Citizens versus Bondholders

18 Pages Posted: 23 Jul 2012 Last revised: 25 Jul 2012

See all articles by Richard Schragger

Richard Schragger

University of Virginia School of Law

Date Written: July 1, 2012


This Essay, written for a colloquium considering the effects of the recent financial crisis on local governments, asks whether bondholders or citizens are better monitors of municipal fiscal behavior and who should be charged with the risk of municipal default when cities experience financial distress. Should citizens feel the fiscal pain through tax hikes and service cuts or should bondholders suffer losses? This Essay argues that bondholders should be charged with the risk of municipal default, not because they are better monitors of local fiscal behavior, but because they are better bearers of financial risk. The Essay further considers whether this allocation of risk can help prevent municipal fiscal stress before it occurs and what the recent history of municipal defaults tells us about the politics of local fiscal crises. The Essay concludes by offering reasons for why municipalities have such low default rates as compared to their private-side counterparts.

Keywords: municipal default, bankruptcy, cities, bondholders, local government, local economic development

Suggested Citation

Schragger, Richard, Citizens versus Bondholders (July 1, 2012). Fordham Urban Law Journal, Vol. 39, p. 787, 2012; Virginia Public Law and Legal Theory Research Paper No. 2012-42; Virginia Law and Economics Research Paper No. 2012-08. Available at SSRN:

Richard Schragger (Contact Author)

University of Virginia School of Law ( email )

580 Massie Road
Charlottesville, VA 22903
United States

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