SPRINGFIELD — An Illinois city or town can be broke as all get out and still unable to seek protection under federal bankruptcy law.
And while State Rep. Ron Sandack, R-Downers Grove, says doesn’t wish bankruptcy on any town, he’s filed a bill to let Illinois municipalities seek reorganization under Chapter 9 of the U.S. Bankruptcy Code.
The legislator said the effort is not one to allow a municipality to throw up its hands, liquidate its assets and say, “We’re out of business.”
Sandack said Chapter 9 is quite similar to the debt restructuring available to individuals under Chapter 13 and businesses under Chapter 11. It is not a financial get-out-of-jail card.
Instead, he said, it is a structured and supervised method of helping a municipality address crushing debt and includes input from creditors and supervision by a trustee and a judge.
“This is no panacea or silver bullet,” Sandack said. “It’s not to be trifled with.”
Sandack said he’s not aware of any municipalities considering bankruptcy protection.
He said his bill simply gives municipalities access to a process that’s been around for nearly 80 years and, during those years, has been used fewer than 700 times.
Sandack said legislation is necessary because federal bankruptcy law requires state authorization for a municipality to file.
The Illinois Municipal League said it views municipality bankruptcy as a last resort.
“Ultimately what were are saying to the General Assembly is if they are unable or unwilling to help us reduce some of our (municipalities’) costs that are tied up in operating and labor and some other unfunded mandates that have been imposed over the years, then we may have no recourse at some point in the future than to avail ourselves under Chapter 9 bankruptcy,” said Joe McCoy, the league’s legislative director.
It would be the league’s preference that an Illinois enabling statute never need be used, he added.
Sandack’s bill likely will face opposition, as creditors generally are repaid a fraction of what they are owed when a bankruptcy occurs. Bondholders and financial institutions would have serious concerns.
Unions also would be unlikely to readily accept any diminishment of already bargained contract terms, such as salaries and pensions.
Illinois News Network’s calls for comment on the bill to the Illinois AFL-CIO, Associated Firefighters of Illinois and AFSCME Council 31 were not returned.
Chapter 9 bankruptcy indeed “is very last resort type of approach,” said David S. Kupetz, a California lawyer who works in resolution and reorganization law for the firm Sulmeyer Kupetz.
There is no single, simple template for a Chapter 9 case and the plans presented by municipalities to bankruptcy judges vary greatly, he said.
But experts said cuts to personnel — including in services such as police, fire and public works — are common.
Still, Kupetz added, a bankruptcy judge or the court’s appointee does not step in to micromanage the city’s operations or given area of operations unless the parties consent, he said.
The court, Kupetz said, applies a feasibility test that looks at not only whether the adjustment plan will allow the entity to ease its pressing debt but whether it can do so while meeting its duties to its citizens.
Addressing liabilities such as pensions and health care benefits for retirees may become a factor in a Chapter 9 bankruptcy, but that in large part has to do with the plan presented, experts said.
But failure to realistically address those liabilities can, in some cases, put the community back where it began and even result in re-entry into bankruptcy, Kupetz added.
John H. Knox is a partner in the public finance section of the firm Orrick, Herrington & Sutcliffe and worked on the bankruptcy cases of the California cities of Stockton and Vallejo.
He said it’s important to remember that cuts, including in personnel, usually will have come long before the filing of Chapter 9. The proverbial “low-hanging fruit” is gone and the bankruptcy filer is looking at more difficult ways to reach cost reductions, he said.
“I’m fond of saying, ‘Bankruptcy is a terrible option unless it’s become the only option,'” he said. “It’s for those situations where you’ve reached the point where there are no other options.”
The act of filing a Chapter 9 case does provides a city some leverage, he said.
In Stockton’s case, he said, the city was able to come to settlements with eight of its nine unions pre-filing and settled with the ninth shortly after Chapter 9 was filed.
Although a last resort, a benefit of Chapter 9 is that it forces everyone to come to the negotiation table, Knox said.
Quite early in the Stockton case, he said, the judge astutely noted that municipal bankruptcy was like “negotiations on steroids.”
Mark Fitton is a reporter for Illinois News Network.