Editor’s note: This analysis was updated on July 13, 2020, to clarify that the 21 local governments that filed for bankruptcy in Nebraska are special-purpose districts and on July 7, 2020, to clarify the reference to U.S. Steel operations in Fairfield, Alabama.
On May 19, the city of Fairfield, Alabama, filed for bankruptcy, becoming the first U.S. city or county to file for Chapter 9 in close to a year. The 10,500-person town is seeking protection from creditors while it comes up with a plan to adjust its debt.
Fairfield, located just southwest of Birmingham, has struggled to keep up with its funding obligations since U.S. Steel closed portions of a facility in 2015 and Walmart closed a Supercenter in 2016. After the closures, the local transit authority stopped bus service, the city faced a shut-off of water service for failure to pay, and the county took over the police force.
Fairfield’s financial woes started well before the coronavirus pandemic. But as the economic effects of COVID-19 threaten municipal finances nationwide because of lost tax revenue and increased costs, more localities may look to bankruptcy as a means of extending the terms of debts, reducing the amount of principal or interest, or refinancing.
Municipal bankruptcies under Chapter 9 of the federal code are relatively rare; the process can be costly and time-consuming and can cause long-term damage to a locality’s reputation. Bankruptcies also commonly result in increased taxes, higher fees for services, reduced benefits for workers, payments to receivers and emergency managers, lawyers’ fees, and elevated future borrowing costs. Although bankruptcy can be one way for a town or city to address financial distress, policymakers should strongly consider the potential costs.
Pew’s research has found that by monitoring local fiscal conditions, states often can identify problems early and provide assistance to local governments to try to avoid bankruptcy altogether.
Note: Pew researchers gathered Chapter 9 bankruptcy filings from the Public Access to Court Electronic Records database as of May 2020. Researchers limited data collection to 2001 or later because some cases filed before then are sealed or archived by the court and do not show up in the database. Researchers excluded the Puerto Rico Chapter 9 bankruptcy filings in the database because those cases, filed in 2017 and 2019, are being dealt with through Title III of the Puerto Rico Oversight, Management, and Economic Stability Act. They also excluded mistaken filings, test filings, and transfers in the database. The number of filings includes cases that were later dismissed.
Jeff Chapman is a director, Adrienne Lu is a manager, and Logan Timmerhoff is a senior associate with The Pew Charitable Trusts’ state fiscal health project.
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