… how are the various states obligated to help them? I assume it totally varies by state but is there some kind of standard forced upon them?
Is there anything at all preventing the federal govt from “assisting”? I can imagine that some states would prefer not to have the kind of assistance that the feds would be inclined to give.
Municipal bankruptcy is handled under Chapter 9 of the US bankruptcy code.
It works largely the same as any bankruptcy organization, with the Court supervising a process whereby the municipality negotiates with its creditors.
The state is not obligated to help in any way. But it may find it advantageous to do so, since if the city is so destitute that it faces no choice but disincorporation, the state will assume the city’s debts.
There is nothing that prevents the federal government from assisting a bankrupt city monetarily. I’m not aware of them doing that on a regular basis, though. The bankruptcy courts are of course part of the federal judicial branch.
Also, often when a municipality ‘goes broke’, it’s not actually a process of formally going to bankruptcy court, but rather something like the state taking over the municipal government to a degree, with a state-appointed Receiver who has the authority to cut spending and raise taxes sufficiently to get the books at least sort-of balanced (remember, municipalities only exist because state law lays out how municipalities work, so the state can do things like this to municipalities).
That appears to be contradicted by **friedo’s ** link to Chapter 9 of the federal Bankruptcy Code:
In PA, municipalities decide whether to declare Bankruptcy; the State decides whether to “take over” financially distressed municipalities.
Is that in fact the case? A state is required to assume the debts (all debts) of any municipality that can’t pay ??
Municipal governments have no sovereignty; they are wholly created creatures of the state government, and the state is ultimately responsible for all their assets and liabilities.
I think Quercus was referring to cases where the state wants to avoid bankruptcy court and so steps in to take things over and get the budget back on track. An example would be the decade-long kerfuffle in Nassau County, New York.
or the mess in Detroit.
Cite? A municipal corporation is not a subdivision of the state nor an agency empowered to act on the state’s behalf.
That is exactly what a municipal corporation is. At least in the United States.
The “Dillon Rule” is the general theory of state preeminence over municipalities and many court cases reference it.
Many states grant some amount of home-rule powers to municipal corporations via a general municipal law or individual charters, but these can be taken away just as easily, by a new act of the legislature. A municipality has no power to act independently without explicit permission from the state that created it.
Thanks for the info!! Are there any examples of states getting out front of problems that “their” municipalities are creating?
Correct. But that’s a very different thing from saying the municipality can act *on behalf of *the state; that the municipal corporation can create debts which the state is obligated to repay.
Private corporations are created by state law as well, but the state is not obliged to assume their debts in bankruptcy.
I don’t understand what you mean. If a municipal corporation with debt disincorporates, then the state is responsible for that debt. It doesn’t go away. The state may assume the debt directly or it may go to a higher-level municipality like a county government, depending on state law or custom.
If a municipality does not wish to disincorporate, then its choices are Chapter 9 bankruptcy (if the state allows) or some kind of takeover/bailout by the state government.
As an example, in New York, the General Municipal Law makes the debts of a disincorporated local government the responsibility of the town that it’s in.
Nobody said that states are required to assume debts in a corporate bankruptcy. Chapter 9 bankrupcties are debt reorganizations. But the state is ultimately responsible a municipality’s liabilities if that municipality ceases to exist.
My point was just that the fact that municipalities are creations of state law doesn’t tell us what happens to their debts. State law may indeed typically provide that states shall assume a disincorporated city’s debts, but nothing about the power to create or destroy a city requires the state to do so. The state could provide to the contrary, although this would presumably raise its cities’ borrowing costs.
Says who?
Just because the municipal corporation is created by the state doesn’t make it a general agent of the state, with the power to act in all ways as if it were the state. If states were responsible for the debts created by their cities, there would be no need to compile credit ratings for thousands of counties, municipalities, and special districts.
Well, Michigan is trying to with its Emergency Financial Manager laws. Of course, the incompetant fuckups who drove their cities into the dirt are fighting them every step of the way, along with unions and other who benefit from the status quo.
Debt goes away all the time.
Your cite doesn’t give an example of a state being required to assume the debt of a municipality.
Can anybody give examples of states that are in fact required to assume a municipality’s debt?
Anybody else???
Are some states required to honor the contracts and assume the debt of municipalities?
How about the federal gov’t and the states?