How Cities Fail: Service Delivery Insolvency and Municipal Bankruptcy

45 Pages Posted: 30 Jun 2020

Date Written: January 31, 2020

Abstract

Courts in municipal bankruptcy cases have confronted the inherent vagueness in the statutory tests for municipal “insolvency” by embracing a test of “service delivery insolvency.” That test is typically evaluated in terms of a significant reduction in the availability of city services. Focus on a municipality’s failure to deliver services certainly serves as a plausible proxy for fiscal health, since provision of services is a primary function of local governments and thus a function that a financially healthy municipality would satisfy. Initially, such a test appears to be viable, since it invites both temporal and interlocal comparison service levels as a measure of fiscal health. Nevertheless, this article indicates severe limitations of a service delivery insolvency test. Reductions in service may indicate efforts to recover fiscal health rather than indicating fiscal distress, because that distress was generated by overspending on services. In addition, focus on particular service reductions as a measure of insolvency creates perverse incentives for local officials who desire to obtain debt relief to diminish those services most susceptible to measurement. Population outflows may serve as an alternative indicator of fiscal distress. But that measure does not necessarily distinguish among emigrants. Local fiscal health is often dependent on the capacity of the locality to obtain the benefits of agglomeration. As a result, and notwithstanding measurement difficulties, one promising proxy for fiscal distress entails identifying whether those who have exited would otherwise have contributed agglomeration benefits to the locality.

Keywords: municipal bankruptcy, insolvency, service delivery

JEL Classification: H12, H30, H72

Suggested Citation

Gillette, Clayton P., How Cities Fail: Service Delivery Insolvency and Municipal Bankruptcy (January 31, 2020). Michigan State Law Review, Forthcoming, NYU Law and Economics Research Paper No. 20-10, Available at SSRN: https://ssrn.com/abstract=3529545

Clayton P. Gillette (Contact Author)

New York University School of Law ( email )

40 Washington Square South
New York, NY 10012-1099
United States
212-998-6749 (Phone)
212-995-4692 (Fax)

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