The years from 2011 to 2013 were remarkable in municipal bankruptcy terms. During those years, several cities and counties took the rare step of filing for bankruptcy under Chapter 9 of the Bankruptcy Code. When Detroit filed for bankruptcy in July, 2013, it became the largest city measured by both population and outstanding debt to file for Chapter 9.The recent filings challenge the conventional wisdom that Chapter 9 is poorly tailored to the rehabilitation needs of larger cities and counties. Those who have written about Chapter 9 in the past twenty years have treated Chapter 9 and state intervention in municipal financial affairs as freestanding alternatives rather than as complementary components of a comprehensive municipal financial recovery plan. These authors compare municipal bankruptcy to corporate bankruptcy and conclude that because Chapter 9 does not incorporate all of the Chapter 11 checks on debtor behavior, it cannot adequately promote the financial rehabilitation of a sizable general-purpose municipality. This approach ignores the original goal of Congress in enacting a municipal bankruptcy law in the aftermath of the Great Depression, which was to bring together two sovereigns, the state and the federal government, to accomplish something that neither could accomplish alone - the imposition of a plan to adjust municipal debts that would be binding on all creditors, wherever located. This article refocuses the discussion about the limitations of the municipal bankruptcy process by examining the goals of Chapter 9 and relating its governance provisions to those goals. A refocused discussion is particularly timely, because the deteriorating financial condition of many cities has led states to reexamine their programs for resolving municipal financial distress and the conditions under which they permit their municipalities to file for bankruptcy. Chapter 9 may only be as effective as the state governance that accompanies it. Therefore, policy makers on the state and federal levels need an understanding of the role of Chapter 9 in an integrated scheme for municipal financial recovery in order to decide whether and how to assist municipalities on the state level and to decide whether reforms to Chapter 9 are necessary.

Committee Serial No. 21.

Considers legislation to provide emergency bankruptcy proceedings for municipal governments and their creditors.

Recent proceedings involving large municipalities such as Detroit, Stockton, and Vallejo illustrate both the utility and the limitations of using the Bankruptcy Code to adjust municipal debt. In this article, we contend that, to truly resolve the distress of a substantial city, municipal bankruptcy needs to do more than simply provide immediate debt relief. Debt adjustment alone does nothing to remedy the fragmented decision-making and incentives for expanding municipal budgets that underlie municipal distress. Unless bankruptcy also addresses governance dysfunction, the city may slide right back into financial crisis. Governance restructuring has long been an essential element of corporate bankruptcy. Given the monopoly position of local governments as providers of local public goods, governance reform is even more important in the municipal bankruptcy context. Some might argue that reducing a city's debt is the best bankruptcy courts can do, because a more comprehensive approach would, among other things, interfere with state sovereignty. In our view, these concerns do not withstand inspection. Based on a careful analysis of the historical origins of the current municipal bankruptcy provisions, as well as an assessment of recent Supreme Court jurisprudence, we argue that governance reform is permitted even under existing law. To be sure, the states themselves, rather than a bankruptcy court, ideally should be the ones to effect municipal governance reform. But political factors and the salience of the fiscal crisis make state intervention unlikely, thus underscoring the need for a more comprehensive approach to municipal bankruptcy.

An authoritative review of the long history of federal responses to state and local budget crises, from Alexander Hamilton through the COVID-19 pandemic, that reveals what is at stake when a state or city can't pay its debts and provides policy solutions to an intractable American problem. What should the federal government do if a state like Illinois or a city like Chicago can't pay its debts? From Alexander Hamilton's plan to assume state debts to Congress's efforts to respond to the COVID-19 pandemic, many of the most important political disputes in American history have involved federal government responses to state or local fiscal crises. In a Bad State provides the first comprehensive historical and theoretical analysis of how the federal government has addressed subnational debt crises. Tracing the long history of state and local borrowing, David Schleicher argues that federal officials want to achieve three things when a state or city nears default: prevent macroeconomic distress, encourage lending to states and cities to build infrastructure, and avoid creating incentives for reckless future state budgeting. But whether they demand state austerity, permit state defaults, or provide bailouts-and all have been tried-federal officials can only achieve two of these three goals, at best. Rather than imagining that there is a single easy federal solution, Schleicher suggests some ways the federal government could ameliorate the problem by conditioning federal aid on future state fiscal responsibility, spreading losses across governments and interests, and building resilience against crises into federal spending and tax policy. Authoritative and accessible, In a Bad State offers a guide to understanding the pressing fiscal problems that local, state, and federal officials face, and to the policy options they possess for responding to crises.