WASHINGTON – Federal Chapter 9 policy is ill-defined and fluid, said bankruptcy expert Juliet Moringiello.
"The law is in fact changing. There is not much in Chapter 9," said Moringiello, speaking Tuesday at a Brookings Institution municipal finance conference. She is a professor at Widener University Commonwealth Law School in Harrisburg, Pa.
Existing bankruptcy law is a "bad match," said Moringiello, because many lawyers view Chapter 9 from property-based corporate and individual perspectives. "Municipal finance law really is not property law," she said.
Some of that existing bankruptcy law is now in play in Puerto Rico, for which President Obama signed an oversight bill known by the acronym PROMESA. The bill calls for the appointment of a seven-member oversight board empowered to require balanced budgets and fiscal plans, plus debt restructuring petitions on behalf of the commonwealth and its affiliations in a federal district court as a last resort.
"A whole bunch of bankruptcy concepts were dumped into PROMESA," said Moringiello.
Puerto Rico Gov. Alejandro Garcia Padilla was scheduled to deliver the keynote address in the afternoon.
On July 1, Puerto Rico defaulted on its general obligations, making it the first state-equivalent government to default on central government debt since Arkansas in 1933.
"Puerto Rico is at a watershed with regard to its economy," Bank of America Merrill Lynch said in a commentary. "The appointment of the control board ends the phase of debt accumulation by the commonwealth. However, it will not, in and of itself, resolve the island's financial crisis."
Moringiello noted that many states, including Pennsylvania, intervene pre-bankruptcy. Her own city, Harrisburg, filed for bankruptcy in 2011 but a federal judge negated the City Council's filing.
"In my state, if Scranton were looking to file for bankruptcy, it would have a receiver appointed first," she said.
Georgia State University professor Bart Hildreth said the reference points for general purpose municipal bankruptcies are few. "But that is also the reason I see no basis for making changes in the law at this time."
Assessing state policies for distressed communities includes determining the various types of bonds issued and their use, said Robert Doty, president of consulting firm AGFS and general counsel and senior vice president of Sacramento, Calif., municipal adviser Government Financial Strategies.
"It's very important not to generalize from state to state. You have to get down in the data," he said. "When Pennsylvania supported Harrisburg, it wasn't for that [incinerator project] that threw Harrisburg for a loop," he said. "It was to help Harrisburg with their general finances."
The fifth annual conference, which Brookings is hosting for the first time, is a partnership among the Rosenberg Institute of Global Finance at Brandeis International Business School, Olin Business School at Washington University in St. Louis, and Brookings' Hutchins Center on Fiscal and Monetary Policy.
"Too often these groups only speak among themselves," said Hutchins Center director David Wessel.
