Chapter 9 Strikes Again

Before last week, not many people may have heard of Hillview, KY. However, the city, with a population of 8,000, made headlines by filing for bankruptcy protection under Chapter 9—the first U.S. city to do so since Detroit, which filed in July 2013. It’s also the third Chapter 9 filing this year, following an Oklahoma hospital and a California district.

Hillview, about 16 miles south of Louisville, has joined a select destitute group. “Only 54 cities, towns and countries have sought court protection from their creditors since 1980,” according to an Aug. 20 Bloomberg article.

The city's filing with the U.S. Bankruptcy Court in Louisville estimates Hillview has liabilities of up to $100 million and assets up to $10 million. Primarily, city officials declared bankruptcy to halt interest gains on a legal judgment of $11.4 million for its largest unsecured debtor, Truck America Training, in a land dispute. In 2002, the city council approved a lease-purchase offer for 40 acres of city land. The trucking company sued Hillview for allegedly failing to transfer title of the land, and a jury awarded damages during a 2006 trial, which an appeals court upheld. City officials appealed to the Kentucky Supreme Court, which denied review so the prior judgment stands.

The city filed to stop interest gains and to structure a payment plan it can manage, the city’s attorney, Tammy Baker, said in news reports. Presently, Hillview does not plan to cut services and will operate as usual, Baker further said.

Federal law permits local governments to file for Chapter 9, but only if its state government allows it. Although cities and counties rarely turn to Chapter 9, an Aug. 5 Moody’s Investors Service report finds that it’s not as taboo as it once was. According to an August 2005 report by The Pew Charitable Trusts, some analysts predict the difficulties that arise from bankruptcy will keep a rash of other struggling cities from filing.

The Pew report identifies the following lessons learned from Detroit’s filing as well as other municipality filings:

· Early state intervention in local governments’ financial emergencies can help avert a crisis or possible insolvency.

· When local governments have no options other than filing for Chapter 9 protection, a broad outreach plan that includes all stakeholders throughout the process can help resolve conflicts.

· Once a local government exit Chapter 9, a long-term recovery plan that outlines immediate financial fixes and long-term strategies, such as investing in economic growth, is critical to addressing underlying fiscal problems and preventing future crises.

· By taking active steps to budget over the long term—matching expenses and revenue over several years—local officials can promote fiscal health and increase their city’s capacity to weather the ups and downs of the business cycle.

· Regular monitoring of local government finances can help state office detect early signs of distress.

· State policymakers can prevent Chapter 9 filings by developing alternatives, such as naming a monitor or temporary manager to restore a city’s’ finances.

- Diana Mota, NACM associate editor

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