CHICAGO – Distressed local governments struggling under the weight of pension, healthcare, and other debts could turn to a special authority for fiscal guidance under legislation before Illinois lawmakers.
House Bill 2575 would establish the Illinois Local Government Protection Authority, charged with guiding troubled local units of government through their financial difficulties without cutting services to the bone.
A "cooperative effort between the state and financially unit of local government -- that involves local elected officials and local governmental bodies and taxpayers, workers, and business entities developing a plan of financial recovery -- is the best way to find a permanent solution to current financial challenges," says the legislation sponsored by state Rep. David Harris, R-Arlington Heights.
The bill stalled in committee and faces an uphill battle judging from Democratic lawmakers' comments, but backers say they will continue to lobby for it and are open to tinkering with provisions to generate support. Democrats control both houses of the General Assembly.
The goal is to get municipalities back on track without bankruptcy, said the Chicago Civic Federation, which tracks Illinois and local government finances and developed the legislation. The organization has long championed the effort to establish such advisory panel.
Chapter 9 filings are not generally permitted under current state statutes but Republican Gov. Bruce Rauner believes it should be an option.
While Chapter 9 has been the subject of sometimes spirited hearings, it has gained little traction as Democrats in Springfield view it as a Republican attack on labor.
Under the legislation, the new authority would be governed by nine trustees, including four appointed by the Illinois Municipal League, which represents municipalities across the state. The governor, House speaker and minority leader, and Senate president and minority leader would each appoint one member.
The authority would rely on the state comptroller's office to supply governmental reports and some operational support while the authority could also set a fee schedule to cover its own administrative expenses.
"The LGPA would serve as a resource to assist distressed municipalities in making determinations as to what essential governmental services are sustainable and affordable and what combination of revenue increases and service cuts, and other actions would be necessary to ensure fiscal sustainability and access to critical services," Civic Federation president Laurence Msall said.
The local government could petition the authority for intervention. The state comptroller, a pension fund, or large creditor owed a substantial debt but the local government could also petition, but the government would have to agree to participate.
To qualify for intervention, a local government would have to meet certain fiscal criteria that include overdue bills, poor liquidity, weak pension funding ratios, or deep budget imbalances.
In addition to making recommendations on cuts, tax hikes, and pension funding issues, the authority would be charged with reviewing whether the entity should try to negotiate a debt restructuring, explore public-private partnerships, or asset sales and consolidation.
The authority would also consider potential pension reforms such as whether the government should offer more corporate-style retirement plans and whether it should establish a trust to fund its retiree healthcare obligations.
It could set various fiscal targets, serve as a mediator in negotiations between the government and other parties, endorse tax increases that might require a public referendum, and make recommendations to lawmakers on the diversion of funds to meet a specific funding obligation.
The authority may seek declaratory and injunctive relief regarding the exercise of its powers and implementation of its findings and recommendations.
The authority would also look at whether, as a last resort, bankruptcy should be pursued.
"This municipal protection authority concept could be the means of providing state and local government cooperation and oversight while allowing the municipality, its elected officials, workers and unions, creditors and bondholders to have a means of participation with a definitive end result," municipal restructuring specialist James Spiotto, a managing director at Chapman Strategic Advisors LLC, told lawmakers.
Spiotto and the federation first pitched the model earlier in the decade as a means to intervene before a government's fiscal strains reach crisis stage. The authority was among the federation's 2014 legislative priorities as the organization searched for a legislative sponsor.
Spiotto's letter outlines the varying degree of state intervention processes seen across the country from advisory commissions to more stringent oversight of a local government's finances through receivership boards or the appointment of an emergency manager as is done in Michigan.
The bill in current form is likely to face a tough road in the legislation, based on comments from Democratic lawmakers in its first hearing held by House Cities and Villages Committee late last month.
Several lawmakers questioned the need for such a body, citing existing laws and the limited number of local governments that might benefit. Some also asked why a local government would pay for the services and questioned whether it provided an avenue to simply avoid prevailing wages or hurt unions' rights.
The state has several existing laws on the books including the Financial Distressed City Act and the Local Government Financial Planning and Supervision Act that allows for state intervention through the creation of a special oversight authority.
Some believe those laws falls short based on the continuing struggles of cities like East St. Louis that remain distressed after leaving oversight. The distressed city Act offers only limited participation depending on tax rates and per capita tax yields and the supervision act is for municipalities under 25,000.
Msall said the benefit of the proposed law would be to establish "a systematic means of evaluating and assisting these governments" instead of doing so in a one-off measure as is the case under the distressed city act. He noted that oversight authority is often viewed favorably by rating agencies.
"The Civic Federation is very concerned about the financial condition of many local governments in the state of Illinois and many of them which will not be able to seek assistance unless there is the creation of this authority," Msall told lawmakers.
No vote was taken and the legislation was re-referred to the Rules Committee last Friday.
"Although the Civic Federation is disappointed that there weren't the requisite number of votes to get this bill out of committee, we are encouraged that the committee took the hour to better understand the matter and also by the support shown by many members including some suggestions that might generate additional support," Msall said.
"The issue is not going away, and the federation will continue to advocate for something other than a direct path to bankruptcy for Illinois' distressed local governments," he said.
The federation said the shortcomings of Chapter 9 in dealing with fiscal distress and the need for intervention through a body like the proposed LGPA will be a topic of discussion at an April 19 conference sponsored by the federation and the Federal Reserve Bank of Chicago. Its title is "Chicago's Fiscal Future: Growth or Insolvency?"
Spiotto will moderate the panel discussion on municipal bankruptcy and efforts in other states to stave off Chapter 9.