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Viewpoint: Municipal restructuring is everyone’s business

Viewpoint: Municipal restructuring is everyone’s business

In a time of economic distress, reorganization under Chapter 9 offers cities some benefits — and drawbacks.
  • Written by Deryck Palmer
  • 10th November 2010

Although not every city is in financial distress, few are immune from the pain. The recession has led to shrinking tax revenues, while the demand for government services has remained steady, if not increased. Add to that union, retiree and creditor obligations, and it is the rare local government that is not being squeezed. In the worst case, if it cannot meet its obligations, the municipality will have to seek relief in court under a state-approved process or Chapter 9 of the Bankruptcy Code.

Under a Chapter 9 proceeding, the municipality’s various obligations — including bonds, purchasing and labor contracts, even pensions — come under review. That allows for a fresh start without bearing the yoke of unmanageable debt, and makes it possible for new sources of funding to come to the table.

Yet, a Chapter 9 solution has a number of very important disadvantages for the city and its creditors. For the city, there is the stigma of bankruptcy: correctly or not, it is seen as a sign of failure and may have a significant impact on the municipality’s ability to attract industry, new residents and investors. Moreover, it may entirely upend the political process, taking control of municipal affairs out of the hands of the elected officials (and so the voters) and vesting it in a chief restructuring officer. For the creditors, meanwhile, it means uncertainty up until the final decision and the loss of some negotiating leverage they might have had.For those and other reasons, most municipalities will try to reach a negotiated settlement out of court.

In fact, there is very little that Chapter 9 can accomplish that cannot also be done out of court. Unlike a court-imposed settlement, the goal of a negotiated restructuring is to arrive at a solution that not only allows the municipality to continue to function, but shares the pain in such a way that everyone feels is fair, and that everyone has a stake in seeing it succeed. It is crucial to have all of the stakeholders at the table and to have complete transparency in the process; each participant must understand the advantages and costs for each option. And, it is often those groups from whom it is most important to get concessions that are most dispersed and hardest to bring in, such as retirees or holders of uninsured bonds.

Concessions are indeed possible, even with pensions, when the negotiations are handled with both financial and political expertise. On the financial side, someone who can help craft creative approaches to each stakeholder’s particular need should be involved. The job of the mayor or other political leader is first to speak for the municipality as a whole, articulating its immediate and long-term interests, and second to help build both the consensus around the table for the solution and the broader communal support to see it through.

Municipal restructurings are about more than finance; they are about schools, homes and communities. A resolution that puts at risk the municipality’s long-term credibility with lenders will have serious consequences when the time comes to build a new school or railway line or industrial park. By facing the challenges early, with all the parties around the table, a restructuring can be more than a way out of debt. It can be the first step toward a revitalized city.

What do you think? Tell us in the comment box below.

Deryck Palmer, partner and co-chairman of the Financial Restructuring Department for New York-based Cadwalader, Wickersham & Taft, LLP, is one of the first lawyers to take the skill set of corporate restructure and apply it to American municipalities. He can be reached at [email protected].

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