Failing Cities and the Red Queen Phenomenon

43 Pages Posted: 27 Jan 2016 Last revised: 25 May 2017

See all articles by Samir D. Parikh

Samir D. Parikh

Lewis & Clark Law School

Zhaochen He

Lewis & Clark College

Date Written: January 26, 2016

Abstract

Cities and counties are failing. Unfunded liabilities for retirees’ healthcare benefits aggregate to more than $1 trillion. Pension systems are underfunded by as much as $4.4 trillion. Many local government capital structures ensure rising costs and declining revenues, the precursors to service-delivery insolvency. These governments are experiencing the Red Queen phenomenon. They have tried a dizzying number of remedies but their dire situation persists unchanged. Structural changes are necessary, but state legislatures have failed to respond. More specifically, many states have refused to implement meaningful debt restructuring mechanisms for local governments. They argue that giving cities and counties the power to potentially impair bond obligations will lead to a doomsday scenario: credit markets will respond by dramatically raising interest rates on new municipal and state bond issuances. This argument – which we term the paralysis justification – has been employed widely to support state inaction. But the paralysis justification is anecdotal and untested. This Article attempts to fill a significant gap in the literature by reporting the results of an unprecedented empirical study. Our study aggregates data for every general obligation, fixed-rate municipal bond issued in the U.S. from January 1, 2004 to December 31, 2014, over 800,000 issuances in total. By employing multivariate regression analysis, we are able to conclude that the paralysis justification is a false narrative. Municipalities located in states that offer meaningful debt restructuring options enjoy the lowest borrowing costs, all other things equal. This Article removes one of the largest obstacles to financial relief for many cities and counties. We hope to encourage recalcitrant state legislatures to enact the structural changes their local governments need desperately.

Keywords: local government, municipal distress, financial restructuring, empirical research

Suggested Citation

Parikh, Samir D. and He, Zhaochen, Failing Cities and the Red Queen Phenomenon (January 26, 2016). 58 Boston College Law Review 599 (2017). Available at SSRN: https://ssrn.com/abstract=2722716 or http://dx.doi.org/10.2139/ssrn.2722716

Samir D. Parikh (Contact Author)

Lewis & Clark Law School ( email )

10015 S.W. Terwilliger Blvd.
Portland, OR 97219
United States

Zhaochen He

Lewis & Clark College ( email )

0615 SW Palatine Hill Road
Portland, OR 97204
United States

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