AN EXAMINATION OF MUNICIPAL FINANCE REFORM REGARDING
MUNICIPAL BANKRUPTCIES IN THE UNITED STATES
Except where reference is made to the work of others, the work described in this
dissertation is my own or was done in collaboration with my advisory committee. This
dissertation does not include proprietary or classified information.
_____________________________
Keren H. Deal
Certificate of Approval:
_____________________________ _____________________________
Bradley Moody Cynthia J. Bowling, Chair
Associate Professor Associate Professor
Political Science and Political Science
Public Administration
_____________________________ _____________________________
Kalu Kalu Anne Permaloff
Associate Professor Professor
Political Science and Political Science and
Public Administration Public Administration
_____________________________
Joe F. Pittman
Interim Dean
Graduate School

AN EXAMINATION OF MUNICIPAL FINANCE REFORM REGARDING
MUNICIPAL BANKRUPTCIES IN THE UNITED STATES
Keren H. Deal
A Dissertation
Submitted to
the Graduate Faculty of
Auburn University
in Partial Fulfillment of the

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VITA
Keren H. Deal, daughter of Richard and Phyllis Hill, Sr., was born September 16,
1967 in Montgomery, Alabama. She graduated with her B.S. in Accounting from
Auburn University Montgomery in 1992 and received her M.B.A. in Business
Administration from Auburn University Montgomery, with an emphasis in accounting, in
1995. She received her C.P.A. in 1999. She worked for the State of Alabama in various
classifications, including Accountant I, II, and III from 1985 to 2000. In August 2000,
she accepted an Instructor of Accounting position in the Auburn University Montgomery
Accounting and Finance Department. In 2002, she married John H. Deal, Jr. and was
blessed with the birth of their son, Zachary, in November, 2002. In 2005, she entered the
doctoral program in Public Administration and Public Policy at Auburn University. In
2007, she received her doctoral degree in Public Administration with an emphasis in
Public Finance and Governmental Accounting. In June 2007, she returned to Auburn
University Montgomery as an Assistant Professor in Accounting.
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DISSERTATION ABSTRACT
AN EXAMINATION OF MUNICIPAL FINANCE REFORM REGARDING
MUNICIPAL BANKRUPTCIES IN THE UNITED STATES
Keren H. Deal
Doctor of Philosophy, August 4, 2007
(M.B.A., Auburn University Montgomery, 1995)
(B.S., Auburn University Montgomery, 1992)
339 typed pages
Directed by Cynthia Bowling
Municipal bankruptcy is considered rare. A total of 569 U.S. municipalities filed
Chapter 9 from 1938-2005; however, the occurrence of Chapter 9 cases since 1990 seems
to be escalating nationwide. At the time of this writing, 29 states allow their
municipalities to file for Chapter 9 protection. Of these 29 states, 14 states do not require
an additional step to be taken by the municipality prior to filing bankruptcy documents,

The author would like to express thanks and gratitude to those who were
instrumental in development of this research study and the completion of the doctoral
program. I am especially indebted to Dr. Carl Grafton, Dr. Cynthia Bowling, Dr. Anne
Permaloff, Dr. Brad Moody, and Dr. Kalu Kalu in this research endeavor. All of these
professors provided invaluable insight and guidance during the phases of the research as
well as encouraged and assisted me in the finalization of this research product. This
research is a testament to their dedication and support of the students in the doctoral
program. Also, gratitude goes to those public officials and academia that assisted me in
this research and were most forthcoming with their knowledge.
God has blessed me with His love along with a loving support system of family,
friends, and colleagues too numerous to name individually in this one page. Thank you
all for your love and support. A special thank you goes to Joe Davis and Judy Kamnikar
for their willingness to always help me and keep me sane.
None of this would have been possible without the help of my family. My
husband and son, Chip and Zachary, along with my parents and niece, Richard, Phyllis,
and Kaitlyn Hill, have supported me without fail. All of you have endured the highs and
lows with me throughout this entire process. Your unwavering love, patience, and
understanding have made this possible. This degree is as much yours as it is mine and I
will be eternally grateful for your support.
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Style Manual Used: Publication Manual of the American Psychological Association
(2001)
Computer Software Used: Microsoft Word and Excel
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TABLE OF CONTENTS
PAGE
LIST OF TABLES xiv
LIST OF FIGURES xvii
CHAPTER
I AN EXAMINATION OF MUNICIPAL FINANCE

Summary 121
V CASE STUDIES OF MUNICIPAL BANKRUPTCIES
IN ALABAMA 123
Alabama Demographics and Background 123
Case Studies of Municipal Bankruptcies in Alabama 124
City of Lipscomb 125
Town of North Courtland 129
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CHAPTER PAGE
V CASE STUDIES OF MUNICIPAL BANKRUPTCIES
IN ALABAMA 130
Alabama State Fair Authority 130
Greene County 135
City of Prichard 147
West Jefferson Amusement Public Park and Authority 156
Etowah Solid Waste Authority 162
Millport 164
Summary of Case Studies 169
VI COMPARATIVE ANALYSIS OF STATES MUNICIPAL
FINANCE REFORM METHODOLOGIES 174
Florida 174
Georgia 181
North Carolina 188
Ohio 194
Pennsylvania 206
Tennessee 217
Summary 221
VII ALABAMA LOCAL BOARDS OF EDUCATION
ANALYSIS OF FISCAL ACCOUNTABILITY LEGISLATION 224
Background of the Alabama State Department of Education 224

Appendix I – United States Code Title 11 Bankruptcy 313
Appendix II – Chapter 9 Bankruptcy Filings, 1971-2005 314
Appendix III – State Statutes Addressing Municipal Bankruptcy 319
Appendix IV – Interview Questions for Municipal Officials 321
Appendix V – Interview Questions for State Officials 322
Appendix VI – Interview Questions for SDE Officials 323
xiii
LIST OF TABLES
PAGE
1.1 Municipal Bankruptcy Filings, 1938 – 2005 7
1.2 Alabama Municipal Bankruptcies, 1990 – 2004 9
1.3 Municipal Bankruptcy Filings By State, 1990 – 2004 10
1.4 State Approaches to Municipal Bankruptcy 15
1.5 Rankings of Municipal Bankruptcy Filings to Local
Governments, 1990-2004 17
1.6 States Chosen for Municipal Finance Study 20
2.1 Chronological Summary of Empirical Studies on Fiscal Stress 33
2.2 Chronological Summary of Empirical Studies on Fiscal Stress in
Local Governments within State Boundaries 46
2.3 Chronological Summary of Empirical Studies on
Municipal Bankruptcies 53
2.4 Comparison of States in Budgetary and Financial Reporting Practices 66
2.5 Honadle (2003) Conceptual Framework on How States
Attention Fiscal Crisis Within Local Governments 77
2.6 Summary of State Official (Individual) Responses to Honadle Survey 78
3.1 Growth of Municipal Bond Defaults As Compiled by The Bond Buyer
1932 – 1936 92
3.2 Municipal Bankruptcy Filings, 1938-2005 106
3.3 Classification of Municipal Bankruptcies, 1960-2005 106
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xvi
LIST OF FIGURES
PAGE
2.1 Model of the Causes of Bankruptcy (Park, 2004) 59
8.1 Analysis of Greene County 2002 Debt Issuance Interest Yields
With Fair Market Yield Curves at August 1, 2003 257
8.2 Analysis of Town of Millport Debt Issuance Interest Yields
With Fair Market Yield Curves at July 31, 2002 258
8.3 Moodys Investment Rating for State of Alabama
General Obligation Debt Issuances, 1970 – 2005 260
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1
CHAPTER I
AN EXAMINATION OF MUNICIPAL FINANCE REFORM REGARDING
MUNICIPAL BANKRUPTCIES IN THE UNITED STATES
Introduction
Local governments are created by the state through either state constitutional
organization (counties) or incorporation by the state. Counties are considered the
administrative arm of the state and perform state-mandated duties such as administration
of elections, maintenance of the roads, property recordkeeping, and judicial functions. In
contrast, a municipality is a political unit which is incorporated by the state for purposes
of local self-government and provides services such as police and fire protection,
sanitation and parks and recreation. Various types of municipalities include cities,
towns, boroughs or villages. Other types of local governments in the United States
include townships, school districts and special districts (Dye & MacManus, pp. 326-329).
Presently, there are approximately 90,000 local governments in the United States.
According to the National League of Cities (NLC) report “City Fiscal Conditions
in 2005,” American municipalities continue to be faced with key fiscal challenges in their
administration of public services (Pagano & Hoene, 2006, p. 1). Although NLC’s 2005
survey yielded a more positive outlook on the financial condition of municipalities, the

The opposite of fiscal health in a municipality is fiscal stress or fiscal strain.
Martin states that the expression fiscal strain was created in the 1970s to describe the
financial problems of large cities such as New York (Martin, 1982, p. 1). Clark and
Appleton define the term as a “lack of adaptation by government to a changing
environment” (Clark & Appleton, 1989, p. 47). In the same context, Pagano and Moore
describe the term fiscal stress as “an imbalance between a city’s revenue-raising capacity
and its expenditure needs” (Pagano & Moore, 1985, p. 23). Rose and Page indicate that
in a municipality with fiscal stress there are “….more claims upon the public purse for
services than there is money to meet these claims” (Rose & Page, 1982, p. 1). One might
particularly agree with Martin’s further depiction of fiscal strain “… as an imbalance
between revenues and expenditures, not due to seasonal fluctuations in revenue
collections, where the municipality is living beyond its means and is fiscally strained”
(Martin, 1982, p. 1).
In 1985, the Advisory Commission on Intergovernmental Relations (ACIR)
studied the causes of local government financial emergencies. The study found “… poor
management practices of spending more than receipts, failing to respond to fewer receipts
than expected, or imposition of unexpected expenses, such as court judgments” (ACIR,
1985, p. 5). Park (2004) considered municipal bankruptcy a form of government failure
as well as market failure as he found that both economics and politics played a role in the
cases he studied. Watson, Handley and Hassett (2005) illustrated that financial
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mismanagement as well as socioeconomic factors such as declining population, rising per
capita costs of the government, structural changes in the economic base, natural or man-
made disasters, and civic distrust all contribute to the fiscal decline of a municipality and
may result in bankruptcy.
Financial health, fiscal stress and municipal bankruptcy must be studied in order
to avoid future filings of municipal bankruptcy as well as to improve the financial health
of local governments. Authors such as Howell and Stamm (1979), Rose and Page
(1982), Rubin (1982), Martin (1982), Pagano (1985), Pammer (1990), Ladd and Yinger
(1991), Mikesell (1993), and Honadle, Costa and Cigler (2004) have all studied fiscal

financial problems in those local governments studied can be attributed to an eroding or
declining tax base, mandated health and social welfare costs, costly labor contracts and
increasing employee benefit costs, and lack of financial management oversight, or in
some cases fraud, by the appointed officials. Any municipal bankruptcy filing can
negatively impact the citizenry that receives services, either by cutting/eliminating
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services or increasing taxes; the investor who invested in the bond issue by not receiving
timely payments as promised; or the vendor who provided services/goods to the entity, by
not receiving timely payment.
Chapter 9 legislation was enacted in 1934 in response to the high municipal bond
defaults due to the economic depression of the 1930s. During this period, municipal
bond defaults went from 678 in 1932 to approximately 4,770 by the end of the 1930s
(Hempel, 1973, p. 1340). This was not the first occurrence of municipal bond default.
The first recorded default by a local government occurred in Mobile, Alabama in 1838
(ACIR, 1973, p. 9). Cohen (1989) studied municipal defaults and found that the worst
rates of municipal defaults were during four major depression periods in the United
States: 1837-43; 1873-79; 1893-99 and 1929-37. The highest rate of defaults occurred in
response to the Great Depression when many municipalities had issued bonds to finance
infrastructure, transportation systems and real estate developments. In response,
Congress enacted the first municipal bankruptcy protection to manage those municipal
defaults. In 1936, the U.S. Supreme Court held that the Municipal Bankruptcy Act was
unconstitutional in the case Ashton v. Cameron Water Improvement District
No. 1. The court found that the bankruptcy legislation was in interference to state
sovereignty as granted to the states through the 10
th
Amendment to the Constitution
(Ashton, 1936). Congress enacted a revised Municipal Bankruptcy Act in 1937, and the
Supreme Court upheld this Act in United States vs. Berkins, et. al. (Berkins, 1938). The
Act had been amended to include voluntary filings along with state permission
requirements. As such, the amended legislation did not seem to violate state’s rights. In