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Indiana senator to push for municipal bankruptcy law

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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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  • Ridiculous
    Politicians preach to voters "Manage your financial matters, bankruptcy is not a way out when bad financial decisions are made". However, it is OK for cities and towns to declare bankruptcy as a pathway to getting out of paying pensions to workers who paid into the system for years. We need a referendum that blocks cities and towns from operating outside a balance budget, and block those same communities from raising sales taxes in order to spend more money on items the community cannot afford. Politicians are friends of sports franchises and business, not city and county employees.
  • Wasted
    I totally disagree with adding the option for bancruptcy and think its a cope out. It's too easy to throw up your hands and "give up" with bancruptcy. Hard choices should be made all the time not when you are facing bancruptcy. The majority of my work deals with tax supported entities and I see some of the most wasteful spending and stupid purchases by municipalities, schools and state governments. A lot of times it shows the laziness of those in charge of making decisions. If the emergency manager doesn't get it right during his/her term then he needs to be replaced immediately. And now this lawyer jumps in to "create" a case to keep himself busy and suck more money out of the county, town or city he is working for....what a waste of money.

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