Municipal Bankruptcy and the Limits of Federalism

During the 2008 financial crisis, general municipalities' across the United States began considering bankruptcy as a means for resolving systemic budget crises. This signified a substantial shift in the relationship between municipalities and Chapter 9 of the federal bankruptcy code. Until 2008, few general municipalities filed under Chapter 9. Special utility districts filed most Chapter 9 petitions. During the recession following 2008, decreases in property value drained municipal tax revenue. Meanwhile, cities and counties maintained spending levels to meet contractual obligations and maintain basic services. General municipalities in the United States faced accumulating debt and the threat of budget deficits. Some used Chapter 9 debt adjustment in attempts to resolve structural budget crises. These events culminated in Detroit, Michigan, filing under Chapter 9 in 2013 for the largest debt adjustment in the nation's history. Detroit exited bankruptcy on December 10, 2014. As general municipalities began filing Chapter 9 petitions, bankruptcy scholars noted that the municipal bankruptcy code did little to address systemic problems underlying fiscal distress. Two key proposals emerged from academic debate. The first contended that bankruptcy judges should use key points of leverage during bankruptcy proceedings to impose tax increases or spending reductions on municipalities. The second argued that judges should impose a restructuring of municipal governance to remedy governmental deficiencies that enable poor fiscal management. These proposals raise substantial constitutional concerns. Doctrines of federalism, which broadly aim to preserve the dignity and autonomy of states and their political subdivisions, threaten to limit