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Abstract

A strategic public policy decision confronting many states is whether to allow a local unit of government to file for Chapter 9 municipal bankruptcy. This is especially problematic when the pending insolvency is the result of years of structural operating deficits. Alternative strategies rely on equally undesirable public policy decisions. These range from management intervention to simply plugging the financial hole in the short‐term rather than solving long‐term imbalances. This paper will examine Chapter 9 in light of the fiscal crisis that has plagued the City of Detroit for many years. Critical to this analysis is understanding how Chapter 9 Adjustments of Debts of a Municipality works and how it is very different from the more common Chapter 11 Reorganization used in the private sector. No major decision is complete without weighing the obvious advantages with underlying long‐term consequences. Lastly, the City of Detroit does not exist in a vacuum. The outcomes of Detroit’s financial challenges have potential implications for the State of Michigan and other Michigan local units of government.

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