Chapter 9 Is For Municipal Bankruptcy

 There is a lot of talk about municipal bankruptcy.  For the record, Chapter 9 of the U.S. bankruptcy code is expressly written for municipalities.   Under the terms of Chapter 9, municipalities can restructure obligations – but cannot renege on the payments – so it is like a bankruptcy for an ongoing concern in the corporate sector (chapter 11).   The talk in Washington and among some corporate bankruptcy law firms is to allow municipalities to renege on their obligations to pay contracts and provide services.  It is a dangerous concept, to be sure, and I suspect it is more smoke than fire. 

Pensions and Other Post Employment Benefits will be the fatal terrain in the coming battle.  We have seen how corporations have declared bankruptcy and jettisoned their pension obligations into the federal life raft entitled: Pension Benefit Guaranty.   As you probably already know, the PBG is underfunded (i.e. insolvent).  Municipalities do not have access to the PBG, currently.  However, I suspect the municipal workers will find themselves in the same leaky life raft as the airline workers and steel workers at the end of the day.

Bondholders should be paid on a timely basis.  In the event of widespread defaults, it will tend to be more technical in nature (timing issues related to revenue recognition and expense payments) and we will provide you with the recovery gradings.   There will be a lot of problems as the politicians restructure the public sector’s wage and benefit packages.


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