News From Terre Haute, Indiana

Indiana Legislature

April 19, 2011

‘Bankruptcy bill’ proposed to give local governments ‘a way out of chaos’

INDIANAPOLIS — Legislation that would let financially strapped local governments and school districts in Indiana call in an emergency manager to impose tough fiscal controls may be one step closer to becoming law.

Senate Bill 105, dubbed the “bankruptcy bill” for its provision that would allow insolvent local units of government to file for Chapter 9 bankruptcy, was approved by the House judiciary committee Monday. It’s already passed the Senate.

Rep. Ralph Foley, a Martinsville Republican who chairs the committee that heard the bill, described it as “a way out of chaos” for communities and schools that can no longer pay their bills.

The bill, though, would require local officials to admit they needed that “way out” and be willing to let a state-appointed manager step in to take over financial decision-making. “Itss like they’d be waving a white flag, saying ‘ give up’,” said Cris Johnston, the state public finance director who helped craft the bill. “I can’t imagine too many people doing that.”

The original bill allowed major creditors of a financially distressed local unit of government to petition the state to appoint an emergency manager to take over the powers of the local executive and the fiscal branch of that government unit.

The emergency manager could impose what Johnston has called “tough love” —  “stringent cost-cutting that include layoffs and contract re-negotiations.”

That provision has been removed. Under the current bill, the request for help has to come from local leaders, such as a mayor and a city council, or a school superintendent and a school board. They’d have to meet one of eight financial conditions to be eligible for the help. Those conditions include missing two payrolls in a row, or defaulting on a bond payment.

The bill comes at a time when local governments and school districts are struggling with reduced revenues brought on by the recession, property tax caps and cuts in state funding.

Indiana currently doesn’t have a law that would allow a local unit of government to declare bankruptcy.

Under the bill, a local unit of government would have to allow an emergency manager to come in an attempt to resolve the fiscal crisis before it could ask the state for permission to file bankruptcy.

Johnston, who sits on the state’s Financial Distressed Units Board that would evaluate the requests for help, explained the value of an emergency manager by citing his experience with the City of Gary.

For the past three years, Gary has had to ask the state’s permission for a waiver to collect more in revenues than it’s allowed to collect under the property-tax cap. In reviewing those requests, Johnston said he found contracts that had been entered into by the city that should have been renegotiated by city officials there to save money. But the mayor of Gary, up for re-election this year, has gone on record saying he won’t ask the state to appoint an emergency manager if the bill passes.

Rep. Dan Leonard, a Republican from Huntington, voted against the bill in committee, saying he opposed giving local governments the option to file for bankruptcy, because it puts the interest of secured creditors, like banks and bondholders, ahead of small business owners who are often unsecured creditors.  Leonard said it would allow for “total irresponsibility of people handling taxpayer dollars.”

The bill now moves to the Senate for debate and vote.

Maureen Hayden is statehouse bureau chief for the Tribune-Star. She can be reached at maureen.hayden@indianamediagroup.com.

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