A Case Study for Chapter 9 Reform?

A Case Study for Chapter 9 Reform?

Westfall Township, a community of just over 2,800 people in northeastern Pennsylvania’s Pike County, might be the tiny engine that could prompt some thinking about the process through which municipalities proceed to bankruptcy (debt readjustment is likely more appropriate) under Chapter 9 of the U.S. Code.

As we pointed out in earlier Policy Briefs and a full-length report, Chapter 9 filings are very rare and, under the national-state division of power in the U.S., under the discretion of the states. Due to amendments passed in 1994, a state must specifically authorize its local governments to enter into Chapter 9. If they grant permission, they are free to attach as many pre-conditions as they like. In Pennsylvania the requirements are spelled out in Act 47, the fiscal distress statute.

Westfall Township faced a $20 million bill due to a developer and could not pay it. They filed for Chapter 9 bankruptcy, four days later were placed into Act 47 status, and after going to court the bill was renegotiated to something more manageable ($6 million).

The municipality’s bankruptcy counsel pointed out that "filing for Chapter 9 should be the last resort for municipalities. The ideal option is to negotiate with the creditors. If that fails, the second alternative is to go through a financially distressed municipality proceeding under Pennsylvania’s Act 47…if those options fail, or if there is an emergency, then Chapter 9 should be considered" (emphasis added).

Perhaps the General Assembly will look to this recent example and ponder whether there should be an alternative way to enter Chapter 9 if there is a sudden catastrophe or fiscal emergency that cannot wait for the Act 47 process to play out. Then too, in light of the massive pension bill that is coming due for school districts in the near term it ought to be considered if school districts should have the right to pursue Chapter 9 filings (Act 47 applies to municipalities only, so school districts have no avenue by which to pursue debt adjustment under Chapter 9).