CHICAGO — Indiana cities would be allowed to file for Chapter 9 bankruptcy protection under a bill touted by Republican Gov. Mitch Daniels.

Daniels this week called the measure — Senate Bill 105 — a "useful mechanism" for helping fiscally stressed cities that would help provide clarity on the topic of municipal bankruptcy.

Already, at least one municipality — the long-struggling town of Gary — is eyeing the measure. The sponsoring senator said he will meet Thursday with Gary's mayor to discuss the bankruptcy bill.

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

The board's ability to provide that tax relief, however, will end after 2011, as voters in November passed a ballot resolution making property tax caps part of the state constitution.

Distressed local governments will soon have few places to turn for help, said Sen. Ed Charbonneau, a Republican from Valparaiso who sponsored the bill.

"We didn't have anything in place," Charbonneau said. "I saw the potential for a problem down the road and felt it was important that we be prepared. It's legislation that everyone hopes we never have to use.

"It's recognition of what's going on all over the country, and not anything unique to Indiana," he added.

Indiana is one of 26 states that do not have on their books the specific state authorization required for a municipality to file for bankruptcy under federal code.

Chapter 9 bankruptcies remain relatively rare. In Michigan, the town of Hamtramck is seeking permission to file — state law currently prohibits it — with officials saying it is the only way the town can escape costly labor contracts.

Nationally, the struggles of local governments are gaining the spotlight, with more local officials mulling Chapter 9, which is the only unilateral way to void labor contracts.

"There's an intensifying of conflicting pressures of municipalities not wanting to file, but being under more and more pressure to get relief from retiree pension and health care obligations," said Martin Bienenstock, a partner at Dewey & LeBouef LLP. "Chapter 9 may be the only way for these municipalities to get relief."

Indiana's bankruptcy bill would give the appeals board the authority to declare a municipality distressed if it meets one of eight criteria, one of which is a missed bond payment. The designation would pave the way for a state financial takeover, the appointment of an emergency fiscal manager, and, finally, permission to file for bankruptcy protection.

The Indiana cities considered most likely candidates for possible bankruptcy are Gary, the town of Lake Station, and a small southern town called Georgetown that last summer passed an ordinance giving itself the authority to seek bankruptcy under the Home Rule Act.

Under the bill, the state would take over if a city council and the chief executive of the local unit asked for help or if a coalition of creditors owed more than 30% of the unit's annual revenue asked the state to step in.

Charbonneau introduced the measure Dec. 23. It will be referred to a Senate committee when lawmakers reconvene Jan. 5, and hearings will later be scheduled.

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