5 things I’ve learned after a decade of reporting on municipal bankruptcy
Happy Friday, readers! This week, I’m doing something a little different. My newsletter for Route Fifty this week was the first installment of a three-part series on Chester, Pennsylvania, a small city outside Philadelphia that filed for bankruptcy in November. It got me thinking about all the cities I’ve covered that have been in this situation. Over the last decade or so, I’ve written about more than a half-dozen cases of either municipal bankruptcy or severe fiscal distress and restructuring in instances where a municipality is not allowed to file for Chapter 9.
From my archives: Covering municipal distress
The 'B' Word: Is Municipal Bankruptcy's Stigma Fading?
Bankrupt Cities? What About Distressed Cities?
Exiting Municipal Bankruptcy Only a Step in Road to Recovery
Stockton Bankruptcy Judge Rules against Pensions
Judge Rules Stockton Can Exit Bankruptcy
The Story Behind San Bernardino’s Long Bankruptcy
Atlantic City on the Brink of Financial Disaster
Detroit Becomes Biggest U.S. City Ever Eligible for Bankruptcy
Bondholders Losing Ground in City Bankruptcies
Detroit's Bankruptcy Exit Plan Threatens Its Financial Credibility
Is Connecticut to Blame for Hartford's Looming Bankruptcy?
While every place has its own way of getting to the point where it’s drowning in debt and runs out of money for payroll or services, there are definitely some big picture commonalities I’ve observed. I also decided to go through my notes from the last decade or so to see what gems and interesting-in-hindsight tidbits were there. Here are the big takeaways.
Getting to insolvency is a group effort
City officials get a lot of scrutiny and criticism when their municipality enters Chapter 9 protection. And while a lot of the time that scrutiny is warranted, it’s almost always unfairly weighted on current officials. Five or six years of bad decisions does not bankrupt a city. It takes decades of pushing off financial responsibility for a city to get to the point where it has no other options. Whether it’s years of accumulating debt with way-too-optimistic projections about how to pay it back or putting off paying the bills (ahem, pension payments) lots of people over a lot of years contribute to the problem.
“Everybody wants a villain,” former Stockton, California, Councilmember Kathy Miller once told me. “And there isn’t one.”
City bankruptcies are a byproduct of their state
Some states will go to great lengths to avoid a municipal bankruptcy while others let cities fend for themselves. California falls into the latter category, which is why three cities have gone through Chapter 9 in the modern era—more than any other state. New Jersey, on the other hand, bailed out Atlantic City when it was on the brink of bankruptcy in 2015.
Other states have enacted laws with some form of state oversight on distressed municipalities. Michigan appoints emergency managers with incredibly broad powers. Pennsylvania has Act 47, in which the state appoints someone to manage the city’s recovery. Sometimes this oversight is enough and sometimes it isn’t and the reasons are unique. In 2011, Pennsylvania prevented the receiver for Harrisburg from successfully filing for Chapter 9 protection on behalf of the city. When Chester’s receiver did so in November, the only people fighting it were the local elected officials.
Retirees always lose
The degree to which retirees lose out varies from a lot (in the case of Central Falls, Rhode Island) to only in healthcare costs (Vallejo, California). One can argue that maybe in some cases, retirees were getting overly sweet deals in the first place and that making these cuts was just plain responsible. That was part of the story in Stockton, which used to offer its employees the cushiest healthcare benefits in the state and free care for life for retirees and spouses.
Even so, most retired city employees entered their golden years making certain financial assumptions and cutting their pension checks and/ or increasing their health-care costs upends those assumptions.
Pension cuts might be legal in bankruptcy but they’re not any easier
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