & Kleine, the LGC uses the following types of indicators: three indicators examine the local revenues and expenditures, two examine the localities' operating position, one examines unfunded liabilities, and one examines legal or technical violations. Kloha et al., supra note 126, at 245 tbl.2.
390. See Fitch Report, supra note 252, at 4.
391. The same information was also conveyed in an interview the author conducted with Dean Cunningham, Senior Fiscal Advisor of the LGC. Telephone Interview with Dean Cunningham, Senior Advisor, The Local Government Commission (June 9, 2006) (transcript on file with author).
392. N.C. GEN. STAT § 159-36.
393. Fitch Report, supra note 252.
394. Id. at 1.
395. Tedra Desue, Moody's: North Carolina Counties Come out on Top, BOND BUYER, July 12, 2000, at 4.
396. Christensen, supra note 231.
397. N.C. DEP'T OF STATE TREAS., THE STATE TREASURER'S ANNUAL REPORT FOR FISCAL YEAR 2001-2002, at 20 (2002), available at http://www.nctreasurer.com/NR/rdonlyres/6C7A2B49-6C4C-4B2C-B801-755C3D3D89B7/0/ 20012002AnnualReport.pdf [hereinafter STATE TREASURER'S ANNUAL REPORT 2001].
398. N.C. DEP'T OF STATE TREAS., THE STATE TREASURER'S ANNUAL REPORT FOR FISCAL YEAR 2002-2003, at 35 (2003), available at https://www.nctreasurer.com/NRyrdonlyres/2B0622CE-7918-4B2B-A8AD-BBEC663846CA/0/ 03AnnualReport.pdf [hereinafter STATE TREASURER'S ANNUAL REPORT 2002]
399. N.C. DEP'T OF STATE TREAS., THE STATE TREASURER'S ANNUAL REPORT FOR FISCAL YEAR 2003-2004, at 29 (2004), available at https://www.nctreasurer.com/NR/rdonlyres/40A3C119-EC61-49BF-8669-7F08716A5BEB/0/ NCTRPT0304LOWREV.pdf [hereinafter STATE TREASURER'S ANNUAL REPORT 2003].
400. sTATE TREASURER'S ANNUAL REPORT 2001, supra note 263, at 20.
401. STATE TREASURER'S ANNUAL REPORT 2002, supra note 264, at 35.
402. sTATE TREASURER'S ANNUAL REPORT 2003, supra note 265, at 29.
403. The savings are calculated over the life of the bonds sold, assuming the local governments would have paid the average interest rate as determined by the national Bond Buyer Index.
404. The Commission's staff consists of a mere thirty-five members, suggesting an operating cost of far less than $50 million. See Carter, supra note 246, at 75.
405. The effectiveness of these and other State programs designed to assist municipal units in or near severe financial crisis varies widely. Nevertheless, in states with court or administrative assistance, the performance of municipal units under stress seems considerably better than those in states in which no provisions have been made for state review, approval or supervision. ADVISORY COMM'N ON INTERGOVERNMENTAL RELATIONS, CITY FINANCIAL EMERGENCIES: THE INTERGOVERNMENTAL DIMENSION 79 (1973).
406. The Advisory Commission reached the same conclusion in its 1985 report. ADVISORY COMM'N ON INTERGOVERNMENTAL RELATIONS, supra note 13, at 5 ("A review of the cases of financial emergencies in local governments occurring over the 1972-83 period, generally confirms the findings in the 1973 . . . report that financial management problems are the principal cause of emergencies, and that state actions are the most appropriate means of preventing and treating them.").
407. Jane Beckett-Camarata, Identifying and Coping with Fiscal Emergencies in Ohio Local Governments, 27 INT'L J. PUB. ADMIN. 615, 624 (2004) (finding that Ohio's Fiscal Emergency Law "appeared to have a noticeable positive long term effect on 12 of the 15 [sampled] local government's financial performance").
408. Id. at 628.
409. See Carter, supra note 246, at 71;
410. Fahim, supra note 247.
411. Id. ("Of all the states North Carolina has the most extensive state involvement in local government finance, especially in relation to state approval of local government debt management and monitoring of financial conditions.").
412. Fitch Report, supra note 252, at 4-5.
413. See supra note 1 and accompanying text.
414. See supra note 1 and accompanying text.
415. See supra note 1 and accompanying text.