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Boston University School of Law




The recent rising failure of municipalities has not produced the avalanche that some expected.1 Yet concerns have been raised that the future will spawn more failures.2 New York City and other municipalities face soaring pension, Medicaid, and retiree health care costs.3 New York City’s neighboring counties face similar challenges; Yonkers, Suffolk, and Nassau Counties each face their own set of fiscal problems.4

Municipalities that have failed, or are likely to fail, have raised a number of legal issues implicated by their inability to pay their debts. Some questions seem new. For example, are employees’ pension benefits “debts” or are they “social obligations”?5 The status of pensions is unclear and is being litigated.6 Additionally, the results of default are serious and can result in loss of access to the capital markets.7 Adding even more uncertainty to this situation, state provisions about municipal bankruptcy filings vary.8 They range from closing the door to bankruptcy proceedings to opening the door wide to them.9

In 2011, “Rhode Island passed a law giving bondholders first lien on revenue,” which allowed a municipality to file for Chapter 9 protection.10 Following the law’s passage, “the city’s receiver . . . invalidated pension agreements and finalized new settlements that cut benefits by 55%.”11 In Pennsylvania, “a federal court invalidated a Chapter 9 filing by the City Council in [the] capital city Harrisburg.”12 Despite several attempts, courts have rejected the Harrisburg City Council’s efforts to move forward with bankruptcy over the opposition by several municipal constituents, including the Harrisburg mayor.13

Control boards are similar to bankruptcy boards. However, some argue that control boards greatly overcharge for their services, while “[b]ankruptcy brings the banks back into play.”14 These commentators further contend that “[t]here’s a hidden meaning behind which mayors favor bankruptcy and which mayors favor a control board.”15

I would like to share from the municipality debacle a few lessons for future behavior. The task is daunting because so many conflicting interests are involved. Nonetheless, it may be worth thinking about how, and creating processes by which, the conflict might be resolved.



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