July 25, 2012
By: John Clark
The humble state of Nebraska leads the country in municipal bankruptcy filings, as it has accounted for nearly 20 percent of all Chapter 9 filings since 1981, according to a report from Bloomberg News.
California is in second place, although it has more than 20 times more people than Nebraska, followed by Texas and Alabama.
California is recently adding to its total, as three cities, Stockton, Mammoth Lakes, and San Bernardino, have all filed for bankruptcy in the past few weeks.
There is, however, a bit of an asterisk next to Nebraska's dubious distinction because the municipalities that filed for bankruptcy in the Cornhusker State aren’t typically towns or cities, like in other states.
On the contrary, no town, city or county has ever filed for bankruptcy in Nebraska. But a grand total of 45 Chapter 9 cases have been filed by what sources call "special tax districts."
In Nebraska, these tax districts are typically owned by residential subdivision developers who pay for streets, plumbing and other key infrastructure projects with local revenue gathered through property taxes.
When the tax revenue dries up, "Chapter 9 is an effective tool that can be used to protect taxpayers and treat creditors fairly," according to an attorney in Omaha who often represents tax districts in these bankruptcy cases.
Apparently, when the housing market ebbs, these unique tax districts become very vulnerable to their creditors, so bankruptcy provides a sort of safety net that allows them to maintain important services for the residents who live in these subdivisions.
Of course, the fact that most Nebraska filings are made by special tax districts is not remarkable by national standards. Of all the Chapter 9 cases filed in the United States since 1981, only 20 percent were filed by towns, cities or counties.
The remaining cases were filed by special entities similar to those that were highlighted in Nebraska. And while Nebraska currently owns the Chapter 9 title, shifting economic circumstances across the country could allow another state to leapfrog Nebraska and take the bankruptcy title.
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