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UNDERNEWS

Undernews is the online report of the Progressive Review, edited by Sam Smith, who covered Washington during all or part of ten of America's presidencies and who has edited alternative journals since 1964. The Review, which has been on the web since 1995, is now published from Freeport, Maine. We get over 5 million article visits a year. See prorev.com for full contents of our site

February 22, 2010

BANKRUPTCY SAFETY NET FOR CITIES

Wall Street Journal - Just days after becoming controller of financially strapped Harrisburg, Pa., in January, Daniel Miller began uttering an obscure term that baffled most people who had never heard it and chilled those who had: Chapter 9.

The seldom-used part of U.S. bankruptcy law gives municipalities protection from creditors while developing a plan to pay off debts. Created in the wake of the Great Depression, Chapter 9 is widely considered a last resort and filings under it are more taboo than other parts of bankruptcy code because of the resulting uncertainty for everyone from municipal employees to bondholders.

The economic slump, however, is forcing debt-laden cities, towns and smaller taxing districts throughout the U.S. to consider using Chapter 9. As their revenue declines faster than expenses, some public entities are scrambling to keep making payments on municipal bonds. And that is causing experts to worry about the safety of securities traditionally considered low risk...


Since Chapter 9 was enacted in 1934, just 600 cases have been filed under the code, partly because they require state approval. Some municipalities have found escape hatches, such as raising taxes. The largest Chapter 9 case was filed in 1994, when Orange County, Calif., lost $1.6 billion on wrong-way bets on interest rates...

To keep cities and towns from toppling into Chapter 9, more states are likely to make use of state laws to assume oversight of financially distressed municipalities, he predicts. Pittsburgh, for one, has been operating under such a law since 2004.


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