Mendoza School of Business

For states, there may be good reason to stop cities from going bankrupt

Published: August 17, 2016 / Author: Marielle Segarra, WHYY

What happens when a city can’t pay its debt? In some states, the city could file for bankruptcyThat’s been done across the country, in Detroit, San Bernardino, Central Falls, Rhode Island, and other municipalities.

But some states, including New York, New Jersey, Ohio, and Pennsylvania, try to intervene before that happens. Now, research from the University of Notre Dame and the University of Illinois finds that states with programs that make it harder for cities to go bankrupt see several benefits, including economic stability.

The draft study [by finance professor Paul Gao] finds that programs that stand in the way of municipal bankruptcy prevent “contagion,” the ripple effects that a bankruptcy could have on the rates other municipalities pay to borrow money. In contrast, the study finds, in states that allow their municipalities to file for bankruptcy with no barrier, the cost of borrowing increases for at least a year.

Read the entire story online.