Law and Legislation in Municipal Bankruptcy

Corporate and consumer bankruptcy are defined by two principal features: a compulsory process and an identifiable set of priorities to debtor property. These “rule of law” features reduce borrowing costs ex ante by, among other things, discouraging rent-seeking ex post. Municipal bankruptcy, by contrast, despite apparent similarities, embodies a radically different kind of debt adjustment. Substantive priorities in Chapter 9 are riddled with uncertainty, and the very invocation of bankruptcy is subject to veto by multiple political actors. Consequently, this Article contends, familiar models of bankruptcy are inadequate to explain the existing regime of municipal debt adjustment. What Chapter 9 creates is less a forum for the application of settled law, and more a venue for legislation, in which multiple political bodies seek to apportion resources by mutual consent. Political economy rather than contract-enforcement theory supplies the appropriate lens. This Article traces some of the implications of this view and argues that, relative to a system of rights enforcement, municipal bankruptcy as we know it leads to too few bankruptcies and at the same time increases the costs of financing city services and impoverishes residents, employees, and retirees. Reformers would do well to keep in mind a simple slogan: more law, less legislation.