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.

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s


%d bloggers like this: