Through the complexity of bankruptcy in local governments.

Author:Scorsone, Eric


Since the great recession of 2008, municipal governments across the world have faced varying degrees of financial distress. This has been caused by falling revenues, cuts in intergovernmental aid, investment losses to pension funds and growing cost pressure from social service programs. In some locations, financial stress has translated into financial crisis or emergency. In these cases, municipal governments face the prospect of running out of cash and facing a potential liquidity crisis and even bankruptcy where applies. This causes not only severe downturns in the provision of essential local public services, such as road maintenance, local police, or social services, but also has effects on local economies, as not paid (local) providers might then go to bankruptcy themselves. For example, in Italy official statistics by the national central bank (Banca d'Italia) highlights that local (regional--including healthcare, provincial and municipal) public sector unpaid accounts payable account for about 5 percent of national GDP.

While only a few years ago the interest on financial health assessment and the related probability of falling into bankruptcy situations of local governments was usually limited to long term loans admissions by banks, today this aspect has become of utmost importance by the providers of local governments in their customers' selection and credit management strategies.

The law literature has paid much more attention to municipal bankruptcy than public administration, public finance or economics. Very little is truly understood regarding the dynamics that cause a municipal bankruptcy filing or the policy impact of the bankruptcy process itself on municipal governments. This special issue of Public Finance and Management is deigned to being a broader research debate on municipal bankruptcy issues.

Municipal bankruptcy is relatively rare situation, even in the United States where it is most common. Many countries do not even have a provision for a municipal bankruptcy filing but rather a higher level, usually the central, government takes charge of the situation. In the United States since 2008, there have been a number of high profile bankruptcy filings. According to an analysis by Governing magazine in December of 2013, there were 38 municipal bankruptcy filings in U.S. federal court. Of those, only 8 were general purpose municipal governments. These included Detroit, MI, San Bernardino, CA, Stockton, CA...

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