Bankruptcy Rarely Offers Easy Answer for Counties

By CAMPBELL ROBERTSON, MARY WILLIAMS WALSH and MICHAEL COOPER
Published: November 10, 2011

BIRMINGHAM, Ala. — When Alabama’s Jefferson County filed for the largest municipal bankruptcy in American history this week, it looked a little like another domino had fallen.

Harrisburg, the capital of Pennsylvania, filed for bankruptcy last month. The tiny city of Central Falls, R.I., filed in the summer. Hamtramck, Mich., tried to declare bankruptcy last year but was stopped by the state. From coast to coast, cities have had to cut services, lay off workers and raise taxes as the downturn has lingered.

Municipal bankruptcies remain extremely rare, and each of these cases can be viewed as unique, a one-off: Jefferson County was undone by a major sewer project marred by corruption, Harrisburg by borrowing more than it could repay for a disastrous incinerator project, Central Falls by pension problems, and Hamtramck by the woes of the auto industry. Viewed another way, though, they show how the downturn has left the nation’s most distressed cities with few options for papering over huge problems, and left some desperate elected officials placing their hopes in bankruptcy judges.

Their desire for simple solutions may be in vain, though: for constitutional reasons, the part of the federal bankruptcy code that municipalities use, Chapter 9, sharply limits the power of bankruptcy judges to intervene in local governance.

“Chapter 9 really puts the judge more in the position of being a referee than somebody who can really run the county,â€