CHICAGO — Indiana lawmakers Wednesday morning held a first hearing on a bill that would allow local units of government to file for Chapter 9 bankruptcy protection.

Sponsoring senator Ed Charbonneau, a Republican from Valparaiso, outlined SB 105 before the Senate Judiciary Committee, which listened to public testimony for about two hours Wednesday morning.

Those testifying, including local government advocates, cited concerns about losing local control under the bill, which would require a state takeover before bankruptcy became an option. Other concerns centered on how bankruptcies or state takeovers would affect the ratings of surrounding communities and bond buyers’ perceptions of local government debt.

Gary is considered a top candidate for state takeover and possibly even bankruptcy, and residents and representatives from the long-struggling city testified both for and against the measure. Public school advocates said many districts are also under pressure and called for the bill to be amended to distinguish between distressed governments and local school districts.

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. However, that board will be dissolved next year.

“The distressed unit appeals board might be going away, but the distress isn’t going away,” Charbonneau told the panel. “We need to craft a bill that can address this situation, and this is the starting point.”

He said the measure has sparked national attention, and that he had received a telephone call from the city manager of Hamtramck, Mich., which is pushing for permission from the state to file

for bankruptcy.

According to Charbonneau,  the Hamtramck city manager said: “ 'We know the train wreck is coming, but because of the way the state statute is written, we have to wait until the train wreck happens.’ He suggested we should have some proscribed way to deal with that.”

Advocates warn that the lack of local control and an appeals process could be problems. “We’re still considering the impacts of SB 105,” said Rhonda Cook, director of governmental affairs for the Indiana Association of Cities and Towns.

“How would it affect the municipal bond market? Our concern is even financially healthy communities would be affected in their bond ratings,” she said. “It may be a tool that’s needed and could help some ailing governments, but there’s more information that is needed from experts.”

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