The Indiana Law Blog

« Courts - "Sandra Day O'Connor Interviews John Paul Stevens" | Main | Ind. Courts - "Allen County Prosecutor Karen Richards said her office will not assist the proposed Fort Wayne city court, limiting the types of offenses that could be tried there" »

Saturday, December 18, 2010

Ind. Gov't. - "Law would let cities declare bankruptcy"; and more from the ILB

Dan Carden of the NWI Times has this important story today -- some quotes:

INDIANAPOLIS | Broke local governments could ask for a state takeover and permission to declare bankruptcy under legislation pending in the Indiana General Assembly.

State Sen. Ed Charbonneau, R-Valparaiso, is sponsoring Senate Bill 105, which would repurpose the Indiana Distressed Unit Appeals Board [DUAB] from providing property tax cap relief to supervising direct management of a local government. * * *

The State Board of Accounts has said in recent audits of Gary and Lake Station it is concerned about the ability of both cities to "continue as a going concern," due to significantly reduced city revenues caused by property tax caps. * * *

[The long story describes the appointment of an emergency manager as a first step]

"This would put someone almost like an administrator in place that would try to take action to alleviate the situation short of filing for bankruptcy," Charbonneau said.

If the emergency manager could not turn the local government around, he or she then could recommend to DUAB that the local government be allowed to file for bankruptcy. DUAB would have to approve the filing for bankruptcy on behalf of a local government, or allow the local government to file for bankruptcy on its own.

Even if bankruptcy were declared, the emergency manager would remain in place until DUAB ruled the local government no longer was distressed, according to the proposal.

Indiana law currently does not permit local governments to seek federal Chapter 9 bankruptcy protection.

Charbonneau said the declining financial condition of cities and states across the country inspired him to devise a process for local governments in Indiana to seek a state takeover to fix their financial condition and, if necessary, declare bankruptcy.

He said the legislation is not intended to target a specific city or local government.

A sidebar to the story explains that "Senate Bill 105 establishes two routes for a local government to be designated a 'distressed unit.'."

SB 105 is not yet available to the public, but should be soon, at this link.

More from the ILB: In this May 1, 2010 ILB entry, Jon Seidel of the Gary Post Tribune wrote:

Gov. Mitch Daniels said Friday it might be time for Indiana to pass a municipal bankruptcy law in case Gary or another insolvent Hoosier city fails to prevent financial ruin in the future.

Such a law is a requirement for any city interested in pursuing bankruptcy, and he said it shouldn't harm Indiana's AAA credit rating, one of the best in the country.

Also relevant is this July 27, 2009 story from Herald J. Adams of the Louisville Courier Journal headed "Southern Indiana town may file for bankruptcy protection." Take a look. Here are a few quotes:

Facing a debt of $1.45 million over a long-delayed sewage plant project, the Floyd County town of Georgetown has taken the first step toward what would be an unprecedented move for an Indiana municipality — filing for bankruptcy protection.

Whether Georgetown could do that, however, is in dispute. State officials say Indiana law doesn't authorize a town to declare bankruptcy.

Georgetown's leaders “have no authority” to declare the town bankrupt, said Brian Bailey, general counsel for the Indiana Department of Local Government Finance.

Bailey cited a 1994 update to the federal bankruptcy code that says a municipality “must be specifically authorized” by state law to be a debtor, and no Indiana law does that. (Kentucky law authorizes its local governments to file for bankruptcy, but none have ever done so.)

Also of interest is this Feb. 18, 2005 story by Patrick Shea, a San Diego attorney, in the San Diego Union-Tribune, that sets out some of the favorables for going the bankruptcy route. Shea was involved in the famous Orange County bankruptcy case. The entire article is still available and worth reading. Here is Shea's list:

• Bankruptcy judges do not take over management of the city. All municipal decisions stay with the mayor and council. The court just deals with the financial mess.

• Bankruptcy plans bind "classes" of claims. So you do not have to get everybody's approval in order to fix the rights of entire classes.

• No city assets need be sold or have liens placed against them to get out of municipal bankruptcy. So you do not lose your beaches or parks.

• No taxes need be increased to satisfy the monster debt.

• The legal issues regarding whether the monster debt is even legal in the first place are decided by judges uniquely experienced in that very type of issue and not unwilling to make the hard decisions.

• On confirmation of a plan, the investment banking world is banging at your door to do business. They actually like that you have addressed all the problems at once, rather than addressing them incrementally.

• Municipal credit ratings recover instantly. Why? Because your financials are real. And your unfunded debt is gone.

• All parties are bound by the plan, so there are no holdouts to private negotiations. If they do not show up at the table, they are on the menu. Everybody shows up.

• It's good for unions. They get real financials, and agreements covered by federal court orders. The day after confirmation of a plan, unions can get back to real bargaining with a solvent city instead of being gamed forever by a city that will always be in financial crisis.

Posted by Marcia Oddi on December 18, 2010 08:54 AM
Posted to Indiana Government