When municipalities go bankrupt
It is rare, but not unheard of for municipalities or even provinces of federal republics like Austria to file for bankruptcy. Only very recently, for example, the Austrian province of Carinthia came to the brink of bankruptcy. At WU, Georg Kodek, professor at the Institute for Civil and Business Law and a judge at Austria’s Supreme Court of Justice, investigates the potential consequences of such bankruptcies from a legal perspective. His conclusion is that under Austrian law, municipalities or provinces would have to implement cuts if they slipped into bankruptcy, but basic public services would have to be maintained nonetheless.
History provides numerous examples of municipalities or provinces going bust, even though such bankruptcies are few and far between in Austrian history. One of the most famous insolvency cases was closed only a few years ago, in 2014: The city of Detroit had lodged the biggest municipal bankruptcy filing in US history, which led to disastrous conditions in the city: 40% of Detroit’s streets remained unlit at night, crime levels hit an all-time high, and the health care system broke down. WU Professor Georg Kodek has been working on bankruptcy law for many years. The case of Carinthia clearly shows just how relevant this work is to the lives of regular citizens: Professor Kodek investigated which concrete effects a potential bankruptcy would have on the province and its people. In 2015, the Carinthian government and its holding company, Kärntner Landesholding, commissioned Professor Kodek to draw up a legal assessment to evaluate the province’s situation.
Constitutional law as a decisive factor
In Austria, the consequences of a municipality or province going bankrupt would be nowhere near as dire as those seen in the US, as Professor Kodek points out. On the national level, Austrian constitutional law provides the legal basis for handling such cases. “Detroit was a particularly dramatic example: A city that used to have a strong economy ended up filing for bankruptcy – an extremely interesting case from a legal perspective. In Austria, there is more legal certainty in such cases,” Professor Kodek explains. “The Austrian constitution assigns specific functions and responsibilities to provinces and municipalities, and these functions and responsibilities must be fulfilled. This includes for instance safeguarding the provincial constitutions, providing adequate social security and health care infrastructures, maintaining public safety, and much more.”
Little money for creditors, small leeway for municipalities
This means that individual citizens do not actually have all that much to fear. However, bankruptcies could nevertheless force municipalities to implement painful cuts. At the end of the day, it is bankruptcy law which determines how much weight obligations under private law and the claims of creditors still carry in such cases. “Our research shows that creditors get only little of their money back in such bankruptcy cases, but on the other hand, the debts of a province or municipality are not discharged either. This means that such a bankruptcy would significantly restrict a municipality’s or a province’s freedom to make budgetary decisions for many years to come. That would be the most important consequence for municipalities or provinces, as these restrictions would eliminate their ability to implement active policies,” Professor Kodek points out. However, citizens would not have to worry too much about basic public services such as waste disposal, public kindergartens, hospitals, police, and key administrative infrastructures.
Anna Maria Schwendinger