D.1 Public Agencies and Bankruptcy
Chapter 9 of the United States Bankruptcy Code (“Chapter 9”) offers protection to insolvent local public agencies that meet the eligibility requirements of Chapter 9 and California Government Code Sections 53760 et seq. Public agency insolvency is usually the result of either (1) an unexpected catastrophic occurrence (e.g., major investment losses, a large legal judgment or an epic natural disaster) or (2) structural economic problems (expenditures consistently in excess of revenues) leading over time to the draining of reserves. Bankruptcy protection can provide an opportunity to “right the ship”. The importance, however, of transparency with respect to financial problems and attending to issues in advance of and with the goal of avoiding, if at all possible, a bankruptcy filing cannot be overstated.
Chapter 9, in deference to the Tenth Amendment to the United States Constitution and the practical realities of entities providing essential public services, differs in important respects from the United States Bankruptcy Code provisions applicable to the bankruptcy of individuals and to private corporations. A Chapter 9 proceeding, for example, may be initiated only by the bankrupt public agency itself; a public agency’s creditors cannot force a Chapter 9 filing. Further, as a general matter, a federal bankruptcy court may not interfere with a public agency’s political or governmental powers, properties or revenues or its use of income producing properties. Specifically, Chapter 9 does not authorize a bankruptcy court to:
- Liquidate a public agency,
- Take over operation of a public agency or appoint a receiver,
- Direct or remove an elected governing board,
- Halt the provision of public services,
- Order the sale of public property, or
- Authorize the overriding of state law requirements respecting the imposition or increase of taxes or revenues or restrictions on the uses of funds.
In determining eligibility, overseeing the assumption or rejection of contracts and leases, evaluating the avoidability of certain transfers and confirming or declining to confirm the public agency’s plan of adjustment, the federal bankruptcy court does, however, exercise significant power.