A Study On Causes For Local Government Bankruptcy In The United States

Local government, as an integral part in the country’s political system, closely relates to economic development and people’s lives. Bankruptcy, as an important means of regulating credit and debt relationship through the legal process in the modern market economy, plays an important role in ensuring the survival of the fittest rules and protecting the interests of creditors and debtors. However, it is difficult to link local government with bankruptcy. Bankruptcy usually occurs among private subjects, such as a natural person or a corporate. In fact, local government is able to go bankrupt in the United States. Local government bankruptcy has been in existence for nearly80years with more than600bankruptcies in the United States so far. In studying local government’s bankruptcy in the United States, the baseline is to find out reasons causing bankruptcy in order to clearly explain the existence of this phenomenon. The study of the causes of local government bankruptcy in the United States will help us understand the nature and purpose of local government bankruptcy. It can also provide a useful complement to the follow-up study of local government’s bankruptcy and to the study of the theory and practice of local finance, law and public administration. This paper focuses on local government’s bankruptcy in the United States, and does not involve a comparative cross-country study.We have to first determine what "local government" is. U.S. local governments are rich in quantity and miscellaneous in forms, covering counties, municipalities, towns, school districts and the Special districts. Because the United States is a federal state, the state and federal administrative status almost equal. This paper argues that states are not in the scope of local governments, so states are excluded of local government bankruptcy (bankruptcy law will also exclude states from the bankruptcy filings body). The definition for local government’s bankruptcy, as in the Bankruptcy Law writing:As the local government debtor insolvency, default occurs. Under this legal definition, we can see the characteristics of local government’s bankruptcy from a historical review in the United States. First, local government bankruptcy did not exist before the1930s, although there had been a serious breach of contract, no laws could be depended on; and breach and chaos happened a lot at that time. Second, local government bankruptcy occurred in/after1934, thanks to local government’s bankruptcy legislation in1934and subsequent laws. Third, local government insolvency involves four regions and34states in the United States. Although not generally occurring in the whole country, it is certainly not a sporadic case. Local government bankruptcy filing continues today.There are laws to abide by local government goes bankruptcy. The main purpose for the federal to set up local government bankruptcy legislation is to provide an orderly debt restructuring mechanism for local government as a debtor default. It helps local governments and theirs creditors avoid stalemate, rupture in the debt adjustment plans negotiations process by minority of dissenting creditors to obstruct negotiations and to protect the interests of creditors. Meanwhile, more consideration is taken for the interests of local governments as debtors. There are quintet stringent requirements for the capacity of local government’s bankruptcy in the federal bankruptcy law. And local government’s bankruptcy filings are not easy. Following certain procedures in accordance with the requirements to enter the bankruptcy process, the local government as a debtor can enjoy including automatic stay and other protections. Federal legislations for local government bankruptcy started from scratch and experienced gradual improvement. It also experienced constant amendments, especially in its unconstitutional provisions, which played a regulatory role of local government bankruptcy as Chapter9of the U.S. Bankruptcy Code. Under the background of bankruptcy legislation and its practice, local government bankruptcy law has formed a relatively complete system with proper procedures. As a law enforcement agency, court matches better with the bankruptcy law. As a debtor, local government has the awareness of filing bankruptcy. If necessary, local government will resort to bankruptcy law, toward bankruptcy.Insolvency is the fact reasons that local government bankruptcy. Local government has a more rigorous revenue and expenditure structure. Data shows, its revenue sources and expenditure whereabouts are relatively fixed, but the trend of expenditure increasing is more obvious. It has become increasingly difficult to meet the balanced budget fiscal discipline with limited local revenue sources and expenditures. And the principle of keeping a balanced budget in practice has been challenged. In the process of distress, deterioration of the financial position of local government, out-control factors and local government inside factors both fueled to go bankrupt. Local government is unable to resist the impact of the national economic fluctuations; local government large-scale defaults and bankruptcies both occurred when the national economy fell in the trough. Local government cannot resist the impact of suburbanization (especially urban), population, social strata and industry and commerce migration all bring serious pressure on finance; local government cannot resist real emergencies, which lead to sharp increase in local government revenue and plummeted spending, in particular, to local government bankruptcy by costliest natural disasters. The occurrence of local government bankruptcy can be traced more to inside factors. Both the issuance of local government bonds (especially revenue bonds defaults) and the heavy debt burden of public sector employees’wages and benefits caused bankruptcy; such factors as poor quality of local officials, investment strategy fails, corruption, incompetent financial management, lack of supervision, and craves for greatness and success, all caused bankruptcy; local government, as a defendant in civil actions, is often fined huge compensation which resulted in bankruptcy.The occurrence of local government bankruptcy is closely related with political system. Although the federal government has no power to intervene directly in the management of local government, it can place financial burden on local government by mandates (especially unfunded mandates) through congressional legislation. When local government fiscal crises impend, the federal often refuses to rescue the local government for fear of violating the constitution, gaining no actual interests and causing moral risks. Fearing local government financial crisis, state sets up various "tax-expenditure limit" laws and regulations for local governments; at the same time, it also sets up various forms of committees to intervene in local budgets. These actions interfered with the autonomy of local finance and placed financial burden on local government. Although local government is a political branch of the state, state either provides aid to local government or not,8ioopweighing the pros and cons, when local financial crisis occurrence. Combined with the state’s role as the solely master of the specifically authorized of local government bankruptcy filing, these all constitute the impact on local government bankruptcy occurrence. Local governments file for bankruptcy with double intention. On the one hand, the need for local officials to obtain votes, for interest groups in order to get more benefits, the confusion of the budget decisions of local council,"fiscal illusion" of voters and weak supervision, all led to the critical point of local government bankruptcy. Local government, on the other hand, maliciously uses bankruptcy in order to take advantage of bankruptcy to achieve these goals, such as transferring debt burden, reducing financial burden and putting threat to federal and state.Based on the causes of the local government bankruptcy in the United States, we need to further research the causes of making and implementing of the local government bankruptcy law. The author found that local government bankruptcy system design is a more refined stakeholder interests balancing mechanism. Local government bankruptcy legislation is not only a collection of various preferences, but also a collection of the limits of adverse factors of these preferences. Designed by the local government bankruptcy system:Not interfere with state sovereignty, the federal constraints of local government, protects the creditors and the bond market and safeguards the reputation and interests of the country; Not violate of the Contract Cluase, state prevents the federal infringement on the autonomy of local government interests, protects the interests of the state, while also protects the local government; Not by the intervention of its political, government functions, local government maintains survive, to be able to continue to carry out their functions. Benefit analysis seems to be the best, the simplest method for benefit problem involved. However, there are still such questions worth pondering upon:Is the local government bankruptcy designed only from the angle of balance of interests? Can the Bankruptcy legal principle be applied to local government? In accordance with the provisions of the U.S. Bankruptcy Code, local government as debtor insolvency occurs can apply to the court for bankruptcy. This is-basically same with requirements for the private domain of natural persons, companies and other entities to file for bankruptcy. There are many reasons for this result. As the same transaction subjects in a highly market-oriented economy, local government and company have to follow the rules of the market; based on the similar governance structure, they both have the contractual relationship; as the insolvency objective phenomenon at the economic level (fiscal/financial position), they both constitute a firm credit and debt relationship. Therefore, local government as a debtor can and has to fulfill credit-debt obligations, and to follow the judicial proceedings and means to resolve terminally credit-debt relations. The local government and the companies have common requirements of bankruptcy, as long as partial distinguish made between them in law content, local government will naturally be able to go bankrupt. Any kind of system design reaches a sound ground in a continuous process. Local government bankruptcy law design is no exception, yet to be perfected.The above analysis shows the reasons for local government bankruptcy in the United States. Of course, the reasons for bankruptcy are complex, often due to multiple reasons. The direct cause of the bankruptcy of U.S. local governments is the enactment of the law on local government bankruptcy. The substance cause of the bankruptcy of U.S. local governments is the financial/fiscal fact that there is insolvent lead to or result in the breach of contract. The mainly cause of the bankruptcy of U.S. local governments is rooted in the United States political system. Local government bankruptcy law would be enacted and implemented, including two reasons:The game with the regulation of the relevant stakeholders, and the enterprise attributes as the subject of bankruptcy of local governments with. Although it is not currently possible for local government bankruptcy in China, the author hopes that this study is able to produce some useful lessons for the researchers and readers.