“Clearly they’re among a very small number of municipalities that are vulnerable to bankruptcy given their extremely bad position,” said researcher Marc Joffe.

CHICAGO -- With talk percolating in Illinois about a bill that would authorize municipal bankruptcy, a report has identified five struggling Chicago-area suburbs as most vulnerable to a Chapter 9 filing.

Chicago-based government financial disclosure firm CivicPartners LLC and independent state and local government research analyst Marc Joffe examined financial statements of all but the state's smallest municipalities that are filed with the state controller. Among other factors, their report examines government-wide unrestricted net position and general fund balance.

Using those measures, roughly 20 Illinois local governments are found to be distressed enough to qualify for Chapter 9. But the report names only five of the municipalities, identifying them as top candidates based on the financial measures coupled with additional evidence such as negative auditor opinions or media reports.

All five are Chicago suburbs located in Cook County.

One thing they have in common? Fiscal mismanagement, said Joffe, a former Moody's Analytics analyst who has conducted similar research with California local governments.

"That's one reason I felt strongly about highlighting those communities; there's confirming evidence above the numbers," said Joffe. "I'm not saying these are absolutely the five most likely cities to default or get a bankruptcy, but clearly they're among a very small number of municipalities that are vulnerable to bankruptcy given their extremely bad position.

"A lot of times these things flow off the radar because they're not rated," said Joffe, who worked on the report with the Center for Government Studies at Northern Illinois University. "It's good to do this full sweep because you find things that are not found by ratings agencies."

The report comes as Republican Illinois Gov. Bruce Rauner pushes lawmakers to approve a bill that would allow local governments to file for Chapter 9 bankruptcy. House Bill 298 is part of Rauner's so-called turnaround agenda for the state and the new governor is pushing it as an option to help some Illinois local governments resolve their fiscal struggles.

The measure, stuck in the House Rules Committee since March, is not expected to find traction among Democratic lawmakers who control the legislature, according to Steve Brown, spokesman for House Speaker Rep. Michael Madigan, D-Chicago.

"It's failed to stir up enough support," said Brown.

Some market participants have said that the bankruptcy bill could gain more support following the state Supreme Court's recent ruling voiding state pension reform legislation.

Rauner has already named Chicago Public Schools as a possible candidate for bankruptcy if it becomes law. Joffe's report focuses only on municipalities and does not examine school districts.

The five municipalities Joffe identified are Dolton, Country Club Hills, Sauk Village, the Village of Maywood and the city of Blue Island. "You can see property prices crater in a small area and they have no margin of error they're very vulnerable," said Joffe.

Officials from four of the five municipalities did not return The Bond Buyer's calls and emails for comment.

The village administrator of Dolton, who did return the call, strongly rebutted the report's findings.

"We are not anywhere near considering or talking about bankruptcy," said Stan Urban, Dolton's administrator since 2013. "We have money in the bank, so I don't know where they came up with the idea that we'd be a candidate for bankruptcy. I take personal offense at that."

Dolton, south of Chicago with a population of 23,000, reported a small negative net unrestricted position in its 2013 finances and a general fund balance that was positive but well below Government Finance Officers Association guidelines that general fund balance should equal two months' of expenditures. Dolton's general fund balance would cover less than a month of expenditures, according to the report.

"I don't think that the GFOA statement has changed since 2000," Urban said. "They don't take into consideration the economic times we are in today."

Joffe's report also highlights an adverse audit opinion in 2013 that features a list of items the auditor was unable to review or confirm, including whether bond proceeds were spent in accordance with applicable ordinances and requirements.

Urban said the village has been improving since 2012 when a new mayor took over and hired him as administrator, and that the village has hired a new auditor.

"Prior to 2012 we were the poster child for bankruptcy," Urban said. "Mayor [Riley] Rogers inherited a nightmare," he said, adding that after years of no annual or tax increment financing audits, the village is now less than a year behind in its annual audits and expects to file its latest audit in August.

He also said the city's home-rule powers make a bankruptcy unnecessary.

"If we were in dire straits - which we are not - the board can raise real estate tax or a cigarette tax or motor fuel or a you-name-it tax that would assist in any financial woes which we would have."

The report names the Chicago suburb of Maywood as a top bankruptcy candidate.

The village, an inner-ring Chicago suburb, has struggled for years with falling revenue and high unemployment among other problems. Maywood has been unrated since 2011 when Moody's Investors Service withdrew its rating due to lack of timely information, and the village failed to file audited financial information from fiscal 2008 through 2013.

Maywood issued $16.8 million of unrated general obligation bonds earlier this year, promising as part of the deal to file annul audited financial statements. A 2020 maturity from that deal with a 4% coupon was yielding 2.9% in recent trading, according to the Municipal Securities Rulemaking Board's EMMA website.

The report says Sauk Village has an unrestricted net position of negative $36.7 million, "very large considering that the village had only $29.6 million in assets and government-wide revenues of $13.4 million." It also had a negative general fund balance and $2.1 million of interest costs, which account for more than 15% of revenue, the report said. "To the extent that interest expenses crowd out spending on resident priorities, political leaders have an incentive to default on debt obligations as a way to shift spending to more popular purposes," Joffe writes in the report.

The city of Blue Island, just south of Chicago has a general fund balance of negative $10.5 million with only $16.3 million in general fund revenue as of fiscal 2013, the report said.

Country Club Hills was the most delinquent in filing audited financial statements among all the municipalities Joffe reviewed, having not filed yet for 2013. The city's 2012 financial statements show a large negative general fund balance and prompted the city's auditor to say it could not verify the accuracy of the city's statements, because the city did not maintain accurate accounting.

Experts increasing see state-based early intervention programs as key to avoiding local financial crises or bankruptcies.

While Illinois does not allow bankruptcy, it has two laws that address distressed local governments: the Financially Distressed City Law and the Local Government Financial Planning and Supervision Act. A handful of cities, including East St. Louis, have used the distressed city act, but no governments have used the financial planning and supervision act, according to market participants.

Chicago-based Chapter 9 expert James Spiotto and watchdog group the Civic Federation are pushing for legislation to create an early intervention program they say is crucial to dealing with strained governments before they reach a crisis point.

Under their proposal, the Illinois Municipal Protection Authority would establish a quasi-judicial authority to help Illinois governments deal with pension-related and other fiscal burdens.

New York has one of the strongest early-intervention programs among the states with a fiscal scoring system that alerts the state of distress, said Joffe.

"I'm a big believer that states should do that," he said. "New York is the best model at this point and Illinois would be well advised to do the same thing."

Even if Illinois becomes the next state to allow bankruptcy, Joffe, like other muni experts, notes that it's a costly complex process that should be considered only the last resort.

"We hope that local leaders and active members of each community review the financial records we have referenced and begin to pursue policies that bring their municipalities back from the brink," Joffe concludes.

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