Panel weighs municipal bankruptcy; other options available, some witnesses say

Published March 26, 2015

SPRINGFIELD — Do Illinois cities need the option of filing bankruptcy?

It’s something the state has to consider, says state Rep. Ron Sandack, R-Downer’s Grove.

Sandack, a former mayor, is sponsoring House Bill 298, which would allow Illinois municipalities to seek reorganization under Chapter 9 of the U.S. bankruptcy code.

Chapter 9, Sandack said, is somewhat similar to the restructuring available to individuals under Chapter 13 and businesses under Chapter 11, but it is by no means a get-out-of-jail-free card.

A state bill would be necessary because federal bankruptcy law requires state authorization for Chapter 9 filings, and Illinois has no such provision.

Rockford Mayor Larry Morrissey testified Friday before a House committee on behalf of his city and the Illinois Municipal League, although he said Rockford is not considering bankruptcy.

He described the dire situation some cities are facing due to shrinking property tax bases, property tax caps, unfunded mandates and pension costs.

“Local city councils should not be in the position at the end of the day of deciding whether to pay a police officer on the street or pay a bond holder,” Morrissey said.

“Simply put, if cities are put in a position where they can’t pay all of their bills, this provision will provide the best — amongst not a lot of good — but the best way to help cities continue to provide public services to citizens while protecting our ability to access the financial markets and provide fairness to all creditors.”

Laurence Msall, president of The Civic Federation, said he agreed many cities are in a bind.

“Even relatively affluent municipalities have reported that over 100 percent of their property tax levy is now going to pay their pension funds, forcing them to find other revenue sources for basic municipal services,” he told members of the House Judiciary Committee.

Still, the federation could only support allowing Illinois municipalities to seek Chapter 9 if such communities had to go through a strong gatekeeper level, Msall said.

Illinois may not need a municipal bankruptcy option and it certainly does not need it very often, said William Brandt, outgoing chairman of the Illinois Finance Authority.

He advised the Legislature proceed with caution.

“Giving (the access to file) blanket authority will come back to haunt you in terms of municipal bond interest rates,” Brandt told the the committee.

Brandt has been involved in some of the country’s biggest-public entity bankruptcy cases, written bankruptcy law and overseen more-restrained forms of public restructuring.

He said Illinois should not let municipalities seek bankruptcy unless they first proceed through a mandatory gatekeeper.

Only if a short-term period of state-supervised restructuring and recovery fails should a Chapter 9 filing be allowed, he said.

“Chapter 9 can never be a substitute for political will,” he told the lawmakers.

Sandack said he’s open to studying ideas for a gatekeeper function and eventually might consider an amendment to that end.

Groups filing in opposition to the bill included the Fraternal Order of Police, Police Benevolent & Protective Association, Associated Fire Fighters of Illinois, and Service Employees International Union.

Firefighters President Pat Devaney said he’s been frustrated with the depiction that state-mandated fire and police pensions are single-handedly breaking cities.

“While it’s convenient to blame police and fire for all of the financial woes of our communities, unfortunately it’s not grounded in fact,” he said.

Devaney and Andrew Bodewes, speaking for the F.O.P., said their unions are glad help search for budget solutions if everyone would keep the conversations factual, explore all costs and revenues and try to work together.

Twenty-four states authorize or conditionally authorize municipal bankruptcy, according to the organization State Budget Solutions. Chapter 9 has been available since the mid-1930s, but has been used fewer than 700 times.

Some of the country’s more well-known and recent municipal bankruptcies include Detroit and the California cities of Stockton and San Bernardino.

Mark Fitton ([email protected]) is a reporter for the Illinois News Network, a project of the Illinois Policy Institute. An earlier version of this article first appeared at Reprinted with permission.