Predictors of municipal bankruptcies and state receivership programs

Objective: The purpose of this study is to examine predictors of municipal bankruptcies and/or state receivership programs in the United States. Historically, municipal bankruptcies in the United States were rare. However, since the great recession beginning in 2008, several high profile local governments have sought bankruptcy protection.  Other local governments, citing large unfunded liabilities for pension and other post-employment benefits, have faced credit downgrades, credit watch and actual defaults and may be contemplating filing for bankruptcy or some type of state receivership program.  Little is known on the municipal triggers for seeking these types of protection.

Data/Methods: The association between credit downgrades (below investment grade), credit watch and actual defaults and municipal bankruptcies or state receivership programs will be explored by searching bond credit ratings (via Moody’s and S&P) for municipalities over 250,000 population since 2008.  Municipalities considered at risk will be selected to conduct a comprehensive review of their state governing laws. A broad definition will be used to include not only state laws regarding bankruptcy or receivership programs but also state laws regarding tax limits, mandated expenditures, expenditure limits and redevelopment constraints. Other state governance tools to be explored include the state’s role for intergovernmental aid, the range of opportunities for cities to make financial decisions and the power of unions.

Results: It is expected that a list of possible predictors will be developed from this research by exploring the association between municipal financial distress and the governing laws of various states. Implications for practice and policy will be advanced. In particular, the practical effects of state governing laws and procedures on municipal options for relieving fiscal distress will be brought to light, providing a framework for determining viable state responses for resolving municipal fiscal distress.