Employee Benefit Financing and Municipal Bankruptcy

Five municipalities with populations over 100,000 have declared bankruptcy since 2008, as have some smaller ones, including Central Falls, RI, in 2011. The bankruptcies have unsettled citizens, current and retired employees, and creditors of the governments involved; further, the apparent increasing willingness of municipal officials to file for bankruptcy has raised concerns nationwide. Municipal bankruptcy is exceedingly rare. Only 650 US Bankruptcy Code Chapter 9 municipal bankruptcy cases were filed between 1937 and 2012; by contrast, 2009 alone saw more than 11,000 Chapter 11 corporate reorganization filings. The bankruptcy of Central Falls shows what can happen when systematic underfunding of employee benefit promises runs into a weak, declining economy. Central Falls is a relatively poor municipality. The consequences of bankruptcy can be severe for citizens, employees and creditors. As the current bankruptcy filings unfold in the courts, there is growing alarm among those concerned with government finances regarding the impact of bankruptcy on future borrowing costs and on the safety of employee benefit promises.