Chapter Nonsense

There’s a notion that bankruptcy can cure what ails municipal finance. Like pension obligations. But Chapter 9 is rare for a reason.

There’s a bunch of inexpert testimony out there regarding Chapter 9 bankruptcy. Chapter 9 is the portion of the Federal Bankruptcy Code that applies to municipalities. A host of bloggers, busybodies, and bigmouths are suggesting that municipalities will strategically file for bankruptcy in order to get the courts to do what they don’t have the political will to do: reduce their pension obligations to the teachers, librarians, and firefighters who work for them.

Hey, the airlines have done it for years. And cities like Harrisburg have made no secret of their hiring bankruptcy counsel. But municipal bankruptcy is different from corporate bankruptcy. Chapter 9 filings are debt adjustments, not reorganizations. Only a state court can reorganize municipal debt.

Also, municipalities can’t file just because they face difficult decisions. The municipality must be insolvent, but this has a different meaning under Chapter 9. Insolvency means they don’t have the cash to pay their debts as they come due. It’s not just a balance-sheet test—it’s a cashflow test. Future issues don’t entitle a municipality to file. It has to be a current cashflow crisis.

Chapter 9 adjusts the debts—it doesn’t change the government. That has to be done by the State, the State Courts, or the voters. There are things that bankruptcy can do—like staying lawsuits and legal writs. But those have to come first.

Municipal bankruptcy is like a slow moving train. It’s rarely a surprise.

Douglas R. Tengdin, CFA
Chief Investment Officer
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By | 2017-07-17T12:35:17+00:00 January 7th, 2011|Global Market Update|0 Comments

About the Author:

Mr. Tengdin is the Chief Investment Officer at Charter Trust Company and author of “The Global Market Update”. The audio version of each post can be heard on radio stations throughout New England every weekday. Mr. Tengdin graduated from Dartmouth College, Magna Cum Laude. He received his Master of Arts from Trinity Divinity School, Magna Cum Laude and received his Chartered Financial Analyst (CFA) designation in 1992. Mr. Tengdin has been managing investment portfolios for over 30 years, working for Bank of Boston, State Street Global Advisors, Citibank – Tunisia, and Banknorth Group. Throughout his career, Mr. Tengdin has emphasized helping clients manage their financial risks in difficult environments where they can profit from investing in diverse assets in diverse settings. - Leave a comment if you have any questions—I read them all! - And Follow me on Twitter @GlobalMarketUpd

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