The Next Financial Hurricane? Rethinking Municipal Bankruptcy in Louisiana

AuthorLauren M. Wolfe
PositionJ.D./D.C.L., 2012, Paul M. Hebert Law Center, Louisiana State University
Pages555-590
The Next Financial Hurricane? Rethinking Municipal
Bankruptcy in Louisiana
I. INTRODUCTION: IS THERE A STORM BREWING?
A combination of the recent economic recession, the declining
housing market, and growing public pension liability concerns has
incited significant chatter about cities and towns in financial
crisis.1 Municipalities are struggling to pay their debts; at the same
time, states are severely cutting funds to local governments,
forcing them to provide essential services from their dwindling
coffers.2 The mantra “do more with less” sounds good, but the
reality is that many governments seem unable to cut spending or
raise revenues sufficiently to meet their obligations.3 Across the
nation, many cities struggling to balance their budgets are
considering bankruptcy as a solution to the problem.4 Chapter 9 of
the U.S. Bankruptcy Code provides relief to municipalities that can
Copyright 2012, by LAUREN M. WOLFE.
1. For the first time in history, Moody’s Rating Agency gave a negative
outlook for the U.S. local government sector as a whole. Omer Kimhi, Chapter
9 of the Bankruptcy Code: A Solution in Search of a Problem, 27 YALE J. ON
REG. 351, 352 (2010).
2. For fiscal year 2010, 48 out of the 50 states “face[d] budget shortfalls,”
totaling $192 billion. Helen Avery, Judgement Day Nears for the Benighted
States, EUROMONEY, Sept. 1, 2010; see also Ameet Sachdev, Official:
Municipal Bankruptcy Fears Overblown, CHI. TRIB., Sept. 21, 2010, at 19
(“With states also financially strapped, lifelines to cities may dwindle and
bankruptcy could become a more attractive option.”); Omer Kimhi, Reviving
Cities: Legal Remedies to Municipal Financial Crises, 88 B.U. L. REV. 633, 639
(2008).
3. Local governments rely on taxes for revenue, which are collected only
once or twice a year. In order to fund projects and provide services that tax
revenues cannot immediately fund, they issue municipal bonds. For an overview
on why municipalities default on their debt obligations, see Kimhi, supra note 2,
at 63747.
4. Los Angeles’s former mayor suggested the city pursue bankruptcy in
light of its fiscal woes. Rick Orlov, City Budget Crisis Bankruptcy: L.A.’s Best
Option? Council: Some Advocates Say Filing Would Allow for Pension, Benefits
Reform, DAILY NEWS (Los Angeles, Cal.), Apr. 11, 2010, at A1. Some city
officials for Harrisburg, Pennsylvania have recommended the state capital file
for bankruptcy to solve its budget deficit of $164 million over the next five
years. Harrisburg in Crisis: A Burning Issue, ECONOM IST, Mar. 20, 2010, at 70.
Jefferson County, Alabama, encompassing the city of Birmingham, became the
largest municipality in history to file for bankruptcy after a settlement deal for
the County’s $3.14 billion debt arising from a court-ordered sewer project fell
through. Melinda Dickinson, Alabama County Files Biggest Municipal
Bankruptcy, REUTERS, Nov. 10, 2011.
556 LOUISIANA LAW REVIEW [Vol. 72
no longer meet their financial obligations.5 Although it is a
relatively rare phenomenon, several states, including Louisiana,
have witnessed their cities and towns file for bankruptcy.6
Municipal bankruptcy is a drastic measure with significant
consequences and thus should be considered only as a last resort.7
Although bankruptcy can give a municipality temporary relief
from debt, it can also result in long-term economic damage and
adversely affect its neighboring cities or even the state as a whole.8
Recognizing the gravity of these risks, the Louisiana Legislature
enacted conservative legislation that imposes state approval
requirements in addition to those set forth by federal law.9 In order
to file, the Louisiana State Bond Commissioncomprised of
numerous top state officials—must first approve the petition.10
Even if bankruptcy is pursued as a last resort, these additional state
5. Only Chapter 9 of the U.S. Bankruptcy Code is available to
municipalities. 11 U.S.C. § 109(a) (2008).
6. In 1999, the Lower Cameron Parish Hospital Service District became
the first and only Louisiana municipality to file for bankruptcy under Chapter 9.
The hospital’s chief executive officer stole over $400,000 in hospital funds by
fraudulently charging Medicare $1.4 million in falsified medical services. The
hospital subsequently owed Medicare $8 million for the overpayments, but only
had a liquidation value of $160,000. The hospital district emerged from
bankruptcy a year later, at which time the residents voted to lease the hospital to
a private management company. See Mary Chris Jaklevic, Ex-CEO Pleads
Guilty to Medicare Fraud; La. Hospital Exec Faces Five Years in Prison for
Bilking Medicare out of $1.4 Million, MODERN HEALTHCARE June 25, 2001, at
15; Mary Chris Jaklevic, Bankrupt But Open: La. Hospital that Owes HCFA
Millions Wins Reprieve, MODERN HEALTHCARE Oct. 16, 2000, at 50.
7. See discussion infra Part III.B.2.
8. The main arguments against municipal bankruptcy are summarized by
Christopher Smith, Provisions for Access to Chapter 9 Bankruptcy: Their Flaws
and the Inadequacy of Past Reforms, 14 BANKR. DEV. J. 497, 52122 (1998).
See also discussion infra Part III.B.2.
9. LA. REV. STAT. ANN. § 13:4741 (2006); LA. REV. STAT. ANN. §
39:1410.64 (2005); see also discussion infra Part IV.C. Federal law requires the
states to enact statutes specifically granting access to Chapter 9. 11 U.S.C. §
109(c)(2) (2006); see also discussion infra Part III.A.2. Louisiana enacted its
municipal bankruptcy statute in 1935. LA. REV. STAT. ANN. § 13:4741 (2006).
“Louisiana . . . ha[s] challenging approval requirements, specifically prohibiting
Chapter 9 filings unless certain conditions are met.” Daniel J. Freyberg,
Municipal Bankruptcy and Express State Authorization to be a Chapter 9
Debtor: Current State Approaches to Municipal Insolvencyand What Will
States Do Now?, 23 OHIO N.U. L. REV. 1001, 1011 (1997).
10. The State Bond Commission is comprised of the State treasurer,
governor, lieutenant governor, president of the senate, speaker of the house,
secretary of state, attorney general, commissioner of administration, chairmen of
the legislative fiscal committees and two legislators. LA. REV. STAT. ANN. §
39:1401(A) (2005).
2012] COMMENT 557
approval requirements may present significant hurdles for
Louisiana municipal governments to overcome.
This Comment argues that the State Bond Commission
approval requirement is sound in theory but not in practice.
Because municipal bankruptcy has significant political
consequences, obtaining the State Bond Commission’s approval
may be virtually impossible. Moreover, there is a more qualified
person, with fewer political motivations and a more comprehensive
understanding of the municipality’s predicament who can decide
which filings to approve. The fiscal administrator—who is
appointed to manage a municipality’s financial affairs during a
fiscal crisisis that person. This Comment posits that giving the
fiscal administrator filing approval authority will make the
management of municipal financial crises more efficient and
effective and will ensure that bankruptcy is pursued only as a last
resort.
Part II begins with a discussion of national and local trends in
municipal bankruptcy. Part III provides a general overview of
Chapter 9 of the U.S. Bankruptcy Code with an analysis of the pros
and cons of the process. Part IV describes Louisiana’s laws on
municipal debt, fiscal administration, and bankruptcy
authorization. Part V explores the positive and negative aspects of
the current legislation. Following this analysis, Part VI
recommends amending Louisiana’s legislation to authorize the
fiscal administrator to approve a Chapter 9 filing and establishing
statutory guidelines to assist the fiscal administrator in this
decision. As a result of these modifications, this Comment
envisions a more predictable and streamlined bankruptcy process
for the municipalities of Louisiana.
II. WILL IT BE A CATEGORY I OR CATEGORY V HURRICANE?
A. An Almanac of Municipal Bankruptcy
Approximately 600 municipalities have filed for Chapter 9
bankruptcy since 1937.11 Of those cases, some of the most
publicized involved California municipalities.12 In 2009, the city of
11. Compared with the 15,000 Chapter 11 bankruptcy filings in 2009 alone,
municipal bankruptcies are relatively rare. Matt Miller, Taboo: Chapter 9, THE
DEAL (Mar. 19, 2010, 2:00 PM), http://www.thedeal.com/newsweekly/2010/03/
taboo:-chapter-9/.
12. The most famous Chapter 9 proceeding involved Orange County,
California. In re Cnty. of Orange, 183 B.R. 594 (Bankr. C.D. Cal. 1995). In
1994, the County made headlines after its treasurer’s high-risk investment
scheme failed due to rising interest rates. The County filed for Chapter 9 with

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