The National League of Cities estimates that the aggregate fiscal shortfall for the nation’s cities and towns could be between $56 billion and $83 billion from 2010 through 2012.1 Delaying projects, laying off workers and increasing fees may not offset municipalities’ declining tax bases, reduced funding from states (which have their own budget issues) and pension funding obligations. Reports indicate that cities (Harrisburg, Pa.) and counties (Jefferson County, Ala.) are considering bankruptcy filings.2
The dire financial condition of municipalities raises the possibility of increased filings under the infrequently invoked Chapter 9 of the U. S. Bankruptcy Code.3 Chapter 9 is a delicate balance between federal judicial oversight of debtors and the states’ sovereign authority over municipalities. This article provides an overview of Chapter 9 for investors and professionals familiar with other sections of the Bankruptcy Code, particularly Chapter 11.
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