Municipal bankruptcy is considered rare. A total of 569 U.S. municipalities filed Chapter 9 from 1938-2005; however, the occurrence of Chapter 9 cases since 1990 seems to be escalating nationwide. At the time of this writing, 29 states allow their municipalities to file for Chapter 9 protection. Of these 29 states, 14 states do not require an additional step to be taken by the municipality prior to filing bankruptcy documents, such as approval by the Governor or state agency or commission. Alabama’s current legislation allows municipalities to file for Chapter 9 protection without notification of the state government.

Alabama is ranked fourth in all municipal bankruptcy filings that occurred between 1990 and 2004. However, when considering the total state municipal bankruptcy filings per number of local governments per state, Alabama is ranked first in the total filings per number of local governments during the 1990 to 2004 period.

In light of the increase in filings, an analysis of the nine Alabama municipal bankruptcies was conducted. The overall contributing factors found were a mixture of financial mismanagement by public officials and the economic decline of the municipalities from loss of businesses and demographic changes. The total financial impact of these municipal bankruptcies is unknown; however, an analysis of the interest rates of debt issuances from two of the municipalities that underwent bankruptcy showed that both municipalities incurred higher-than-average interest rates. This translates to a higher burden on the local taxpayer to repay the debt.

This study also performed a comparative analysis on the financial reform methods enacted by Florida, Georgia, North Carolina, Ohio, Pennsylvania, and Tennessee in dealing with local government fiscal stress and municipal bankruptcy. A secondary analysis of the policies and procedures currently employed by the Alabama State Department of Education (SDE) for local boards of education in Alabama was also conducted.

Bankruptcy, of any type, should be considered as a last resort. Numerous municipal bankruptcies indicate underlying state policy problems in addressing local government finances. This study found information that might be useful to elected officials in Alabama and public administrators in considering other state programs as well as the SDE for municipal finance reform and in determining future policies for local governments in Alabama.