March 26, 2015
Under federal bankruptcy law, State governments decide whether and how local governments have access to Chapter 9 bankruptcy. There are 12 states that allow their local governments unfettered access to municipal bankruptcy, 12 states that allow municipal bankruptcy under certain conditions, two states that specifically prohibit their local governments from filing bankruptcy, 21 states that are unclear or do not have specific authorization and three states with only very limited authorization. Illinois is in the final category.
According to municipal bankruptcy expert James Spiotto, in Illinois specific authorization to file Chapter 9 bankruptcy is only allowed for the Illinois Power Agency (20 ILCS 3855/1-20(b)(15)). As discussed on this blog, the Local Government Financing and Supervision Act (50 ILCS 320) permits a commission to recommend that the Illinois General Assembly authorize a bankruptcy filing, but this is not considered a specific authorization.
On Friday, March 20, 2015 the Illinois House of Representatives Judiciary-Civil Committee held a subject matter hearing on proposed legislation that—if passed without revision—would make Illinois the 13th state to specifically authorize its local governments to file for bankruptcy. However, a purpose of the hearing was also to hear alternatives, including whether a better course would be to join the group of states that only conditionally allow bankruptcy. Conditionally allowing bankruptcy can involve a “second look” provision such as requiring approval by the:
- Some other state agency or authority; or
- A requirement for a period of negotiations before entering bankruptcy, as was implemented in California in 2011.
Another option is for a state to create a local government protection authority as a municipal debt resolution mechanism for local governments in fiscal distress. The latter course was proposed at the hearing by Mr. Spiotto and Laurence Msall, president of the Civic Federation, and was supported by the Illinois Municipal League.
Mr. Spiotto’s written testimony provided the members of the committee with a background in the history of municipal bankruptcy, a summary of how different states have attempted to supervise local government finances and assist them in times of fiscal crisis and a proposal developed for a Local Government Protection Authority by the Civic Federation’s Pension Committee, of which Mr. Spiotto is a co-chair. The testimony also describes how Chapter 9 bankruptcy works and lists which creditors of a municipality are given priority under a bankruptcy proceeding.
Under the Local Government Protection Authority proposal, the state would establish a quasi-judicial entity that would provide financially distressed local governments and their employees with a venue, encouragement and supervision to aid in finding creative, voluntary solutions to financial challenges. LGPA would make recommendations and findings on what costs are affordable and sustainable and do not interfere with providing essential governmental services to residents.
 James E. Spiotto, “Is Chapter 9 Bankruptcy the Ultimate Remedy for Financially Distressed Municipalities: Are there Better Resolution Mechanisms?” Testimony Submitted for Subject Matter Hearing of the 99th General Assembly on House Bill 298, March 20, 2015.