Is Bankruptcy Right For Our Municipal Governments?

02/27/2013 06:10 pm ET Updated Apr 29, 2013

Washington's "cliff" is a trickle down fiscal crisis impacting states and municipalities throughout America. Thousands of state and municipal officials are grappling with budget shortfalls created by a growing reliance on federal funds soon to dry up. Public pension promises that cannot be fulfilled, expensive union contracts and unsustainable government growth are stretching many municipalities to the breaking point.

When the debt becomes too much, many governments turn to borrowing, transferring, delaying and underfunding government programs. If this strategy works, it only serves as a Band-Aid and will lead to more grave fiscal woes in the long term.

Cities and other municipalities falling on hard financial times is nothing new, but it is rare that any such entity files for bankruptcy as a way of addressing its massive debts. Out of nearly 89,500 municipalities in the country, there were just 239 municipal bankruptcy filings between 1980 and 2010.

Now, a slew of high profile municipal bankruptcy cases from San Bernardino, California, to Central Falls, Rhode Island, to Jefferson County, Alabama, are increasing the visibility of municipal bankruptcies, but not necessarily making the process better understood.

To explain the complexity of the highly intricate bankruptcy process, State Budget Solutions, a non-partisan advocate for state budget reform, released "Municipal Bankruptcy: An Overview For Local Officials." It is designed to help state and local officials understand both the complex process and the implications of municipal bankruptcy.

This guide provides as an overview of the basics of municipal bankruptcy, and boils down the municipal bankruptcy process so that officials and citizens have a framework within which to discuss whether bankruptcy is a viable option. It outlines who is involved in the process, which states permit municipal bankruptcy, when a municipality may be considered insolvent, the potential costs and benefits of the process, and more.

While not legal advice, "Municipal Bankruptcy: An Overview For Local Officials" can assist elected officials as they wrestle with difficult decisions, including massive tax increases, deleterious services cuts and state bailouts. It provides an introductory, yet thorough, understanding of the complicated Chapter 9 filing process.

Of course, eligibility, procedures and results differ based on the location of the municipality and there are countless other details unique to each case. This is made clear by the many case studies touched upon in the document itself. Additional questions about municipal bankruptcy will inevitably arise, and consultation with an attorney or expert in the field is strongly advised.

Local leaders and citizens need to be aware of the municipal bankruptcy process and what it means to their community. Unless government officials learn to exercise budget control, more and more municipalities may face the prospect of bankruptcy. An important dialogue must occur in this country between lawmakers, employees and citizens about options that are available to municipalities to both continue to pay their bills and continue to provide essential services to citizens.