Forget Meredith Whitney, as Muni Lawyer Predicts New Bankruptcy Wave

“It’s not that conditions are necessarily becoming more dire that will force a new crop of cities into bankruptcy,” Dubrow said. “To the extent that some of the recent municipal bankruptcies can be successfully resolved in the view of the tax-exempt marketplace, that could represent a model of success that paves the way for other cities to follow suit with their own filings.”

Central Falls in Rhode Island could be the case to watch as a bellwether Chapter 9 in 2012, he says. Central Falls filed for bankruptcy last year and is now under state receivership.

Due to marked differences in state law, some cities fare better than others by declaring bankruptcy, according to Dubrow. In Rhode Island, where Providence, East Providence and Pawtucket are among the highest-risk cities, he notes, a law was passed in 2011 giving general obligation bondholders first-lien claims on all taxes and revenues, thus giving bondholders priority over local unions in getting paid in any restructuring.

Dubrow explains that Rhode Island recently created a statute giving a state-appointed receiver emergency powers to take over city finances and negotiate collective bargaining agreements and other contracts with municipal workers in the event of a default. Such authority, including the receiver’s ability to file a Chapter 9 petition over objections of the city council or mayor, may be critical in maintaining public worker payroll and essential services for residents.

“Even though its cities are some of the most precarious in terms of financial health, Rhode Island has put a legal regime in place that could minimize the pain and stigma of a bankruptcy filing and actually facilitate a positive outcome for stakeholders,” Dubrow says.

In contrast, he points to the lack of legal clarity in Alabama, where Jefferson County has struggled in the wake of its own Chapter 9 filing last November under the weight of a $3 billion sewer financing.