Municipal Insurance: What Happens When a City Goes Bankrupt?

Municipal Insurance: What Happens When a City Goes Bankrupt?Municipal Insurance: What Happens When a City Goes Bankrupt?

San Bernardino is the third California city file for bankruptcy, joining Stockton and Mammoth Lakes in financial woe. But what happens to a city after filing for Chapter 9? How does this affect their insurance? Is New York next?

A bankruptcy can affect an entire city, from police and fire department shortages to pension cuts and creates an all around legal nightmare. One example is the Rhode Island town of Central Falls who declared bankruptcy in August 2011. Taxed with one of the most expensive retirement systems in the country, fiscal mismanagement and declining revenues forced the city to file Chapter 9. The effects were harsh. All of the teachers in the local schools were let go- the state now runs the schools. Volunteers operate the library, and citizens could see their pensions cut in half, according to CNN.

California’s cities have seen significant financial hardship, and more cities are expected to follow. The issue lies in outstanding bonds- Stockton at $700 million and San Bernardino has 18.5 billion. If a city can’t pay for its insurance, the policies lapse at renewal and the city becomes self-insured.

Companies file for “Chapter 11” bankruptcy- a provision that allows them to renegotiate deals, to downsize and fire people. It also allows the option to break up, a scenario that is not possible for a city. Thus, cities file for “Chapter 9” bankruptcy, which covers municipalities. Fareed Zakaria discussed the city bankruptcy trend in a CNN blog:

“California’s pension-related costs rose 20-fold in the decade since 1999. This frightening trend is true almost everywhere in America. And it’s simply not sustainable. A recent Pew research survey found that the gap between state assets and their obligations for public sector retirement benefits is $1.38 trillion. It rose by 9 percent in 2010 alone – and it will likely keep rising until these obligations are renegotiated.”

New York Municipal insurance is legally and politically complex- at MHB Insurance, our goal is to not only design and write municipal insurance policies, but also to facilitate programs that can significantly reduce the cost of risk. Every state, county, city and town has its own unique municipal peculiarities and needs. We can design a Municipal insurance package of coverage that meets your specific needs. From everything from Park Rangers and correctional facilities to water districts and courthouses, we can help you design a program that works for your community. Contact us today for more information about our Municipal Insurance programs.

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