States as Chapter 9 Bankruptcy Gatekeepers: Federalism, Specific Authorization, and Protection of Municipal Economic Health

Abstract

Chapter 9 of the U.S. Bankruptcy Code provides relief exclusively to financially distressed state-based municipalities. Once a debtor municipality meets eligibility requirements however, Chapter 9 operates advantageously to debtors due to the constitutional protection of state sovereignty. Though Chapter 9 filings have historically been less frequent in comparison to other Code chapters, as Chapter 9 filing quantities and outstanding debt numbers continue to increase, the macro-level economic impact of these filings also continues to raise concerns. Eligibility for Chapter 9 access requires debtors to be "specifically authorized" by state law to access the federal bankruptcy system. Thus, each State operates as its own gatekeeper to Chapter 9. Because of this, States bear the responsibility of balancing the economic impact of municipal bankruptcy with the ultimate needs of individual municipalities to find relief from financial distress. This piece advances the idea that the optimal balance is found through States implementing statutory express authorization to Chapter 9 as well as an additional conditional authorization system based on the Political Model. Additionally, this piece provides a breakdown of how each of the 50 states handles the Chapter 9 specific authorization requirement as well as a comprehensive analysis of each Conditional Authorization system currently being implemented.