Tags: Experts Ailing US Cities Unlikely to Go Bankrupt

Experts: Ailing US Cities Unlikely to Go Bankrupt

Wednesday, 06 Oct 2010 02:23 PM

Cities and local governments that are struggling with gaping budget holes and piles of debt will likely raise taxes and cut services rather than resort to bankruptcy, restructuring experts said Wednesday.

The city of Vallejo in California and a toll road operator in South Carolina are among the few to file for bankruptcy under Chapter 9, the part of the bankruptcy code for government entities.

"You look at these budgets and it looks pretty daunting if you look at all their obligations, pensions plus other things," Steven Smith, the global head of restructuring for UBS AG, told the Reuters Restructuring Summit in New York.

Hit by falling tax revenue and added demand on services, some cities are turning to their states for help. Pennsylvania's capital city, Harrisburg, asked last week to be put into a special state program for distressed cities.

Budget deficits and tapped out taxpayers probably mean painful adjustments, creating work for turnaround advisers, but not defaulting on debt obligations, Smith said.

"I just don't think there is much appetite to see cities go bankrupt," said Smith.

James Sprayregen, who heads the restructuring practice at law firm Kirkland & Ellis, said he saw several obstacles to small governments seeking relief from debts in court. "The problem is they have the power to tax."

In addition, governments can take the unpopular medicine of cutting spending and services, Sprayregen said.

Filing for bankruptcy also is complicated for governments, and many states do not have the provisions in place to allow local governments to seek Chapter 9 protection, he said.

Still, many restructuring professionals have begun to pitch their services to hobbled cities and regional governments, particularly as work dries up for turning around bankrupt companies.

It is likely to be an area of active work for specialized consultants, he said.

"There may be whole teams of people who will develop experience the average restructuring person is not well suited to do. Muni is a really different animal," Smith told the Reuters summit.

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Cities and local governments that are struggling with gaping budget holes and piles of debt will likely raise taxes and cut services rather than resort to bankruptcy, restructuring experts said Wednesday. The city of Vallejo in California and a toll road operator in South...
Experts Ailing US Cities Unlikely to Go Bankrupt
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2010-23-06
Wednesday, 06 Oct 2010 02:23 PM
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