Illinois May Be the Next State to Let Municipalities File for Bankruptcy

by | February 5, 2015

By Kim Geiger and Hal Dardick and Joe Mahr

Gov. Bruce Rauner wants to give cities, towns and counties the authority to file for bankruptcy protection, a move that could give local governments a stronger foothold when negotiating with local police and fire officials over costly pension obligations.

The governor made no mention of the idea during his State of the State speech Wednesday, instead burying the concept in a list of talking points the administration distributed to lawmakers. Rauner aides would not elaborate on how it might work.

But the single sentence calling for the state to "extend to municipalities bankruptcy protections to help turn around struggling communities" mirrors a proposed law introduced last month by state Rep. Ron Sandack, R-Downers Grove. Sandack said his aim was to give cities more tools for getting their financial affairs in order, including a "level field" when negotiating over pensions.

Federal law only allows municipalities to file for bankruptcy with explicit permission from the state where they are located, said James Spiotto, a municipal bankruptcy expert and attorney who is managing director of Chicago-based Chapman Strategic Advisors.

Currently, only the Illinois Power Agency has been given such authority. It would take passage of a new state law to extend the authority to municipalities.

Asked to explain how the law would be structured, Rauner spokesman Lance Trover said, "the specific details regarding authorizing communities to pursue that option will be part of an ongoing dialogue in the coming weeks."

Since 1954, just 63 municipalities have filed for bankruptcy in the United States, with Detroit being the only city "of size" to do so, Spiotto said.

Lawmakers on both sides of the aisle said they were open to the idea, but some were skeptical about how useful it would be.

"Do you ever want to become Detroit?" said Rep. Jack Franks, D-Marengo. "That's sort of, like, a nuclear option that you don't use unless you're ready to explode."

Bankruptcy is no panacea, Spiotto cautioned, but allows a municipality to reduce its debt in the short run so a long-term plan to grow the local economy can be made.

Chicago Mayor Rahm Emanuel's office dismissed the proposal, instead noting efforts by the mayor to lower the long-term costs of city worker pensions, the city's biggest financial problem, and bring the city's annual spending in line with the amount of money it takes in.

"The mayor will continue on this path, and the governor's proposal -- which we were not aware of -- is in no way part of our plans," spokesman Adam Collins said.

The debt levels of many municipalities have ballooned after Illinois loosened the rules in 1970 on how much towns can borrow without seeking voters' approval. The latest recession gutted the investment portfolios of towns' police and fire pension funds, and a new state law forced towns to pay more to stabilize those funds.

Amid concerns that towns could go broke over pensions, the Illinois Municipal League has been pushing for towns to have greater leeway to file for bankruptcy -- which could allow them to renegotiate pension deals. Rockford's mayor has led the charge, although no towns, including Rockford, have publicly said they would seek bankruptcy protection if they could.

Even still, said Rep. Joe Sosnowski, R-Rockford, "if cities don't have the ability to get out of some of those contracts or modify them, bankruptcy may be the only solution."

Sandack, who was mayor of Downers Grove before being elected to the House, said giving cities the ability to file for bankruptcy would give them more leverage when negotiating with unions.

"I know what difficulty it is being in charge of a municipality ... with ever-increasing police and fire pensions and very little in the form of power to do anything about it," Sandack said. "I think (towns) need to be permitted all reasonable tools to fend for themselves and control their futures."

Others said there are better ways to help. The General Assembly can pass legislation to allow an individual municipality to file for bankruptcy once it's in dire financial straits, but there's no standard form of state assistance to help them straighten out their finances prior to that.

"Other states provide much more direct financial expertise and assistance in helping local governments navigate away from bankruptcy," said Laurence Msall, president of the nonpartisan Civic Federation budget watchdog group.

Even in south suburban Harvey, which has for years spent far more than it takes in, there is little appetite to mull bankruptcy. Longtime Ald. Joe Whittington said the fear is that outsiders, once given control, could gut the town in ways unfair to residents.

The state could better help by more aggressively overseeing how towns spend and borrow money, Whittington said.

"If you look at a lot of the towns around here, it's an indictment of (state) government not stepping up," he said. "If Rauner wants to make this state great, then make all the municipalities get on board and get their act together and pay the piper."

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