August 1, 2011

Municipal Bankruptcy is a Tenth Amendment Issue

Carroll Andrew Morse

The initial Projo report on today's announcement that the receiver for Central Falls will file for bankruptcy highlights one of the many high-level policy, political and legal issues that municipal bankruptcy is going to involve…

In a commercial bankruptcy, the judge has the authority to order the sale of assets, even the closing of the business, to pay the creditors. But a government can't be sold off.

A Chapter 9 judge can approve or reject a receiver's settlement proposal, but he or she can't order the sale of assets because of the Tenth Amendment to the United States Constitution, which states that any powers not specifically given to the federal government by the Constitution belong to the states, meaning a federal bankruptcy court can't tell the city how to run its affairs, like selling assets.

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But, the judge can set aside union contracts. And other cozy deals. That is why you see airlines in bankruptcy so often.

I don't think the inability to "order" a sale is an important factor, what was CF going to sell? Schools? Traffic control devices? Judges rarely order a sale on their own initiative, it is done in furtherance of a plan proposed by the debtors, or creditors. If the debtor (CF) proposes to sell, I'm not sure I see a 10th Amendment problem. If bondholders already have an enforceable claim on assets, I am not sure I see a Constitutional problem. I do see some interesting litigation (as with other litigation, Bankruptcy rulings are appealable).

What CF does have, through its taxing authority, is a "regular income". So, think of it as a Chapter 13 "Wage earner's plan". What will be required is a plan to bring the expenses down to a point where income can meet them. (In Chapter 11, after the expiration of the "exclusive period", the creditors can propose a plan. I am not sure of creditor's rights in 9, nor do I know who the creditors are. If they are bond holders, I don't know that they don't have the right under the bonds to force a sale. Since those assets would already be "pledged", there would be no 10th Amendment issue.) That can be done through the rejection of "burdensome contracts". I don't know why this might not include pension contracts. CF will have taken the "poor debtor's oath", what it can't afford, it can't afford. I don't know how pensioner's claims will be classified. But creditors/claimants is what pensioners are, claims can be eliminated by a Bankruptcy Judge.

Of course, if through some democratic process, CF could decide to sell some assets. I don't know why the judge could not "allow the sale".

Posted by: Warrington Faust at August 1, 2011 3:59 PM

On a more prosaic note, the C.F. bankruptcy has made the Drudge Report.

Posted by: Monique at August 1, 2011 5:20 PM
"It's too bad, because Central Falls has always been a progressive city," said Ortiz.

Couldn't have said it any better myself.

Hopefully this will put the fear of God back into the remaining public unions and they will be more willing to negotiate than their Central Falls brothers were.

Posted by: Dan at August 1, 2011 6:04 PM

In Pritchard Alabama the union pigs ended up with a 67% cut in pensions through chapter 9.
Sleep tight union whores and keep those checks to "Friends of XXXXX" coming!

Posted by: Tommy Cranston at August 1, 2011 7:18 PM

According to the news,the receiver has already asked the bankruptcy judge to set aside the contracts with police and fire departments. Predictable, that would be the point of filing banruptcy.

Assuming they are successful, other towns may take heart with the realization they have an alternative. Of course,the first realization should have been "Just say no".

Posted by: Warrington Faust at August 1, 2011 9:16 PM

"what was CF going to sell?"

Ultimately: The whole thing, to Pawtucket.

CF generates 10-14M of tax revenue. With the contracts broken and the local government dissolved, I suspect Pawtucket's own oversized government would be able to absorb it at very little additional cost.

If it was done correctly (without much hiring), it would 'shrink' the government per-capita by 15-25%, which would put both communities solidly in the black for the long run.

The fact that CF so small makes this a perfect experiment. Pawtucket's central garage and station could cover all of CF without needing to keep a brick-and-mortar presence in the old city, and student transportation to Pawtucket's half-empty schools could be easily facilitated.

Posted by: mangeek at August 2, 2011 11:57 AM

"If it was done correctly (without much hiring), it would 'shrink' the government per-capita by 15-25%,"

The political class would never allow that to happen, or at least, not allow it to abide. "More budget, more clout".

Posted by: Warrington Faust at August 2, 2011 6:13 PM
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