Service Solvency and Quality of Life After Municipal Bankruptcy

Abstract

As a legal intervention, Chapter 9 of the federal bankruptcy code provides an avenue by which a financially distressed local government can reorganize its operations. The outcomes of that reorganization, particularly for residents of those local governments, are unclear. In theory, a government could choose to use the leverage generated by Chapter 9 to make deep cuts to public expenditures, following the theoretical path described by austerity urbanism. Alternatively, a government could follow the tenets of practical municipalism and attempt to use the Chapter 9 process to steer any decline toward a better outcome. In this research, we explore how filing for Chapter 9 affects government service delivery. Beginning with general purpose governments that petitioned for Chapter 9 protection during The Great Recession, we generate a set of governments that were similarly-situated prior to the Chapter 9 filing via propensity score matching. We then evaluate the effects of filing for bankruptcy using a staggered difference-in-differences and event study analysis. This allows us to causally identify the treatment effect of a successful Chapter 9 filing on a battery of service-delivery outcomes: expenditures on a variety of core services; tax burdens; crime clearance rates; and investment in capital projects. We gather these metrics from myriad sources, including audited financial statements, the Census of Governments, and the DoJ’s Unified Crime Reporting database. We find that filing for bankruptcy is associated with a shrinking public sector, but that these declines are also associated with improved service delivery. These findings suggest that Chapter 9 bankruptcy may provide governments with the space to improve operations while still cutting costs. ∗Draft prepared for the Brookings Municipal Finance Conference, Washington, D.C., July 13-14, 2020. This is a first draft and work in progress. †Department of Government and Politics, St. John’s University; [email protected]. ‡School of Public Affairs, Arizona State University; [email protected].