Indiana Conference Committee To Weigh Chapter 9 Option in Bill

CHICAGO — Indiana lawmakers will debate whether to allow municipalities to enter into bankruptcy as they hammer out final differences to a bill passed by both chambers but stripped of the Chapter 9 option by the House.

SB 105 carves a path for fiscally stressed governments to enter into state-controlled emergency financial management, similar to a new measure enacted last month in Michigan.

The Republican-controlled Indiana House approved the bill last Thursday after stripping it of a provision that would allow local governments to declare bankruptcy — a provision that supporters say is crucial to giving the law teeth.

If approved, Indiana will join eight other states in creating an emergency management act for fiscally stressed cities. Gov. Mitch Daniels has said he supports the legislation.

The bill would allow the state to declare a local unit — including school districts, which are considered among the most vulnerable credits — to be distressed and appoint a financial manager only if the local unit itself asked for help.

The government must meet one of eight criteria before it could be declared in fiscal distress.

The emergency manager would be granted an array of powers, though not the ability to dissolve labor contracts, as is the case in Michigan.

If the emergency manager was unable to solve the unit's problems, he or she could recommend that the unit be allowed to file for Chapter 9 under the Senate version.

After a heated debate Wednesday, the House stripped the bill of its bankruptcy provision. The bill will now head to conference committee where the two chambers will attempt to hammer out the differences.

Sponsoring Sen. Ed Charbonneau, R-Valparaiso, said he plans to re-insert the bankruptcy provision.

House Sponsor Rep. Ed Soliday, R-Valparaiso, refused a colleague's request on the House floor Thursday morning asking him to promise not to sign a final bill that allows bankruptcy.

Like 26 other states, Indiana does not currently allow municipalities to file for federal bankruptcy protection. Cash-strapped local governments are instead directed to the state's Distressed Unit Appeals Board, which is authorized to provide various forms of tax relief.

But the board's ability to deliver relief will be dissolved next year, after voters last November voted to make the property-tax caps part of the state constitution. The legislation would cut the board down to three members — the head of the Office of Budget and Management, the state auditor, and the commissioner of the department of local government finance.

Gary has successfully petitioned the board for tax relief three years in a row, the only government to do so. The bill has been dubbed the "Gary bankruptcy bill" and is widely viewed as a measure aimed specifically at paving a path for the long-struggling city to file Chapter 9.

Supporters have denied that it is aimed at Gary and said many units of governments across Indiana, including school districts and counties, face fiscal difficulties that would be helped by the new law.

"This is not a Gary bill — Gary has issues, Youngstown had issues, New York City almost went bankrupt," Soliday said. Local governments "around the state have financial issues. This is about preventing Chapter 9. … Default affects us all because we're all in one pool with the bond market. We spent hours and hours with the banking and bonding community trying to find compromises that work."

Like critics of the Michigan law, some say the Indiana bill gives too much power to an emergency manager who would take over the local unit if approved by the distressed unit appeals board.

"You need to rethink your philosophy of help," said Rep. Vernon Smith, D-Gary, who voted against the measure. "This gives too much authority to one person — a manager, a dictator, a potentate, a king, an autocrat."

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