GMU Fiscal Study Preliminary Research




Shafroth, Frank

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Center for State and Local Government Leadership, George Mason University


In its recent report, the State Budget Crisis Task Force noted one theme arising out of the Great Recession: fiscal stress runs downhill. Local governments are confronting the greatest fiscal challenges in at least a century, struggling to balance their budgets in the wake of the greatest economic downturn since the 1930s. Despite the pressures facing local governments, providing for the continuity of essential services matters. Indeed, what distinguishes Chapter 9 municipal bankruptcy from other kinds of corporate bankruptcy in federal law is the provision to ensure continuity in the provision of essential services. When a corporation faces default, it can simply take the “keys” and hand them over to a federal bankruptcy court—which can sell the remainder assets and distribute the proceeds to the debtors and shareholders. But when a municipality faces default, that is not an option. For the child whose chance for success rests upon learning—access to schooling, to health care, to safety are uniquely local challenges—whether the local government has disparate levels of poverty, crime, inadequate fiscal resources or legal authority; the essential responsibility may not be abjured. Yet, despite the dire predictions from commentators, the numbers of Chapter 9 bankruptcy filings or municipal bond defaults have not risen through the Great Recession. In fact, considering the extraordinary pressures they face, remarkably few local governments have opted to seek Chapter 9 municipal bankruptcy protection or have fallen into state receivership. Where are the risks greatest to the most critical and essential services? What are the options for our system of federalism, especially at the state-local level, for local governments that are at risk? This study will examine the challenges facing local governments flowing from the great recession. The following literature review will place the George Mason University Local Government Fiscal Sustainability Project in the context of the existing literature that answers these questions.



Chapter 9 municipal bankruptcy, Bankruptcy, Local government, Great recession