Service Solvency and Quality of Life After Municipal Bankruptcy

Despite playing a critical role in the delivery of public goods to residents, American local governments face many resource-related challenges, including hard budget constraints, state restrictions on revenue generation, and declining economic bases. These situations can sometimes result in a perpetual cycle of fiscal stress, thereby harming residents via the impaired delivery of public goods. This research examines how an understudied and often maligned intervention — Chapter 9 of the federal bankruptcy code, or municipal bankruptcy — might affect residents via local government service delivery. After employing propensity score matching to generate a set of control governments that are fiscally similar prior to intervention, we assess the effects of filing for Chapter 9 on the delivery of public goods. We find that bankrupt governments make deeper cuts to expenditures across a variety of service areas relative to the counterfactual. We also show that these cuts are concentrated in the area of public safety and policing but that these cuts come with an apparent improvement to service quality via increases to crime clearance rates and no negative effects on crime rates. This suggests that Chapter 9 may provide local governments the space to reorganize their fiscal profiles in ways that are politically-untenable during normal times but potentially yield improved public goods at a lower cost for residents.