Municipal bankruptcies are illegal in Maine, but fiscal challenges in multiple Maine counties prompted legislators to consider legalizing them.
State Sen. Marianne Moore, who sponsored the bill that would authorize counties and municipalities to file Chapter 9, said she was inspired by a financial crisis in her district. Moore, a Republican, said she sought to give Washington County a way out of a financial crisis.
Local officials aren't that eager for the option. Washington County commissioners reportedly
"The bill itself, I suppose there's no harm in it being there," Washington County Commissioner Courtney Hammond said. "But as far as Washington County, it's not an option for us to ever utilize, at least under our current way that we operate."
Many people expressed concerns about the bill at a Wednesday committee hearing that didn't come to a conclusion. Meanwhile, Hammond argues, the problems that plague Washington County are running unchecked statewide.
There are 28 states that allow for Chapter 9 municipal bankruptcies. Even where they are legal, they're rare: only five cities have filed for bankruptcy since 2013, according to
Moore's bill would allow counties and municipalities in Maine to declare bankruptcy if they have exhausted other alternatives, are determined to be insolvent by the state auditor, and the majority of county commissioners or municipal officers approve the filing.
Washington County officials first realized it was at risk of becoming insolvent last year, Moore said in her testimony before the Senate State and Local Government Committee. But the problems started with a change of accounting practices in 2019.
"Carry-over amounts in a department's budget were being shown as revenue, not considering overspent line items," Moore said. The county's COVID relief funds were placed in a separate savings account to fund a new sheriff station, and now-departed members of the county's finance staff began transferring those funds into the general fund to cover a cash flow shortage, she said.
The problems were invisible to most county officials when they tried to monitor its budget, Moore said — herself included. And although Maine requires counties to conduct annual audits, the county fired an auditor around 2020 and couldn't find a new one.
So, last year, Washington County commissioners realized it had a revenue shortfall. The county operates off of tax anticipation notes from a local bank, and officials began to worry it wouldn't be able to pay off the $11 million TAN.
"We were looking at any and all options that might be out there for us, throwing mud at the wall and seeing what sticks," Hammond said.
Washington County has no outstanding bonds and no ratings.
The county attempted to issue bonds to fill the gap, but voters rejected the referendum in November. Moore and the county commissioners asked the legislature for a one-time loan, but were denied there, too.
To open up the last resort, Moore submitted the bill,
The bill has four sponsors, all of whom are Republican state representatives. It also
Democrats have majorities in both houses of Maine's legislature and Gov. Janet Mills is a Democrat.
The county commissioners don't think Chapter 9 would solve its problems.
"It's not an option for Washington County, because of the way that we operate, using tax anticipation notes from a bank," Hammond said. "If you were to go bankrupt, then no bank is going to lend you money."
Moore told the committee she was disappointed that Washington's commissioners weren't willing to offer support for the bill. But the need for the bill goes beyond Washington, she argued.
"We continue to receive reports from counties and municipalities that are struggling to make ends meet; therefore, l have decided to move forward with this bill," Moore said in her testimony. "Regardless of what is happening in Washington County, we need to have this tool in Maine."
Moore didn't offer specific examples, but there are several to choose from.
Nine people and organizations submitted comments for the hearing on Moore's bill. Seven of those comments were in opposition.
Many comments expressed concerns that allowing municipal bankruptcies could lead lenders to consider Maine borrowers as higher risk, raising borrowing costs for all counties and municipalities.
"The
Concerns for ratings and other credit evaluations were echoed in comments from the
"Adding Chapter 9 language to our statutes will introduce greater risk into every bond deal, whether or not any municipality or county actually chooses to use Chapter 9," said Terry Hayes, executive director of the Maine Municipal Bond Bank, in
The ability to file for bankruptcy is not a part of the rating criteria at Fitch Ratings or Moody's Ratings.
"The bill's passage would not fundamentally change how we evaluate counties and municipalities in Maine," wrote Dan Kowalski, assistant vice president at Moody's.
"If the state expands access to Chapter 9, Maine would join a number of states that already allow it, and yet municipal bankruptcy remains exceedingly rare, with only about a dozen filings over the last five years," Kowalski wrote. "Our rating analysis is based on the probability of default and loss given default. Default can occur with or without a bankruptcy filing, and since Chapter 9 restructuring requires the municipal entity to be insolvent, access to bankruptcy shouldn't affect the likelihood of default."
In addition to concerns for credit, the bond bank's Hayes said the bill should include more details on what a bankruptcy would entail, and she doesn't believe the necessary clarity can be reached with the three months remaining in the legislative session.
A representative from the Maine Public Employee Retirement System testified in opposition to the bill because in bankruptcy proceedings, counties and municipalities can have their pension liabilities discharged by the courts. To address the concerns, Moore suggested an
The legislators on the committee, in their questioning, seemed interested in how Washington County got into its current predicament, more than the merits of Chapter 9 bankruptcies.
"Should we be looking more at accountability for those that haven't done their statutory due diligence?" Rep. Randall Greenwood, a Republican, asked Moore. "Should we tie state money to making sure that your audit is updated?"
Moore, along with several members of the committee, opined that counties across the state were struggling to find auditors. Washington has attempted to conduct a forensic audit, but could not afford it, she added.
"Maybe the state needs to provide a little bit more help, a little more assistance," Moore said, "especially in the auditing aspect of it."
Hammond said Washington has received no support from the state in solving its funding gap. Several states that allow Chapter 9 bankruptcies, like Pennsylvania and Michigan, have programs to help municipalities prevent a bankruptcy, according to Nuveen.
Washington's current plan to fix its gap is asking its municipalities, which normally send tax payments to the county in September or October, to use their fund balances to send an early payment.
The county, the easternmost in the continental United States, has about 31,000 residents. It's about 200 miles from Portland, the state's largest city.
The state government is Washington County's largest source of revenue, Hammond noted, and commissioners asked the state to pay its funds early, too, but the state didn't help. Nor was it willing to help collateralize the loan.
Hammond said he's optimistic that the county will receive enough funds from its municipalities to pay off the TAN by its deadline on Feb. 20. Once it's paid off, the county will immediately take out another TAN. Commissioners hope to make structural changes in the 2027 budget that will prevent future shortfalls.
