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San Bernardino Bankruptcy

The nearly empty E Street Mall in San Bernardino, Calif., is shown on Wednesday, July 11, 2012. The San Bernardino city council voted Tuesday night in favor of the city filing for bankruptcy. City officials have said, San Bernardino "has an immediate cash flow issue" and may not be able to make payroll with a budget shortfall of more than $45 million in the next fiscal year. (AP Photo/Grant Hindsley)

Quirks in local, state and federal law have made Nebraska home to almost one-fifth of the more than 220 Chapter 9 bankruptcies filed in the United States since 1981, according to a Bloomberg News review of federal court records.

Chapter 9 is in the news as San Bernardino, Calif., population 210,000, became the third California city to seek federal bankruptcy protection in less than two weeks. Chapter 9 applies primarily to municipalities, but also to other taxing entities, including hospital authorities and school districts. 

In Nebraska, no cities have filed for bankruptcy, but Chapter 9 has been used by Sanitary and Improvement Districts, statutory taxing authorities unique to Nebraska and developers to create residential areas on the fringes of cities, without all the powers of cities. 

California is second in Chapter 9 filings, followed by Texas and Alabama. Those states, along with Oklahoma, account for more than half of all Chapter 9 filings in U.S. bankruptcy courts.

The main difference between Nebraska and its larger brethren is the kind of government bodies that file for bankruptcy. All 45 of Nebraska's Chapter 9 cases were by the special tax districts, most of them owned by residential subdivision developers who used property tax revenue to pay for streets, sewers and other infrastructure.

Chapter 9, used by local governments and entities they create, differs significantly from Chapter 11, the section written for private companies and nonprofit groups. State lawmakers must pass laws authorizing local governmental bodies to file for bankruptcy before they can do so.

About half of the states allow full, or conditional, access to bankruptcy court, according to a legal analysis by Jim Spiotto, a bankruptcy attorney with Chapman & Cutler in Chicago who helped write a book about municipalities in financial distress.

Nebraska grants Sanitary and Improvement Districts unobstructed access to bankruptcy courts, said Brian C. Doyle, a land-use attorney in Omaha who represents bankrupt subdivisions.

For cities and counties, filing a Chapter 9 case is more difficult because it requires a vote of elected officials.

Once in bankruptcy, Chapter 9 gives cities and counties an advantage over companies using Chapter 11 to reorganize. Municipalities don't need to ask the bankruptcy court for permission to pay any bills they ran up before filing for court protection, including wages, utility bills and rents.

That means creditors can't put as much pressure on a city over its spending habits, as sometimes happens in Chapter 11 cases, said Lee Bogdanoff, an attorney with Klee Tuchin Bogdanoff & Stern. The firm represents Alabama's Jefferson County, which filed the biggest municipal bankruptcy in the United States last year, listing more than $4 billion in debt.

In Nebraska, Chapter 9 bankruptcies are more like prepackaged Chapter 11 cases because the district owners and creditors most often work out an agreement beforehand, Doyle said. Those deals almost always guarantee full repayment of bondholders' principal, stretched over a longer period of time and at a lower interest rate, Doyle said.

Most of the Sanitary and Improvement Districts in Nebraska are around Omaha, Doyle said. Lincoln won't allow Sanitary and Improvement Districts to attach themselves to city services, which discourages their creation.

In the next two years, as many as 10 more of the special districts may go bankrupt as debt comes due for subdivisions built during the housing slump that followed the credit crisis, Doyle said.  

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