Detroit-style bankruptcy can't happen in Indiana

2013-07-27T21:30:00Z 2013-07-28T22:51:04Z Detroit-style bankruptcy can't happen in IndianaDan Carden, (317) 637-9078
July 27, 2013 9:30 pm  • 

INDIANAPOLIS | No matter how destitute or debt-laden, no Hoosier local governmental body can file for bankruptcy like Detroit did earlier this month.

State law doesn't allow it, but at least one region lawmaker would like to change that.

The federal bankruptcy code permits municipal governments to seek Chapter 9 bankruptcy protection only if authorized to do so by their state.

Indiana is one of 22 states, including Illinois, that do not sanction local government bankruptcies.

Michigan, on the other hand, is among a dozen states that will assent to municipal bankruptcy when various state financial remedies have been unsuccessful or are exhausted. Other states allow their local governments to file for bankruptcy without first seeking any state help.

Municipal bankruptcy is very rare. Between 1980 and 2012, just 262 of the 55,000 local governments that can issue debt (less than 0.05 percent) filed for bankruptcy, according to research by the Pew Charitable Trusts.

Nevertheless, state Sen. Ed Charbonneau, R-Valparaiso, believes in light of Detroit's bankruptcy, the largest in the nation's history, it's time Indiana set up a state intervention process to make bankruptcy an option for distressed local government units when all else fails.

"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.

A 2012 state law, sponsored by Charbonneau and enacted by former Gov. Mitch Daniels, sets the groundwork for a potential Indiana municipal bankruptcy option.

It allows the executive and fiscal bodies of a local government, such as the mayor and council in a city, to jointly ask the state's Distressed Unit Appeals Board to designate their local government as distressed.

If the board agrees the local government meets one of eight distressed financial conditions — such as defaulting on debt, skipping payroll or failing to pay vendors — the board then can appoint an emergency manager with broad powers to reduce the local government's spending, renegotiate labor contracts and audit the books.

But if the emergency manager is unsuccessful, he or she currently does not have the authority to file for bankruptcy and put the restructuring of the local government's finances in the hands of a federal judge.

Instead, the state board only can hire a different emergency manager and try again.

Charbonneau said the possibility of bankruptcy is needed in that process to pressure the emergency manager and local officials into making the hard choices necessary to avoid bankruptcy.

"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.

So far no local governments have sought assistance from the Distressed Unit Appeals Board since its role was revised in 2012. The board's website indicates the procedures for a distressed local government determination are still "under development."

In an earlier incarnation, the board permitted Gary to exceed the state's property tax caps for three years while the city adjusted its spending to match reduced revenues. However, that action now would be unconstitutional following voter approval of the 2010 property tax cap amendment.

Overall, Indiana local governments generally are in a better financial position than Detroit for at least two reasons: a constitutional cap on local government debt set at 2 percent of the value of all taxable property in the municipality (it's 10 percent in Michigan) and a pre-paid employee pension system administered statewide.

Detroit indicated in its July 18 bankruptcy filing that it owes up to $20 billion in long-term debt, mostly underfunded pensions and post-employment health benefits for current and retired city employees.

At the Indiana Statehouse, Charbonneau said because a municipal bankruptcy law isn't immediately needed to address a similar Hoosier crisis, it's the perfect time for lawmakers to consider the issue dispassionately.

He plans to sponsor legislation on the topic during the 2014 session of the General Assembly.

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