Legal judgments leave rural counties in a bind, facing bankruptcy

Gage County, Nebraska (Wikipedia map)

When rural counties face legal judgments that award defendants millions of dollars that local governments are unable to pay, the only option often is to declare bankruptcy, Stephen C. Fehr, Adrienne Lu and Matthew Cook report for Stateline. "Of the 18 general-purpose local government bankruptcies filed since 2006, legal judgments have been an important factor in five, or nearly 30 percent, according to research by The Pew Charitable Trusts."

Gage County, Nebraska, could be the next rural county to file for bankruptcy, reports Stateline. A federal jury in July awarded $28.1 million in damages plus attorneys’ fees to six people, who DNA evidence showed were wrongly convicted of a rape and murder in the county in 1985." In response to the jury's financial award, Myron Dorn, chairman of the Board of Supervisors for the farming county of 22,000, told Stateline, “No county could prepare for that."

Stateline reports, "Increasing taxes to cover the judgment would be difficult, because Nebraska’s property tax cap limits the county from raising taxes by more than about $3.7 million. Residents could theoretically vote to exceed the state-imposed limit, but that is unlikely. The county has appealed the verdict and is awaiting a decision; in the meantime, officials have hired bankruptcy attorneys to explore their options in case they lose the appeal."

"The legal judgments underscore the importance of local governments maintaining a healthy reserve fund balance to absorb unforeseen expenses," reports Stateline. "They also reinforce the need for states to be aware of the fiscal health of their local governments, so officials can prepare for situations when the state may need to step in to help. Washington state, for example, asks local governments about 'litigation costs or pending legal judgments that risk depleting available fund reserves,' to try to anticipate and to plan for potential fiscal shocks."