Bankruptcy and Banking & Finance and Legislation and Government & Economic Development and Government

Indiana senator to push for municipal bankruptcy law

August 3, 2013

A northwestern Indiana lawmaker says he will push a measure next year that would change state law to allow local governments to file for bankruptcy like Detroit did in July.

Republican Sen. Ed Charbonneau of Valparaiso says it's time for Indiana to set up a process to make bankruptcy an option for distressed local governments when all other choices have been exhausted.

Federal bankruptcy laws allow municipal governments to seek Chapter 9 bankruptcy protection only if their state authorizes it. Only 28 states allow local government bankruptcies under various conditions.

A dozen states, including Michigan, allow municipal bankruptcies when state remedies have been unsuccessful. Other states allow local bankruptcies even if local officials don't seek state help, The Times in Munster reported.

Between 1980 and 2012, just 262 of the 55,000 local governments that can issue debt filed for bankruptcy, according to the Pew Charitable Trusts.

But Charbonneau said he believes Detroit's bankruptcy shows the need to have measures in place.

"These kinds of things are a possibility, and we need to get a plan in place to be able to address these situations when they arise," Charbonneau said.

Former Gov. Mitch Daniels signed a law in 2012 allowing the executive and fiscal bodies of a local government to jointly ask the state's Distressed Unit Appeals Board to designate their local government as distressed.

To receive the designation, the local government must meet one of eight conditions, such as defaulting on debt, skipping payroll or failing to pay vendors. If the criteria are met, the board then can appoint an emergency manager with powers to reduce the local government's spending, renegotiate labor contracts and audit its books.

If the effort fails, the only current options are to hire another emergency manager and try again.

Charbonneau said adding bankruptcy as an option can pressure the emergency manager and local officials into making the hard choices necessary to remain solvent.

"When you have that option, it encourages people to do a lot better job of seriously coming to the table to talk about issues and resolve them," he said.

Before its role was revised in 2012, the Distressed Unit Appeals Board permitted Gary to exceed the state's property tax caps for three years while the city adjusted its spending to match reduced revenues.

Overall, Indiana local governments generally are in better shape than Detroit. That's largely because of a constitutional cap on local government debt set at 2 percent of the value of all taxable property in the municipality and a pre-paid employee pension system administered statewide.

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