Municipal Debt: Methods for Restructuring

Resource Government
December 19, 2012 — 1,120 views  
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Municipal Debt: Methods for Restructuring


In many areas, city managers are dealing with serious issues surrounding municipal debt. The debt may have accumulated for a number of reasons, including failed projects that were started and are no longer feasible. While the general consensus is that filing for Chapter 9 bankruptcy is the only option, the fact is that there may be a way to avoid this serious step. Take some time to explore a few alternatives before deciding bankruptcy is the only way to deal with the current financial crisis.

Bond Issues

While bond issues are general considered a way of raising money to make some sort of improvement to municipal properties or services, this strategy can also be used as a way of raising money to settle current debts and regain control of municipal finances. The right type of bond issue would make it possible to settle a range of debts that are threatening to undermine the fiscal stability of the city or town and make reorganizing the rest of the debt a lot easier. Assuming that the repayment terms with the bond issue are favorable to the city while still offering investors some real type of return over the life of the bond, this solution can buy the time needed to get the city back on track.

Asset Conversions

Another way to aid in the restructuring of the debt is to consider what is known as asset conversion. The general idea is to find financial partners who are willing to accept certain assets in return for providing some sort of cash flow for an agreed upon period of time. Banks, venture capitalists and even individual investors may be interested in securing long term access to properties owned by the city and using those properties for their own business ventures. In the interim, the city agrees to maintain basic services and upkeep to the assets. The result is a stream of revenue that can be used to restructure the current debt into a more manageable strategy.

Chapter 9 Bankruptcy

When other methods will not provide the type of relief required, there is no option but to consider application for what is known as a Chapter 9 bankruptcy. This form of bankruptcy protection makes it possible to establish a court approved schedule for repaying the amounts owed to the city’s creditors, as of the date of the filing. In some cases, the court may approve a reduction in the amount owed to certain creditors. In addition, the rates of interest applied to the outstanding debt may be capped at a certain level. All these measures combined can make it possible for the municipality to continue operating and eventually pay off the past due balances.


Resource Government

In many areas, city managers are dealing with issues surrounding municipal debt. This article explores the alternatives before deciding bankruptcy is the only way to deal with a financial crisis.