50:4 Is Bankruptcy the Answer for Troubled Cities and States?

Abstract

The financial crisis that has afflicted America’s cities and states for the past decade is far from over. Under existing U.S. law, distressed municipalities can file for bankruptcy if their state permits this, as roughly half do. The states themselves do not have a bankruptcy option, however, no matter how bleak their circumstances may be. There have recently been dramatic developments in the handling of municipal distress. Several cities have filed for bankruptcy under Chapter 9, which, although adequate for sewer and water districts or a very small town, has conventionally been deemed irrelevant for real cities and municipalities. Additionally, several states have enacted or amended their laws to give the state greater control over the finances of troubled municipalities. Other recent developments that might initially seem unrelated may also have important implications for municipal and state distress: (1) the Supreme Court reinvigorated its jurisprudence on federal “commandeering” of the states and (2) the recent crisis in Europe raises questions about the internal dynamics of a federalist framework that also are highly relevant for the U.S. situation. In this Essay, Professor David Skeel proposes to take stock of each of these developments, focusing in particular on the lessons they offer about the role of formal restructuring rules in a federal system.