Bill Would Allow Towns to File for Bankruptcy Bankruptcy: A Judge Wouldn't Be Able to Force Towns to Raise Taxes

Daily Herald (Arlington Heights, IL), March 30, 2015 | Go to article overview

Bill Would Allow Towns to File for Bankruptcy Bankruptcy: A Judge Wouldn't Be Able to Force Towns to Raise Taxes


Byline: Nick Swedberg Associated Press By Nick Swedberg Associated Press

SPRINGFIELD -- Stressed by pension debt, other financial issues and the possibility losing a chunk of their state aid, some Illinois cities want the option to file for bankruptcy. They've found an ally in a suburban Republican lawmaker who has proposed legislation to allow municipalities to follow in the footsteps of Detroit and other cities in restructuring debt and paying back creditors. Opponents, however, say there are less drastic, intermediate steps than the "dangerous" path of bankruptcy.

One thing is clear, Rockford Mayor Larry Morrissey told senators earlier this month: "If history has proven anything in this state, delay, deferral and denial are not solutions."

Twelve states authorize cities to file Chapter 9 bankruptcy filings, according to the National Conference of State Legislatures, and another 12 grant conditional ability to file. Twenty-six states either don't have Chapter 9 authorization or prohibit it.

Rep. Ron Sandack is sponsoring legislation that would grant authority for communities to file for bankruptcy under Chapter 9 of the federal code. The Downers Grove Republican says it's a "measure of last resort," especially with Gov. Bruce Rauner's proposal in next year's budget to cut in half the local governments' share of state income taxes by 50 percent.

"It's just giving time and space to do things right," he said.

But not even wealthy towns are immune to costs associated with unsustainable pensions, personal and long-term debt, which can make bankruptcy seem like a viable option, said Laurence Msall, president of the Civic Federation, a Chicago-based, nonpartisan government research organization. He and other critics recommend establishing an authority that can work with the local government before a bankruptcy judge would consider approving a filing.

"Bankruptcy is a very dangerous place for us to be heading," Msall said.

Municipal bankruptcies are rare, statistics from the National Conference of State Legislatures show. Of 37 local government filings since 2010, only 8 were cities, with the majority filed by utilities and special districts.

Detroit filed for the nation's largest municipal bankruptcy in July 2013, looking to restructure $12 billion of debt. Michigan allows Chapter 9 filing when certain conditions are met, and Michigan Gov. Rick Synder appointed an emergency manager to handle Detroit's finances and negotiations with creditors. Late last year, a federal judge approved a plan in which Detroit was able to erase or restructure $7 billion of its debt.

"I don't consider Chapter 9 to be a good thing or a bad thing," said Bill Roberti, a senior adviser with Alvarez and Marsal, a global firm that specializes in bringing companies out of insolvency. "Sometimes, it's a necessary thing."

A municipality has to prove its insolvency and exhaust other means to pay back debt before a bankruptcy judge will approve a plan, said Roberti, a financial adviser to creditors during Detroit's bankruptcy. Chapter 9 differs from better-known aspects of bankruptcy law in that city assets can't be sold off to pay back debts and creditors don't become owners of a bankrupt city.

State Rep. Jeanne Ives, a Republican from Wheaton, is the only co-sponsor on the measure. Sandack said he's crafting an amendment to his bill to establish a commission that would attempt to structure a settlement between the local government and creditors to avoid bankruptcy, something that the Civic Federation and other groups have proposed.

But bankruptcy experts warn that judges can't directly force municipalities to find alternatives, such as tax increases, to solve financial problems.

Illinois Finance Authority chairman William Brant said there's a good reason most states don't allow unfettered access to Chapter 9, and he noted that Illinois already has the authority to create an oversight group that can find ways for a municipality to recover without bankruptcy. …

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