Bankruptcies, defaults, and other local government financial emergencies Page: 11
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owners of the oil truck. A $500,000 settlement provided
money for the city to pay the $112,000 condemnation
judgment, legal fees, and other debt incurred in connection
with the incident. As a consequence, the bankruptcy
proceedings were dismissed in September 1983, and
the town no longer had a financial emergency.
South Tucson, AZ
The financial emergency in South Tucson was directly
caused by a $3.6 million tort liability judgment
against the city in October 1980. The judgment resulted
from an incident in which a South Tucson police officer
shot and severely crippled a Tucson officer while engaged
in a joint raid. It was upheld through all state court
appeals. The $3.6 million award exceeded the city's
1981 general fund expenditures and occurred at a time
when the city was already close to a financial emergency
as a result of a large accumulated operating deficit totaling
$264,000, an amount equal to 7.7% of its $3.4 million
budget. General fund expenditures exceeded
revenues by $117,000 in 1981 alone. From the time of
the judgment until August 1983, the city refused to pay
the judgment because it claimed a financial inability to
do so based on its serious financial problems and the
size of the judgment relative to its budget. During fiscal
years 1981, 1982, and 1983 the city brought its operating
budget into balance, and as a result, the city went from a
general fund imbalance of $117,000 in 1981 to an excess
of revenues over spending of $258,000 in 1983. The
budget turnaround enabled the city to eliminate the
1981 fund deficit and end 1983 with a $61,000 surplus.
However, even with this improvement in city finances,
the 1983 budget surplus was still not sufficient to pay
even the interest on the judgment and the city continued
to claim it was financially unable to pay the judgment.
The key question regarding payment of the award became
not whether the city had funds immediately available,
which it obviously did not, but whether it could
reasonably raise them in the future by new or increased
taxes or by budget reductions. In the summer of 1983, a
state court, in a mandamus action filed by the holder of
the judgment, was about to decide whether the city
could raise the money to pay the award. The court action,
if successful, would have required the city to levy
additional taxes, or use other means to to pay the judgment
over a reasonable future period.
With a hearing scheduled for September 13, 1983, the
city filed a federal bankruptcy petition on August 25,
1983. This action stayed proceedings in the state court
and shifted the problem of determining the city's ability
to pay the judgment to the federal bankruptcy court. The
city then filed a bankruptcy plan on December 23, 1983,
with a proposal to pay a reduced judgment over 25
years. The bankruptcy judge found deficiencies in the
plan, including the proposal to pay over 25 years, and
the failure to pay a lump sum at the beginning of the
Instead of acting on the plan, the judge decided to let
the state court proceed with its determination of whether
the city could pay. A state court hearing on the city's
ability to pay was then rescheduled for February 21,
1984. However, just prior to the hearing, a settlement
was reached for the payment of about $3 million of the
judgment. The city raised the money through a combination
of transfer of city-owned land to the plaintiff and a
bond issue. As a result, all lawsuits, including the bankruptcy
case, were dismissed.
The question of whether South Tucson was insolvent
at the time it filed for bankruptcy rests on whether it was
impossible for the city, on some reasonable basis, to
meet its responsibility to pay the judgment. An Arizona
appeals court judge suggested that "mere financial hardship
is insufficient as a defense, but a complete want of
funds and inability to raise them is a defense to mandamus."
Although neither the state nor federal court ever
decided whether South Tucson was insolvent, the city
was successful in using bankruptcy proceedings to delay
a state court action, and eventually to gain a reduction
in its judgment.
The bankruptcy of the only school district to file in the
period is important because it involves the largest government
to file, and because it raises some important
issues regarding the bankruptcy law.
San Jose School District
San Jose School District filed a Chapter 9 bankruptcy
petition on June 30, 1983, and declared itself insolvent.
The San Jose bankruptcy case presents a situation in
which state laws may have forced the district into bankruptcy.
The district, as a result of the Proposition 13 tax
limitation, depends almost completely on state aid for
financing its budget, and state aid levels are dependent
on annual appropriations by the state legislature. In addition,
the district is required by state law to have a
balanced budget to receive the state aid. In its bankruptcy
petition, the district claimed it was impossible to
balance either the 1983 or 1984 budgets. These anticipated
budget imbalances directly stemmed from employee
collective bargaining agreements negotiated in
1982. At the time that the agreements were signed, it was
anticipated that the forthcoming state aid would provide
sufficient funds to fulfill those agreements. However,
when school aid appropriations for 1983 and 1984
were finally determined by the state, San Jose's appropriations
were insufficient to meet its collective bargaining
If it did not meet the state requirement of a balanced
budget, the district feared it would lose all its state aid
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United States. Advisory Commission on Intergovernmental Relations. Bankruptcies, defaults, and other local government financial emergencies, book, March 1985; Washington, D.C.. (digital.library.unt.edu/ark:/67531/metadc1317/m1/21/: accessed January 17, 2019), University of North Texas Libraries, Digital Library, digital.library.unt.edu; crediting UNT Libraries Government Documents Department.