Arizona Bankruptcy Attorney Blog

Jefferson County is suffering, a roughly four billion dollar debt they cannot pay is forcing them to take the road many other cities are already debating: Chapter 9 Bankruptcy.

Since they are just north of FOUR BILLION dollars in debt, they have set both a record and have assisted in establishing a precedence that politicians and lawmakers have been worried about. The record for most substantial Chapter 9 to date was previously held by Orange County, California and their debt was just shy of two billion dollars making Jefferson County the largest Chapter 9 bk in the nation to date.

The precedent, however, is that cities following in this direction will have and example to drawn upon should similar investment have blown their debt out of control. Jefferson County's debt woes are primarily tied to a sewer system investment, similar to other costly attempts to better a city that led down this same path.

That said, expect to hear about two or three more cities making the same announcement within the next few months simply because it's still an option; that is until the Lobbyists persuade a new set of amendments out of Washington.

I hope that I'm wrong, but we'll find out regardless.

Harrisburg's City Council is pushing hard to advocate the Municipal Chapter 9 Bankruptcy, a move which will likely inspire other cities and states to follow suit should they succeed. Much like other attempts before them, elements within their own city are desperately seeking to stymie the efforts of the City Council, the loudest voice in attendance being the Mayor.

Joseph actually brought up Harrisburg before, he asserted that they were dithering unnecessarily. That instead of utilizing the one tool that could save them from being gobbled up by the state and set upon by their looming creditors, they kind of sat around waiting for it to happen. Or for something worse to happen than natural disasters and insolvency.

Something worse than defaulting Bonds, missed payrolls and a state takeover?

Now that they've taken Joseph's advice, or at least the City Council has made an honest effort to push forward, they're running into roadblocks. Kind of like how California tried to plug up the attempts of insolvent municipalities with Anti-Bankruptcy legislation.

Some critics are calling the movie irresponsible because the situation that will leave creditors swinging in the wind. However, this logic begs the questions of where they expect a trouble-riddled city to find the dough to pay for already overwhelming debt after a natural disaster, displaced citizenry and a massive investment that tanked its economy.

Rep. Glen Grell, Pennsylvania State Representative 87th Legislative District, is railing against it insisting that the greatest harm comes to Municipal Bond holders and joins Harrisburg's mayor, Linda D. Thompson, in labeling it an illegal action.

I realize these folks don't like how a bankruptcy would look on the City's record, but to date no one has a plan to revive the withering Economy in the fair city of Harrisburg. No way to bring jobs, industry or relief to the people of the city.

The most loathsome part of this is that the internal strife brought on by the mayor seeking to keep the city swamped with debt is creating more debt and keeping already existing debt alive. In fact, considering that the costs of her efforts to halt the attempt by the City Council to relieve the city of its debt are also coming out of the city itself this creates more problems than solutions.

Harrisburg can't pay payroll, but the mayor can hire legal counsel to keep the city up to its eyes in debt that it can't afford to pay.

I wonder what her next election platform is going to be?

Something about how heroically she fought to keep the city down in the muck? She selflessly shielded the city from debt relief? She spared no expense from Taxpayers to make sure the state wouldn't be able to pay it's debts and ensured there was no escape?

I admit that this is a scary precedent to set either way, but the option of seeking relief is vastly more hopeful than seeking solutions that simply aren't present as the city falls apart around them.

We'll probably find out more later today.

The poor folks in Harrisburg, PA have had it pretty rough.

Massive flood damage that led to an exodus of over 10,000 people, huge unemployment and a big investment that never panned out.

They are taking the matter into their own hands in dealing with over 300 Million Dollars in debt.

There appears to be some dissent in the ranks, including the Mayor who insists that the city council went over her head and that the Bankruptcy is going nowhere.

More as it develops!

An anti-bankruptcy statute is headed toward California Governor Jerry Brown's desk.

It's designed to prevent insolvent municipalities in California (is that redundant?) from using Chapter 9 Bankruptcy to restructure their debts.

The cute part of Assembly Bill 506, which was proposed by Assemblyman Bob Wieckowski with support from the California Labor Federation, is a required statement that the municipality is unable to meet its obligations within 60 days.

That means, as I see it, that long range bankruptcy-planning for California Cities is about to be outlawed; the municipality will now be required to spend itself into penury before using the appropriate tool to fix the problem: a bankruptcy!

I am attaching what I believe to be the most-amended version of the statute. I don't guarantee that this is the version that will become law, because I'm just a simple back-country bankruptcy lawyer, and not an expert in using the California statute-finder thingamajig.

But here's what may well become law in California almost immediately, the No-escape for California Municipalities Statute:

BILL NUMBER: AB 506 AMENDED
BILL TEXT

AMENDED IN SENATE SEPTEMBER 8, 2011
AMENDED IN SENATE SEPTEMBER 2, 2011
AMENDED IN SENATE AUGUST 31, 2011
AMENDED IN SENATE AUGUST 15, 2011
AMENDED IN SENATE JULY 12, 2011
AMENDED IN SENATE JUNE 29, 2011
AMENDED IN ASSEMBLY MAY 31, 2011
AMENDED IN ASSEMBLY MARCH 31, 2011

INTRODUCED BY Assembly Member Wieckowski

FEBRUARY 15, 2011

An act to amend Section 53760 of, and to add Sections 53760.1,
53760.3, and 53760.5 53760.5, and 53760.7
to, the Government Code, relating to local government.

LEGISLATIVE COUNSEL'S DIGEST

AB 506, as amended, Wieckowski. Local government: bankruptcy:
neutral evaluation.
Under existing law, any taxing agency or instrumentality of the
state may file a petition and prosecute to completion bankruptcy
proceedings permitted under the laws of the United States.
This bill would prohibit a local public entity from filing under
federal bankruptcy law unless the local public entity has
participated in a specified neutral evaluation process with
interested parties, as defined, or the local public entity has
declared a fiscal emergency and has adopted a resolution by a
majority vote of the governing board at a noticed public hearing that
includes findings that the financial state of the local public
entity jeopardizes the health, safety, or well-being of the residents
of the local public entity's jurisdiction or service area absent
bankruptcy protections.
Vote: majority. Appropriation: no. Fiscal committee: no.
State-mandated local program: no.

THE PEOPLE OF THE STATE OF CALIFORNIA DO ENACT AS FOLLOWS:

SECTION 1. The Legislature hereby finds and declares all of the
following:
(a) Filing for Chapter 9 can reduce service levels to the
taxpayers and residents of a municipality. In some circumstances, it
can have major short- and long-term fiscal consequences for the
municipality, the surrounding municipalities, and the state. Filing
for bankruptcy protection under Chapter 9 should be considered a last
resort, to be instituted only after other reasonable efforts have
been made to avoid a bankruptcy filing or otherwise appropriately
plan for it. It is in the interest of the state, local governments,
and the public that local governmental entities have sufficiently
sound financial capacity to provide required services to the public
and meet their contractual and other obligations during any
restructuring or financial reorganization process. Furthermore, it is
in the best interest of the public, the state, and local
governmental entities that employees, trade creditors, bondholders,
and other interest holders be included in an appropriate
restructuring process and have an adequate understanding of the
financial capacity of local governmental entities and their
obligations, as a clear understanding of both is necessary for any
restructuring or reorganization process.
(b) To the extent financial relief granted through Chapter 9 can
affect debt service payments, the bondholders have a direct interest
in the Chapter 9 process, particularly prior to filing. Therefore, it
is important for those parties to be able to participate in a
prefiling confidential neutral evaluation process that could assist
parties in reaching a settlement and avoiding a bankruptcy filing or
otherwise lead to a prenegotiated consensual plan of readjustment as
clearly contemplated by Section 109(c) of Title 11 of the United
States Code.
(c) To the extent financial relief granted through Chapter 9 could
affect public employee compensation, employees have a direct
interest in the Chapter 9 process, particularly prior to filing.
Therefore, it is important for those parties to be able to
participate in a prefiling confidential neutral evaluation process
that could assist parties in reaching a settlement or otherwise lead
to a prenegotiated, consensual plan of adjustment and avoid a Chapter
9 filing.
(d) Given the connection between state allocations and local
budgets, the state has a role in assisting municipalities to address
potential insolvency with the goal of averting municipality
bankruptcy filings where possible and providing a process designed to
make the debt restructuring process in or outside of a Chapter 9
bankruptcy as cost effective and efficient as possible for all
participants.
(e) California's taxpayers who rely on public safety, senior,
recreational, municipal health, library, and other public services,
as well as those who own and operate businesses in our communities,
deserve every reasonable and appropriate effort that state and local
government can make to avoid adverse consequences of Chapter 9
bankruptcy filings, particularly where a neutral evaluation may lead
to the avoidance of Chapter 9 filing by an out-of-court resolution of
outstanding obligations and disputes.
(f) Resolving municipal and state business and financial issues in
a timely, fair, and cost-effective manner is an integral part of a
successful government and is in the public interest. It has long been
recognized that alternative dispute resolution proceedings, like a
neutral evaluation, offer an economical, discreet, and expeditious
way to resolve potentially devastating situations.
(g) Through the neutral evaluation process, the neutral evaluator,
a specially trained, neutral third party, can assist the
municipality and its creditors and stakeholders to fully explore
alternatives, while allowing the interested parties to exchange
information in a confidential environment with the assistance and
supervision of a neutral evaluator to determine whether the
municipality's contractual and financial obligations can be
renegotiated on a consensual basis.
SEC. 2. Section 53760 of the Government Code is amended to read:
53760. A local public entity in this state may file a petition
and exercise powers pursuant to applicable federal bankruptcy law if
either of the following apply:
(a) The local public entity has participated in a neutral
evaluation process pursuant to subdivision (a) of
Section 53760.3.
(b) The local public entity declares a fiscal emergency and adopts
a resolution by a majority vote of the governing board pursuant to
Section 53760.5.
SEC. 3. Section 53760.1 is added to the Government Code, to read:
53760.1. As used in this article the following terms have the
following meanings:
(a) "Chapter 9" means Chapter 9 (commencing with Section 901) of
Title 11 of the United States Code.
(b) "Creditor" means either of the following:
(1) An entity that has a noncontingent claim against a
municipality that arose at the time of or before the commencement of
the neutral evaluation process and whose claim represents at least
five million dollars ($5,000,000) or comprises more than 5 percent of
the local public entity's debt or obligations, whichever is less.
(2) An entity that may would have a
noncontingent claim against the municipality
arising out of upon the rejection of an
executory contract or unexpired lease in a Chapter 9 case and whose
claim represents would represent at
least five million dollars ($5,000,000) or comprises more than 5
percent of the local public entity's debt or obligations, whichever
is less.
(c) "Debtor" means a local public entity that may file for
bankruptcy under Chapter 9.
(d) "Good faith" means participation by a party in the neutral
evaluation process with the intent to negotiate toward a resolution
of the issues that are the subject of the neutral evaluation process,
including the timely provision of complete and accurate information
to provide the relevant parties through the neutral evaluation
process with sufficient information, in a confidential manner, to
negotiate the readjustment of the municipality's debt.
(e) "Interested party" means a trustee, a committee of creditors,
an affected creditor, an indenture trustee, a pension fund, a
bondholder, a union that, under its collective bargaining agreements,
has standing to initiate contract or debt restructuring negotiations
with the municipality, or a representative selected by an
association of retired employees of the public entity who receive
income from the public entity convening the neutral evaluation. A
local public entity may invite holders of contingent claims to
participate as interested parties in the neutral evaluation if the
local public entity determines that the contingency is likely to
occur and the claim may represent five million dollars ($5,000,000)
or comprise more than 5 percent of the local public entity's debt or
obligations, whichever is less.
(f) "Local public entity" means any county, city, district, public
authority, public agency, or other entity, without limitation, that
is a municipality as defined in Section 101(40) of Title 11 of the
United States Code (bankruptcy), or that qualifies as a debtor under
any other federal bankruptcy law applicable to local public entities.
For purposes of this article, "local public entity" does not include
a school district.
(g) "Local public entity representative" means the person or
persons designated by the local public agency with authority to make
recommendations and to attend the neutral evaluation on behalf of the
governing body of the municipality.
(h) "Neutral evaluation" is a form of alternative dispute
resolution that may be known as mandatory mediation. A "neutral
evaluator" may also be known as a mediator.
SEC. 4. Section 53760.3 is added to the Government Code, to read:
53760.3. (a) A local public entity may initiate the neutral
evaluation process if the local public entity is or likely will
become unable to meet its financial obligations as and when those
obligations are due or become due and owing. The local public entity
shall initiate the neutral evaluation by providing notice by
certified mail of a request for neutral evaluation to all interested
parties as defined in Section 53760.1.
(b) Interested parties shall respond within 10 business days of
receipt of notice of the local public entity's request for neutral
evaluation.
(c) Interested (1)
The local public entity and the interested parties agreeing to
participate in the neutral evaluation shall , through a mutually
agreed upon process, select the neutral evaluator to oversee
the neutral evaluation process and shall
facilitate all discussions in an effort to resolve their disputes.

(2) If the local public entity and interested parties fail to
agree on a neutral evaluator within seven days after the interested
parties have responded to the notification sent by the public entity,
the public entity shall select five qualified neutral evaluators and
provide their names, references, and backgrounds to the
participating interested parties. Within three business days, a
majority of participating interested parties may strike up to four
names from the list. If a majority of participating interested
parties strikes four names, the remaining candidate shall be the
neutral evaluator. If the majority of participating parties strikes
fewer than four names, the local public entity may choose which of
the remaining candidates shall be the neutral evaluator.
(d) A neutral evaluator shall have experience and training in
conflict resolution and alternative dispute resolution and shall meet
at least one of the following qualifications:
(1) At least 10 years of high-level business or legal practice
involving bankruptcy or service as a United States Bankruptcy Judge.
(2) Professional experience or training in municipal finance and
one or more of the following issue areas:
(A) Municipal organization.
(B) Municipal debt restructuring.
(C) Municipal finance dispute resolution.
(D) Chapter 9 bankruptcy.
(E) Public finance.
(F) Taxation.
(G) California constitutional law.
(H) California labor law.
(I) Federal labor law.
(e) The neutral evaluator shall be impartial, objective,
independent, and free from prejudice. The neutral evaluator shall not
act with partiality or prejudice based on any participant's personal
characteristics, background, values or beliefs, or performance
during the neutral evaluation process.
(f) The neutral evaluator shall avoid a conflict of interest or
the appearance of a conflict of interest during the neutral
evaluation process. The neutral evaluator shall make a reasonable
inquiry to determine whether there are any facts that a reasonable
individual would consider likely to create a potential or actual
conflict of interest. Notwithstanding subdivision (n), if the neutral
evaluator is informed of the existence of any facts that a
reasonable individual would consider likely to create a potential or
actual conflict of interest, the neutral evaluator shall disclose
these facts in writing to the local public entity and all interested
parties involved in the neutral evaluation. If any party to the
neutral evaluation objects to the neutral evaluator, that party shall
notify all other parties to the neutral evaluation, including the
neutral evaluator, within 15 days of receipt of the notice from the
neutral evaluator, the neutral evaluator shall withdraw and a new
neutral evaluator shall be selected pursuant to subdivisions (a) and
(b) of Section 53761.3.
(g) Prior to the neutral evaluation process, the neutral evaluator
shall not establish another relationship with any of the parties in
a manner that would raise questions about the integrity of the
neutral evaluation, except that the neutral evaluator may conduct
further neutral evaluations regarding other potential local public
entities that may involve some of the same or similar constituents to
a prior mediation.
(h) The neutral evaluator shall conduct the neutral evaluation
process in a manner that promotes voluntary, uncoerced decisionmaking
in which each party makes free and informed choices regarding the
process and outcome.
(i) The neutral evaluator shall not impose a settlement on the
parties. The neutral evaluator shall use his or her best efforts to
assist the parties to reach a satisfactory resolution of their
disputes. Subject to the discretion of the neutral evaluator, the
neutral evaluator may make oral or written recommendations for
settlement or plan of readjustment to a party privately or to all
parties jointly.
(j) The neutral evaluator shall inform the local public entity and
all parties of the provisions of Chapter 9 relative to other
chapters of the bankruptcy codes. This instruction shall highlight
the limited authority of United States bankruptcy judges in Chapter 9
such as the lack of flexibility available to judges to reduce or
cram down debt repayments and similar efforts not available to
reorganize the operations of the city that may be available to a
corporate entity.
(k) The neutral evaluator may request from the parties
documentation and other information that the neutral evaluator
believes may be helpful in assisting the parties to address the
obligations between them. This documentation may include the status
of funds of the local public entity that clearly distinguishes
between general funds and special funds, and the proposed plan of
readjustment prepared by the local public entity.
(l) The neutral evaluator shall provide counsel and guidance to
all parties, shall not be a legal representative of any party, and
shall not have a fiduciary duty to any party.
(m) In the event of a settlement with all interested parties, the
neutral evaluator may assist the parties in negotiating a
prepetitioned, preagreed plan of readjustment in connection with a
potential Chapter 9 filing.
(n) If at any time during the neutral evaluation process the local
public entity and a majority of the representatives of the
interested parties participating in the neutral evaluation wish to
remove the neutral evaluator, the local public entity or any
interested party may make a request to the other interested parties
to remove the neutral evaluator. If the local public entity and the
majority of the interested parties agree that the neutral evaluator
should be removed, the parties shall select a new neutral evaluator.
(o) The local public entity and all interested parties
participating in the neutral evaluation process shall negotiate in
good faith.
(p) The local public entity and interested parties shall provide a
representative of each party to attend all neutral evaluation
sessions. Each representative shall have the authority to settle and
resolve disputes or shall be in a position to present any proposed
settlement or plan of readjustment to the
parties participating in the neutral evaluation.
(q) The parties shall maintain the confidentiality of the neutral
evaluation process and shall not disclose statements made,
information disclosed, or documents prepared or produced, during the
neutral evaluation process, at the conclusion of the neutral
evaluation process or during any bankruptcy proceeding unless either
of the following occur:
(1) All persons that conduct or otherwise participate in the
neutral evaluation expressly agree in writing, or orally in
accordance with Section 1118 of the Evidence Code, to disclosure of
the communication, document, or writing.
(2) The information is deemed necessary by a judge presiding over
a bankruptcy proceeding pursuant to Chapter 9 of Title 11 of the
United States Code to determine eligibility of a municipality to
proceed with a bankruptcy proceeding pursuant to Section 109(c) of
Title 11 of the United States Code.
(r) The neutral evaluation established by this process shall not
last for more than 60 days following the date the evaluator is
selected, unless the local public entity or a majority of
participating interested parties want to continue and
elect to extend the process for up to 30 additional
days. The neutral evaluation process shall not last for more than 90
days following the date the evaluator is selected unless the local
public entity and a majority of the interested parties agree to
an extension.
(s)The
(s) The local public entity shall
pay 50 percent of the costs of neutral evaluation, including but not
limited to the fees of the evaluator, and the creditors shall pay
the balance, unless otherwise agreed to by the parties.
(t) The neutral evaluation process shall end if any of the
following occur:
(1) The parties execute an settlement agreement.
(2) The parties reach an agreement or proposed plan of
readjustment that requires the approval of a bankruptcy judge.
(3) The neutral evaluation process has exceeded 60 days following
the date the neutral evaluator was selected, the parties have not
reached an agreement, and the parties do not agree on
extension of neither the local public entity or a
majority of the interested parties elect to extend the neutral
evaluation process past the initial 60 day time period.
(4) The neutral evaluator confirms that a neutral evaluation was
initiated by the local public entity but that no interested parties
participated.
(4) The local public entity initiated the neutral evaluation
process pursuant to subdivision (a) and received no responses from
interested parties within the time specified in subdivision (b).

(5) The fiscal condition of the local public entity deteriorates
to the point that a fiscal emergency is declared pursuant to Section
53076.5 and necessitates the need to file a petition and exercise
powers pursuant to applicable federal bankruptcy law.
(u) If the 60 day time period for neutral evaluation has expired,
including any extension agreed to by the local public entity
of the neutral evaluation past the initial 60 day
time period pursuant to subdivision (r) , and the neutral
evaluation is complete with differences resolved, the neutral
evaluation shall be concluded. If the neutral evaluation process does
not resolve all pending disputes with creditors the local public
entity may file a petition and exercise powers pursuant to applicable
federal bankruptcy law if, in the opinion of the governing board of
the local public entity, a bankruptcy filing is necessary.
SEC. 4. SEC. 5. Section 53760.5 is
added to the Government Code, to read:
53760.5. Notwithstanding Section 53760.3, a local public entity
may file a petition and exercise powers pursuant to applicable
federal bankruptcy law, if the local public entity declares a fiscal
emergency and adopts a resolution by a majority vote of the governing
board at a noticed public hearing that includes findings that the
financial state of the local public entity jeopardizes the health,
safety, or well-being of the residents of the local public entity's
jurisdiction or service area absent the protections of Chapter 9. The
resolution shall make findings that the public entity is or will be
unable to pay its obligations within the next 60 days. Prior to a
declaration of fiscal emergency and adoption of a resolution, the
local public entity shall place an item on the agenda of a noticed
public hearing on the fiscal condition of the entity to take public
comment. The board of supervisors of a county that int
ends to take action pursuant to this section and places a notice
on an agenda regarding a proposed resolution to declare a fiscal
emergency may require local agencies with funds invested in the
county treasury to provide a five-day notice of withdrawal before the
county is required to comply with a request for withdrawal of funds
by that local agency.
SEC. 6. Section 53760.7 is added to the
Government Code , to read:
53760.7. This article shall not impose any liability or
responsibility, in law or equity, upon the state, any department,
agency, or other entity of the state, or any officer or employee of
the state, for any action taken by any local public entity pursuant
to this article, for any violation of the provisions of this article
by any local public entity, or for any failure to comply with the
provisions of this article by any local public entity. No cause of
action against the state, or any department, agency, entity of the
state, or any officer or employee of the state acting in their
official capacity may be maintained for any activity authorized by
this article, or for the act of a local public entity filing under
Chapter 9 of Title 11 of the United States Code, including any
proceeding following a local public entity's filing.
SEC. 5. SEC. 7. The Legislature
finds and declares that Section 4 of this act which adds Section
53760.3 to the Government Code, impose a limitation on the public's
right of access to the meetings of public bodies or the writings of
public officials and agencies within the meaning of Section 3 of
Article I of the California Constitution. Pursuant to that
constitutional provision, the Legislature makes the following
findings to demonstrate the interest protected by this limitation and
the need for protecting that interest:
To facilitate the process to avoid municipal bankruptcy, it is
necessary to provide for secure documents.

There are a bundle of insolvent cities in the United States.

Some file bankruptcy, some don't.

We'll get to compare how the residents of those cities fare.

My guess is that the folks who live in Harrisburg will be downright cranky that they didn't file bankruptcy when they had a chance, instead of dithering, and dithering, and dithering, with some dither sauce.

At this point, Harrisburg is facing bond defaults, missed payrolls, and a takeover by the State.

None of those would make me a happy camper if I lived in Harrisburg, I think.

On the other hand, things are pretty rosy, by comparison, in Central Falls. Payrolls are being met, and the bond payments are being met, as well.

Elections will be won or lost in the future by politicians who promise to file, or not file, bankruptcy for cities.

Imagine the campaign speech:

"My friends, if I am elected, I will immediately put this city in a bankruptcy! I promise!"

Terry Collins wrote a nice article for the Associated Press about Vallejo and it's emergence from Chapter 9 Bankruptcy.

But reading the article did not give me a warm, fuzzy feeling.

There was discussion of a report that was ignored by the City Council, which report predicted the bankruptcy unless Vallejo changed its free-spending ways.

The part of the article that scared me was the wistful way people talked about the free spending past, and the rueful tone addressing the stay-inside-the-budget present.

See, with a governmental entity of any kind, there's just no excuse for needing to file a bankruptcy.

You KNOW in advance what your income is going to be. You KNOW in advance what the costs are going to be, and you KNOW your historic debt.

You OWN a bean-counter or twenty, and their job description certainly ought to include figuring out when you're in the zone of insolvency, and beating the drums and sounding the alarms.

But the seductive power of giving away other people's money is just too much for politicians, apparently.

Now, I'm a lawyer. A bankruptcy lawyer, to be specific.

And lawyers are trained to be able to argue either side of any argument.

So I can make excuses for Vallejo and talk about how nobody expects tax revenues to go down.

Except.

All you have to do when tax revenues go down is to cut spending immediately, and intelligently (for heaven's sake, don't cut cops and firemen and garbagemen and teachers first. That's just stupid).

Ordinary people have to live within their means.

Why not cities?

And while we're at it, why not countries?

p.s. so it'll be harder for Vallejo to borrow in the future? Well, does anybody think that's a bad thing? Really?

When Central Falls filed a Chapter 9 Bankruptcy, the receiver made some hard, and necessary, decisions.

Frankly, it shouldn't have taken a receiver or a Chapter 9 Bankruptcy to figure out that a town of 18,000 people shouldn't take on debt of $80,000,000.

But I digress.

Ultimately, borrowing became an addiction in Central Falls, and a little tiny town can't print money or raise taxes to fix the problem.

That's for two reasons.

One is that if a tiny city prints lots of money, that's counterfeiting. It is punished by law, because printing lots and lots and lots of worthless money harms everyone.

Right?

The reason that Central Falls couldn't raise taxes enough to cover the shortfall is...Oh, come on! Look at the numbers!

If you lived in Central Falls and your city tax bill was high enough to pay your share of $80,000,000, what would you do?

So would I. And that would leave poor Central Falls a ghost town.

So the city didn't try that route.

Creditors wouldn't budge, so Central Falls had one option, which is also the reason there are so many consumer bankruptcy cases these days.

But there are some nice things that have come out of the Central Falls Bankruptcy.

One is a wave of volunteers to help out with the library and similar services.

And that's a good thing.

There are a lot of nice places to live in the United States.

Some of them, like Central Falls, with its overwhelming debt of $80,000,000 in a city of fewer than 20,000, have already filed a Chapter 9 Municipal Bankruptcy.

Some of them, like Jefferson County, have contemplated bankruptcy so much that the locals have bankruptcy fatigue, and don't want to hear about it anymore. I read an unofficial poll that suggested the residents wanted to file, and not talk about it anymore.

But Gilbert, AZ is a lovely city with a growing population and a great credit report, which doesn't look as though it'll be downgraded anytime soon.

Now, that's a good thing, because even though I'm an Arizona Bankruptcy Lawyer, I don't like to see cities and other municipalities need to file bankruptcy cases.

This is an interesting video concerning the economic troubles of cities and states; if you have too much month left at the end of your money, bankruptcy will at least cross your mind.

And, apparently, it also crosses the minds of folks who are running cities and other municipal entities.

You'll hear these commentators talking about the fact that bankruptcy for cities and municipalities is "bad", because of the effect that it will have on bondholders.

On the other hand, it seems to me that at the point that the bondholders aren't getting paid, Chapter 9 Bankruptcy Cases will get filed, like the one in Central Falls that was filed yesterday!

It appears that a poster child for Municipal Bankruptcy Cases under Chapter 9 is in play.

"From the ashes of bankruptcy Central Falls will rise again," said the state-appointed receiver for Central Falls, Rhode Island, who caused the bankruptcy filing to occur, as a "last resort".

The little city has only about 19,000 inhabitants, but has unfunded pension liabilities of $80,000,000, and runs a deficit of about $5,000,000 per year.

If it were a business, and I say this as a bankruptcy lawyer with thirty years of experience, I would have suggested that it file a Chapter 7 Liquidation Bankruptcy, because as businesses go, it's a hobby.

After all, if you lived in Central Falls, and you needed to pay your chunk of $80,000,000 unfunded liability in that city, what would you do?

Me?

I'd move.

Fast and far!

p.s. we both know that this isn't the last Chapter for Chapter 9 Municipal Bankruptcy Filings in the United States. The Big Three aren't automakers anymore. They're the municipalities that are so underwater with debt that a bankruptcy looks like the only option, not the best option. And those are Jefferson County, Detroit, and Harrisburg, Pa.

But we have to give plucky little Central Falls an Honorable Mention in the "Spending Other People's Money Like a Drunken Sailor" Competition. With only 19,000 inhabitants, and five million a year negative cash-flow, and EIGHTY MILLION IN UNFUNDED LIABILITIES, brave little Central Falls worked hard to be a contender!

And now maybe it will reinvent itself through bankruptcy so that it learns to live on its income.

That's a pretty good lesson to learn.

p.s. what kinda wacky-tabaccy could possibly cause politicians to spend enough so that each and every citizen of a tiny city of 19,000 people was looking down the barrel of unfunded liabilities of $80,000,000?

Does it seem to you that those politicians were buying votes with other people's money?

Or maybe not; you never know, after all. Maybe they were just generous.

With other people's money.

The United States is having some problems with debt these days.

Ordinary consumers are laden with guilt when they think about having too much debt, after losing a job, a bout with cancer, a heart attack, a divorce, and losing their other job.

But Cities and Counties and States and, well, the United States seem pretty relaxed about walking down a road that involves saying, "Charge it!"

There are now three major municipalities in the United States that may start a landslide of filings under Chapter 9 that will dwarf most bankruptcy filings of the past.

The most-talked-about-teetering-on-the-edge-of-bankruptcy municipality is Jefferson County, which has famously hired famous bankruptcy attorney Kenneth Klee; as to creditors, it's always good to send the very best message that you're serious, right?

Harrisburg, Pa., needed to pay interest of $68,000,000 on bonds. Harrisburg has a yearly total budget of about three million dollars south of that.

Does anybody else see a problem with that?

Then there's Detroit, which floated bonds to the tune of $250,000,000, which bonds were grabbed up quickly because the Michigan promised it would cover defaults on those bonds.

Does that seem like a great idea to you?

Me, neither.

Not long ago when I said "Big Three" I was talking about the three biggest automakers in the world, all U.S. Corporations.

What a difference a debt makes.

I have read polls suggesting that 85% of those polled believed that a filing was a good idea.

This is one of those few cases where the agonizing over bankruptcy vs. non-bankruptcy options is happening with a municipality, rather than an individual.

The "B" word is hard to take at first for anybody.

After all, "bankruptcy" is based on the an Italian phrase meaning "broken bench", which wasn't a very pretty debt-management technique when it was practiced in Florence in the late Middle Ages.

But I was entertained by the article in Bloomberg by Margaret Newkirk, Martin Z. Braun and Kathleen Edwards.

The general idea behind the article is that people in Jefferson County are experiencing "sewer fatigue", and that they just want closure on the constant talk about their debt crisis.

Frankly, that's a pretty common emotional experience in connection with bankruptcy.

And once people make up their minds to file a bankruptcy, they tend to want to do it right away.

That can be a problem for some folks, if they don't pass the means test!

But there are many ways to skin that cat.

None of them fun, or easy, of course.

But that's the way the banks wanted it when they lobbied Congress to get the 2005 Amendments to the Bankruptcy Code that led to the Bankruptcy Gold Rush of '05, and the Great Bankruptcy Drought of '06 and '07, which in turn led to the "deep mining" techniques of the panel trustees in bankruptcy cases today.

The Jefferson County Commission hired bankruptcy counsel.

It didn't make a decision to file a Chapter 9 Bankruptcy, but it hired a specialist who knows how to handle this sort of case, because Kenneth Klee worked on the Orange County Chapter 9 Bankruptcy Case about a decade ago.

It never ceases to amaze me that the simple act of hiring a serious, experienced, credentialed, and well-reputed bankruptcy specialist has effects.

Kinda like hiring a particularly fast gunfighter for your side of the corral.

See, when a litigator says that his clients are going to file bankruptcy, the usual response of opposing counsel is "Yeah, yeah, we've heard it all before."

But when those folks go and hire a real bankruptcy lawyer, that increases the chances of settlement dramatically.

And sometimes (not always) that means the bankruptcy doesn't need to be filed.

Also note that in consumer cases, the best show-and-tell exhibit for a settlement conference are draft bankruptcy schedules, meticulously completed.

On the other hand, once the potential debtor has filled out the schedules, that means they have also crossed a psychological Rubicon, and are much more likely to say "Forget the settlement; let's file!"

Let's talk about the "B" word, bankruptcy.

The folks in Jefferson County are negotiating with creditors.

How do they deal with that negotiation when it gets tough?

Well, Jefferson County brings in Kenneth Klee, an experienced, credentialed, superlative bankruptcy lawyer, to talk.

And talk's cheap, except when you hire an experienced, credentialed, superlative bankruptcy lawyer.

But if talking with Kenneth Klee at $1,000 per hour is helpful in making the biggest Chapter 9 Proceeding in history disappear before it happens, that's probably a pretty good investment.