Originally published on May 8, 2020
As a member of the Supreme Court Bar, Frank Shafroth has worked in the U.S. House for former representatives Gladys Spellman (D-Md.) and Jim Moran (D-Va.), as well as with the U.S. Senate for former U.S. Sen. John Heinz (R-Pa.). His experience and expertise were also shared on the Senate Banking Committee. Shafroth is an expert in state and local government, regional development, municipal bankruptcy, and disruptive economies at the Schar School of Policy and Government.
Can, as U.S. Senate Majority Leader Mitch McConnell (R-Ky.) recommended, states file for bankruptcy?
Shafroth: Majority Leader McConnell stated: "I would certainly be in favor of allowing states to use the bankruptcy route. It saves some cities. And there's no good reason for it not to be available."
That is unless you consider the U.S. Constitution to be a good reason. The Constitution provides that "states are sovereign entities, and the federal government has limited authority to compel...," but especially because the Constitution's Contract Clause prohibits states from "impairing the obligations of contracts." Indeed, state defaults on debt are not new. In the 1870s, a number of southern states renounced the Reconstruction era debts. In 1933, Arkansas defaulted on its debt.
If our Senate Majority Leader wishes for states to be able to file for bankruptcy, he would have to lead an effort to amend Article 1, Section 10 of the Constitution, which bars states from declaring bankruptcy.
What steps can cities and municipalities take when filing for bankruptcy?
Shafroth: On the morning Detroit filed for Chapter 9 municipal bankruptcy, I went to the governor's downtown Detroit office to meet with his designated emergency manager to ask what steps he had taken. He told me he had emailed every employee of the city to advise them that when the court opened that morning, he would be filing for municipal bankruptcy. He added that, upon arriving on the same flight as I from Washington, D.C., the previous evening, he had emailed every employee of the city to advise them of his actions—directing them all to be at work that morning with a positive attitude—and that the most critical actions were to insure every street and traffic light was working, and that every 9-1-1 call received an expeditious response.
Why is Chapter 9 municipal bankruptcy important for the nation's cities and counties?
Shafroth: Our country currently has the greatest number of confirmed COVID-19 cases in the world. Confirmed infections make up nearly a third of the world's cases. When an American dials 9-1-1, the federal government does not reply, it is a city or county which does.
Because of this seemingly unrelenting virus, there has been a surge in such calls, calls which do not go to the federal government. The critical import of municipal bankruptcy was that it created a way to ensure a response to every 9-1-1 call—and that streetlights and traffic lights worked, irrespective of the fiscal conditions of such a municipality.
During the difficult period of years for Detroit to reach a plan of debt resolution which was approved by a federal court, Americans were protected. Terrorist attacks on the World Trade towers in New York and at the Pentagon, visible from the White House and Congress that fateful day, received heroic responses commanded by an Arlington County Fire Department leader.