In his Jan. 14 column, "Why So Many Big Bankruptcies?," Robert Slavin wrote that this year, for the municipal bond industry, "marks the midpoint in what may turn out to be the decade of the bankruptcy." It almost reminds one of the ludicrous claims made by Meredith Whitney, but bears little reflection of reality. The truth is how remarkable it is how few municipal bankruptcies were sought in the wake of the most severe fiscal crisis to hit local governments since the Great Depression — as the Great Recession's most fearsome impact was on the housing market, slamming the single most critical source of local revenues.
According to the 2012 Census of Local Governments, there are 89,004 local governments in the U.S. These governments — and their elected leaders, the vast majority of whom have full-time jobs, families, and many other responsibilities have confronted perhaps the greatest fiscal challenges in nearly a century, struggling to balance their budgets in the wake of the greatest economic downturn since the 1930's. Yet, despite the direst predictions from commentators, exceptionally few have opted to seek Chapter 9 municipal bankruptcy protection. Indeed, for 2013, there were 1,038,720 non-municipal corporate bankruptcy filings — a level slightly ameliorated last year, compared to the paucity of municipal chapter 9 filings. Moreover, unlike the vast federal bailouts to non-municipal corporations in the wake of the Great Recession, there was not a single federal bailout. Rather, federal aid to local governments has continued to decline. Or, as in its recent report, the State Budget Crisis Task Force noted one theme arising out of the Great Recession: fiscal stress runs downhill. As a result, local governments are badly strained.
In the U.S., local governments are defined and structured differently in every state — without seeming rhyme or reason. Nevertheless, local governments make up not just the oldest kind of government in our country, but also the only level in the United States that affects every American, every day. From the most basic needs of ensuring the provision of streets, drinking water, sewage treatment, traffic safety and snow removal, schools, etc. — to the most critical needs of any American; local governments are the 911 of the 21st century. When a super storm hits, when a home catches fire, when a gunman kills small children in a school, when terrorists attack the Pentagon; one dials 9-1-1. The most essential and critical services government provides in America come from local governments. We all have to understand that Paris had no way to plan and incorporate in its budget for this year the horrifying attack — but this is the reality for Boston and every other municipality in America.
In their report, "Good News for Private Sector Jobs, Bad News for State-Local Government Jobs," the Rockefeller Center's Lucy Dadayan and Donald Boyd noted that last week's report from the Bureau of Labor Statistics demonstrates that while there has been relatively strong private sector employment, the picture remains "rather gloomy for state and local governments: Seven years after the start of the Great Recession, their employment is still below the levels reported in December 2007, the first month of the Great Recession." That is, even as total nonfarm employment rose by 1.4 percent (2.0 million jobs) over the seven year period since the start of the Great Recession in December 2007, with private sector employment growing by 2.1 percent; state and local government employment remains below prerecession levels: State government employment is down by 1.1 percent and local government employment is down by 2.3 percent (-340,000 jobs): state and local government employment is far weaker seven years after the start of the Great Recession than it was seven years after the start of any of the previous four recessions, the Center notes, adding that local government employment accounts for the largest number by far of government jobs lost in the current recession. According to the Center, the Great Recession led to deep cuts in state and local government jobs — much deeper than any other recession in the last five decades. That is, the women and men, mostly unpaid, who are the elected leaders of the nation's towns, school boards, cities, and counties, unlike the federal government, have made hard choices and significant reductions in their budgets — even as they have been confronted with reduced revenues, but greater needs. As of last month, state and local government employment is down 3.0 percent, or 598,000 jobs, from the peak level recorded in August 2008. That is, rather than seeking a bailout or some supposed protection from federal bankruptcy courts, more than 99% of local governments have made deep cuts in local government jobs, and worked much harder to meet the significantly increased demand for key public services that, in many cases, is rising.
Providing for the continuity of essential services matters. Indeed, what distinguishes Chapter 9 municipal bankruptcy from other kinds of corporate bankruptcy in federal law is the provision to ensure continuity in the provision of essential services. When a corporation faces default, it can simply take the keys and hand them over to a federal bankruptcy court — which can sell the remainder assets and distributed the proceeds to the debtors and shareholders. But when a municipality faces default, that is not an option. The toilets still need to flush. The 911 call because of a fire or accident threatening a life may not be ignored. For the child whose chance for success rests upon learning — access to schooling, to health care, to safety are uniquely local challenges — whether the local government has disparate levels of poverty, crime, inadequate fiscal resources or legal authority; the essential responsibility may not be abjured.
It is valuable to look at a timeline of Jefferson County, Alabama, to obtain a sense of the extraordinary dimensions of the challenge the County faced:
- Nov. 10, 2010: The five-member Jefferson County Commission is seated;
- Dec. 1, 2010: Circuit Judge Charles Price orders the county to stop imposing its occupational tax immediately. Price rules that the 2009 tax law was unconstitutional because the Legislature did not properly disclose key elements of the bill before the special session that led to its passage;
- Jan. 25, 2011: The commission votes to cut $31.2 million from the fiscal 2011 budget after three days of budget hearings;
- March 16, 2011: The Alabama Supreme Court affirms Price's ruling and throws out Jefferson County's 2009 occupational tax law and business license fee, which in fiscal 2010 had generated $74 million, about one-fourth of the county's general fund;
- April 12, 2011: The commission votes to close four satellite courthouses and switches 2,913 hourly workers to a four-day workweek in an effort to cut $21 million annually from the budget. The 32-hour workweek, effectively a 20% pay cut, does not apply to 445 salaried workers;
- April 27, 2011: More than 60 tornadoes carve
1,100 miles of destruction across Alabama, leaving victims in Jefferson County communities such as Pratt City, Concord, Pleasant Grove, North Smithfield, Edgewater and McDonald Chapel; - Jan. 23, 2012: A pre-dawn tornado sweeps through Jefferson County, killing two people, injuring scores of others and damaging or destroying roughly 500 homes.
It is beyond extraordinary, if one thinks about it, that so few cities and counties have filed for federal bankruptcy protection in the wake of the Great Recession — the first severe recession in U.S. history that affected local governments more than any other level because of the collapse of the mortgage market. It is a testament to the women and men who have chosen to serve.
Frank Shafroth is Director of the Center for State and Local Leadership at George Mason University.
Note: The reference to the "decade of the bankruptcy" was added by an editor to highlight the news value of the increase in municipal Chapter 9s in the 2010s, when four of the five biggest cases have been filed. The spate of bankruptcies, including Detroit's filing, distinguishes this decade from the seven-plus decades since Chapter 9 became available to munis. The article ties the increase in Chapter 9 filings to the Great Recession, among other factors — and notes that default rates on munis remain low.
