Kentucky Rep. Brad Montell, R-Shelbyville, has asked the state Legislature to study municipal bankruptcy laws.

BRADENTON, Fla. – With municipal bankruptcy cases receiving heightened attention across the country, and in his own state, a Kentucky lawmaker believes it's time to examine the state's restructuring law.

Rep. Brad Montell, R-Shelbyville, also wants the state to determine if it should develop a program to assist financially struggling local governments, he said.

"In looking at our statutes we simply don't address it," said Montell, a former broker-dealer who is a registered investment advisor at Meridian Wealth Management in Lexington. "It seems to me we need to have sort of a blueprint of what authority the state government has in these instances."

Hillview became the Bluegrass state's first city to file a Chapter 9 petition last August, as the small municipality sought to deal with an $11.4 million legal judgment after losing a lawsuit to Truck America Training.

U.S. Bankruptcy Judge Alan C. Stout is currently considering whether to allow the city of 9,000 residents south of Louisville to proceed with its case. Truck America has objected to Hillview's petition.

"I think all of us have tended to think it could never happen here. It can, and it did," Montell told The Bond Buyer. "Hopefully, we won't see a lot more of these. If we do, I think as a state we need to be prepared."

House Concurrent Resolution 13, filed by Montell, said defaults and bankruptcies in Alabama, California, Pennsylvania, and Rhode Island have brought heightened awareness of municipal bankruptcy.

HCR13 requests that the Legislative Research Commission conduct a study of municipal bankruptcy, including laws and prevention practices employed by other states.

There is precedent for programs, and evidence that they can be successful.

More than half of the states and the District of Columbia have implemented municipal debt supervision or restructuring mechanisms to help local governments, according to studies by municipal restructuring expert James Spiotto, managing director of Chapman Strategic Advisors.

Such programs provide assistance, refinancing, oversight, and other mechanisms, giving local governments a "second look" at ways to avoid taking the final, last-resort option, he told the U.S. Senate Committee on the Judiciary Dec. 1, while testifying about measures to help Puerto Rico deal with its $70 billion debt burden.

Since 1980, those municipalities with no "second look" or oversight have been over six times more likely to file for Chapter 9 bankruptcy, he said.

Twelve states specifically authorize municipal bankruptcies, while 12 states authorize the filing of a petition with conditions.

Kentucky falls into the latter group. Although any taxing agency or instrumentality can file for bankruptcy, Kentucky counties are prohibited from filing a petition unless their restructuring plans first are approved by the state local debt officer and the state local finance officer.

The state's oversight provision doesn't apply to cities or any entity other than counties.

Montell said he filed HCR13 in an attempt be "proactive" in the event of filings other than Hillview's. He isn't aware of any a local government currently in fiscal distress, he said.

Montell's study would include a review of other state laws, and the practices that they have employed in order to intervene in a city or county financial crisis.

"We just want to get some answers, and see how other states have handled this in case we need to take action next session," he said.

The resolution he has proposed also cites the possibility of credit rating downgrades for the entire state due to the unhealthy financial health of its governments, as another reason to study Chapter 9 further.

"I know Kentucky is not very highly rated with our handling of the pension situation," Montell said. "We're taking it very seriously, and it's going to be addressed."

In a report last week, Moody's Investors Service said the worst performing states in terms of making their actuarially determined contribution in fiscal 2014 were: New Jersey (18.6%), California (48.2%), Texas (62.9%), New York (64.4%), Kentucky (64.5%), and Virginia (69.3%).

The state had the second-lowest pension funding ratio of any state behind Illinois, and the third worst if Puerto Rico is included, according to Atlanta-based Asset Preservation Advisors, which specializes in managing municipal bond portfolios.

Kentucky's actuarial accrued pension liability for all plans was $43.6 billion in fiscal 2014, up from $25.7 billion in 2005, APA said.

Under new accounting guidelines, the worst-funded plan in the state's portfolio currently is the Teacher's Retirement System with unfunded liabilities totaling $24.4 billion for a funded ratio of 42.5%.

Lawmakers this year, as in year's past, are negotiating the funding level, and potentially catch-up contributions, for the teacher's plan as well as possibly using pension obligation bonds to alleviate some of its unfunded liabilities.

Montell said the state should look at its bankruptcy law because the budgets of cities, counties, and school districts also could be pressured because of their costs to participate in state-run pension plans, along with other stressors such as labor costs.

"We want to get our financial house in order and I'm confident we will," he said. "That's one reason we want to be on top of [the bankruptcy law] as well."

States traditionally have enacted legislation designed to protect their cities from financial distress or to aid cities should financial distress befall them, according to Spiotto's testimony before the Senate Committee on the Judiciary.

While Chapter 9 bankruptcy isn't designed for Puerto Rico because it is more like a state, Spiotto said, Congress should consider establishing a Financial Oversight and Recovery Assistance Authority to help the commonwealth to develop the Recovery Plan.

Puerto Rico needs a detailed plan that takes a holistic approach to foster financial credibility and economic recovery, he said.

Such oversight would lead to "constructive participation by creditors and others through an impartial and fair process that will bring all required parties to the table and provide all the best results possible," Spiotto told the committee in December.

Some 26 states and the District of Columbia have debt supervision programs or restructuring mechanisms for local government entities, according to Spiotto.

He said effective programs aimed at avoiding financial meltdown and Chapter 9 have been "well demonstrated" by the Municipal Assistance Corporation for New York City in 1975, the Pennsylvania Intergovernmental Cooperation Authority for Philadelphia in 1991, the District of Columbia Financial Responsibility and Management Assistance Authority for Washington, D.C. in 1995.

Florida, Indiana, Michigan, Nevada, New Jersey, New York, North Carolina, Pennsylvania, and Rhode Island include a variation on a provision allowing for the appointment of a financial control board or commission, emergency managers, receivers, coordinators, or overseers for troubled local governments, Spiotto's studies said.

While Kentucky didn't have an oversite program when Hillview filed for bankruptcy, the Kentucky League of Cities has said it supports Montell's resolution, which could lead the state to institute an emergency assistance program.

The resolution is before the House Local Government Committee, and hasn't been heard.

The Kentucky Legislature's annual session began Jan. 5 and runs through April 12.

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