CHICAGO — The Indiana Senate could vote as early as Tuesday on a bill that would allow fiscally distressed cities and towns to file for bankruptcy.
The law would make Indiana the 25th state to allow local governments to file Chapter 9. Nationally, the struggles of local governments are gaining the spotlight, with more local officials mulling bankruptcy, which is the only unilateral way to void labor contracts.
“This is a national issue,” said Sen. Ed Charbonneau, a Republican from Valparaiso who is sponsoring the bill. “If a local unit can’t pay its bills anymore, then you have chaos on your hands, and it’s going to affect the community, the surrounding communities, and the whole state,” he said.
“So we need to have in place a way to prevent that from ever happening.”
The Senate Judiciary Committee unanimously approved Senate Bill 105 last week, but first imposed several changes to assuage local government advocates.
The original bill stipulated that the state would declare a local unit distressed and appoint an emergency financial manager only if the local unit itself 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.
After meeting with municipal advocates, lawmakers agreed to remove the ability of creditors to ask the state to step in.
Now the state can take over only if a municipality’s city council and mayor ask for help.
“This is putting a process into effect where a local unit can go for help. And if that’s truly what this is all about, why should a creditor be able to jam it down your throat?” Charbonneau said.
“Creditors have options now — they can go to court and file a suit.”
Another amendment would preserve the current right of the state treasurer to intercept state revenue aid for debt service if a local unit is facing default.
Charbonneau said the change — requested by the state treasurer and the Indiana Bond Bank — is an effort to keep the state intercept process outside the purview of a bankruptcy court.
Local officials also successfully lobbied for the bill to include a provision allowing a new mayor to petition the state to suspend the distressed status for 180 days so that he or she may present a new plan.
The bill is supported by Gov. Mitch Daniels and several Democrats and is expected to pass the Senate. Senators could vote on the measure as early as Tuesday or Thursday or Friday.
The chamber is not in session Wednesday. If approved, a representative would introduce a companion bill in the House.
Indiana law does not 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 in 2012, as voters last November passed a ballot resolution making property tax caps part of the state constitution.
“It’s a tool that we need to have in the tool box, and hopefully we’ll never have to use it,” Charbonneau said.