 And while State Rep. Ron Sandack, R-Downers Grove, says doesn’t wish bankruptcy
on any town, he’s filed a bill to let Illinois municipalities seek
reorganization under Chapter 9 of the U.S. Bankruptcy Code.
The legislator said the effort is not one to allow a municipality to throw up
its hands, liquidate its assets and say, “We’re out of business.”
Sandack said Chapter 9 is quite similar to the debt restructuring available to
individuals under Chapter 13 and businesses under Chapter 11. It is not a
financial get-out-of-jail card.
Instead, he said, it is a structured and supervised method of helping a
municipality address crushing debt and includes input from creditors and
supervision by a trustee and a judge.
“This is no panacea or silver bullet,” Sandack said. “It’s not to be trifled
with.”
Sandack said he’s not aware of any municipalities currently considering
bankruptcy protection.
He said his bill simply gives municipalities access to a process that’s been
around for nearly 80 years and, during those years, has been used fewer than 700
times.
Sandack said legislation is necessary because federal bankruptcy law requires
state authorization for a municipality to file.
The Illinois Municipal League said it views municipality bankruptcy as a last
resort.
“Ultimately what were are saying to the General Assembly is if they are unable
or unwilling to help us reduce some of our (municipalities’) costs that are tied
up in operating and labor and some other unfunded mandates that have been
imposed over the years, then we may have no recourse at some point in the future
than to avail ourselves under Chapter 9 bankruptcy,” said Joe McCoy, the
league’s legislative director.
It would be the league’s preference that an Illinois’ enabling statute never
need be used, he added.
Sandack’s bill likely will face opposition, as creditors generally are repaid a
fraction of what they are owed when a bankruptcy occurs. Bondholders and
financial institutions would have serious concerns.
Unions also would be unlikely to readily accept any diminishment of already
bargained contract terms, such as salaries and pensions.
Illinois News Network’s calls for comment on the bill to the Illinois AFL-CIO,
Associated Firefighters of Illinois and AFSCME Council 31 were not returned.
Chapter 9 bankruptcy indeed “is very last resort type of approach,” said David
S. Kupetz, a California lawyer who works in resolution and reorganization law
for the firm Sulmeyer Kupetz.
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 There is no single, simple template for a Chapter 9 case and the
plans presented by municipalities to bankruptcy judges vary greatly,
he said.
But experts said cuts to personnel — including in services such as
police, fire and public works — are common.
Still, Kupetz added, a bankruptcy judge or the court’s appointee
does not step in to micromanage the city’s operations or given area
of operations unless the parties consent, he said.
The court, Kupetz said, applies a feasibility test that looks at not
only whether the adjustment plan will allow the entity to ease its
pressing debt but whether it can do so while meeting its duties to
its citizens.
Addressing liabilities such as pensions and healthcare benefits for
retirees may become a factor in a Chapter 9 bankruptcy, but that in
large part has to do with the plan presented, experts said.
But failure to realistically address those liabilities can, in some
cases, put the community back where it began and even result in
re-entry into bankruptcy, Kupetz added.
John H. Knox is a partner in the public finance section of the firm
Orrick, Herrington & Sutcliffe and worked on the bankruptcy cases of
the California cities of Stockton and Vallejo.
He said it’s important to remember that cuts, including in
personnel, usually will have come long before the filing of Chapter
9. The proverbial “low-hanging fruit” is gone and the bankruptcy
filer is looking at more difficult ways to reach cost reductions, he
said.
“I’m fond of saying, ‘Bankruptcy is a terrible option unless it’s
become the only option,'” he said. “It’s for those situations where
you’ve reached the point where there are no other options.”
The act of filing a Chapter 9 case does provides a city some
leverage, he said.
In Stockton’s case, he said, the city was able to come to
settlements with eight of its nine unions pre-filing and settled
with the ninth shortly after Chapter 9 was filed.
Although a last resort, a benefit of Chapter 9 is that it forces
everyone to come to the negotiation table, Knox said.
Quite early in the Stockton case, he said, the judge astutely noted
that municipal bankruptcy was like “negotiations on steroids.”
[This
article courtesy of
Watchdog.]
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