Indiana Bill Would Allow Cities to Declare Bankruptcy; Gary, Lake Station Likely Candidates; Hands Tied in Rhode Island

By: Mike Shedlock | Tue, Dec 28, 2010
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A bill in the Indiana legislature would allow local governments to declare bankruptcy. Given Governor Mitch Daniels is backing this plan, I expect it to pass. Best of all, the bill gives an emergency manager the ability to renegotiate labor contracts, and approve or veto contracts, expenses, loans and hiring.

Please consider Bill would allow Indiana cities to declare bankruptcy

A plan backed by Gov. Mitch Daniels would allow local governments in Indiana to ask for a state takeover and declare bankruptcy if necessary. Daniels says he hopes there won't be many local governments that seek bankruptcy, but says the state needs to have the law clarified and on standby in case it happens.

Republican state Sen. Ed Charbonneau of Valparaiso is sponsoring a bill to outline the procedure. His bill would allow a local government in financial trouble to ask the Indiana Distressed Unit Appeals Board to appoint an "emergency manager" to run the government.

The emergency manager would have the power to cut the budget, renegotiate labor contracts, and approve or veto contracts, expenses, loans and hiring.

The bill states that if the emergency manager can't turn around the local government's finances, the unit would be allowed to seek federal bankruptcy protection.

The State Board of Accounts in recent audits has questioned the abilities of the city governments in Gary and Lake Station to "continue as a going concern" because of continued high city spending despite significantly reduced city revenues because of statewide property tax caps.

I salute this bill and look forward to the bankruptcy of a handful of Indiana cities. Gary has a population of around 100,000 and is Indiana's fifth largest city. Lake Station has a population of about 14,000.


Details of the Bankruptcy Bill

Inquiring minds are reading Law would let cities declare bankruptcy for details about the bill.

State Sen. Ed Charbonneau, R-Valparaiso, is sponsoring Senate Bill 105, which would repurpose the Indiana Distressed Unit Appeals Board from providing property tax cap relief to supervising direct management of a local government.

Gary twice has won DUAB permission to charge the highest property tax rates in the state to bring its city budget into balance.

Under Charbonneau's bill to restructure DUAB, the council and executive of a local government could jointly seek to be designated a "distressed unit" if it meets one of eight financial criteria. Or, a coalition of a government's creditors owed more than 30 percent of the unit's anticipated annual revenue could ask DUAB to declare a local government distressed.

If DUAB agreed the local government were distressed, DUAB would appoint an "emergency manager" with the powers of both the council and executive, who could slash the budget; renegotiate labor contracts; review salaries; approve or veto contracts, expenses, loans and hiring; and audit the books -- all independently of the government's elected officials.

The emergency manager would not be allowed to raise taxes and would be required to work with elected officials to develop a financial plan for the future, according to the legislation.

Hallelujah! Raising taxes to meet untenable union wages and pension benefits has to stop.


Criteria for "distressed" designation (one of eight needed):

  1. Default in payment of principal or interest on bonds or notes
  2. More than 30 days late on payroll or two consecutive payrolls missed
  3. Failed to pay judgment creditors more than 30 days after judgment
  4. More than 30 days late any of the following: sending taxes withheld from employees, sending employer or employee contributions to Social Security or Medicare, depositing minimum obligation payment to a pension fund
  5. Accumulated a deficit in total government funds of more than 5 percent of current year revenues
  6. Seeks renegotiation of payments owed that are more than 30 percent of annual revenues and more than 90 days overdue
  7. The state is intercepting local government funds to make required payments
  8. Uses interfund loans to support the same fund for two years in a row


Tax Free Does Not Mean Worry Free

The Financial Sense article Muni Bonds: Tax Free Doesn't Mean Worry Free has a list of 26 states (up from 21 in 2007) that currently do not allow bankruptcy.

Alaska New Hampshire
Delaware New Mexico
Georgia North Dakota
Hawaii Oregon
Illinois Rhode Island
Indiana South Dakota
Iowa Tennessee
Kansas Utah
Maine Vermont
Maryland Virginia
Massachusetts West Virginia
Mississippi Wisconsin
Nevada Wyoming

The most recent addition to the above list is Rhode Island which just passed a law outlawing bankruptcy after the City of Central Falls disclosed it would seek bankruptcy.

Do the governors that signed such legislation really think problem will go away if the one possible solution is removed? Sheeesh?

Look for Indiana and Michigan to come off the list. In addition, Wisconsin governor-elect has proposed decertification of public unions, so I believe he would be agreeable to local bankruptcies if such a bill was presented to him.

Please see Hardball in Wisconsin; Massive Defeat for Unions in Lame-Duck Session for more about Wisconsin, governor-elect Scott Walker's showdown with state union employees.


Central Falls Prohibited From Bankruptcy

The only thing that makes any sense for Central Fall is bankruptcy, but that option is currently missing. Please consider Receiver to city: Financial ruin near

CENTRAL FALLS -- The city's financial problems are so profound that the only way to solve them is through a merger with Pawtucket or a regionalization of city services, the state-appointed receiver said in a report Thursday to the Carcieri administration.

"Central Falls, in my judgment, cannot remain a stand-alone community as it presently is, unless the state wants to subsidize this into the future," said retired Superior Court judge Mark A. Pfeiffer, the man appointed by the state Department of Administration in July to run the city, with elected government officials in advisory roles, after those officials had earlier declared the city insolvent.

The underlying, built-in problems in the city's finances -- with sizable operating budget deficits projected well into the future -- require significantly changing how municipal employee contracts and retirement benefits are handled under state law, he said.

Senate President M. Teresa Paiva Weed said underfunded municipal pensions have been the subject of a special Senate study commission, and Central Falls -- with a $48-million unfunded pension liability, according to Pfeiffer -- would put even more focus on that work.

"This will be a priority for the Senate in the upcoming legislative session," she said. "TheSenate agrees that there is a need for swift but prudent action by the state."

The state is already heavily involved in the city. It took over financing the local school system in the last big state fiscal intervention in 1991 and has spent $604 million on the city's schools since then. Despite that effort, improvement has been difficult: this year, the city's high school was rated one of the six worst-performing ones in the state.

In the short term, Pfeiffer said the city will need about $2.1 million in some form of state support authorized by the General Assembly, a grant or some kind of bond guarantee, to close a deficit in the current budget. Beyond that, he said more substantial changes were needed.

The major problem is the city, with an annual operating budget of about $16 million, is facing about $32 million in promised after-retirement health-insurance costs in addition to the $48 million in pension obligations.

"That's $80 million for a city that has 19,000 citizens, approximately," he said. "That's a huge problem."

No city would merge with Central Falls in a foolish attempt to save it. It would mean their own financial ruin. Furthermore, why should Rhode Island taxpayers in general have to fund Central Fall's pension obligation?


Massive Teacher Absenteeism at Central Falls High School

Check out the morally corrupt Central Falls Teachers union: Central Falls teacher absences still on the rise

Since the school year started Sept. 1, there has not been a single day when all of the 88 teachers at Central Falls High School have shown up for work.

On that first day, two teachers called in sick and a third took a personal day.

And there have been only five days -- all in September -- when administrators were able to replace all the missing teachers with substitutes.

Last week alone, there were at least 19 teachers out every day, 10 to 13 of whom called in sick each day.

The severity of the problem came to light last week when The Journal reported that more than half of the high school's 840 students didn't receive a grade in one or more classes for the first quarter.

The school's leaders, Deputy Supt. Victor Capellan and co-principals Evelyn Cosme-Jones and Sonn Sam, said 453 students did not receive solid instruction in several classes, and therefore no grade could be given.

Since Nov. 12, there have been at least 20 teachers missing or absent at the high school each Friday. Starting Oct. 21, there were 14 to 19 teachers absent daily for seven straight days. And 453 of the 840 students at Central Falls High School didn't receive enough instruction this fall to earn a grade in at least one class.

Like Detroit, Central Falls is fiscally, morally, and educationally bankrupt. The one and only thing that makes any sense for Central Falls is to declare bankruptcy.

Please see Detroit Mayor Plans to Halt Garbage Pickup, Police Patrols in 20% of City; Expect Bankruptcy, Massive Municipal Bond Turmoil in 2011 for the problems Detroit faces.

I expect Governor Snyder to do the right thing and allow Detroit to file. If it takes legislation, he will get it if he asks. The pending legislation in Indiana appears to be a good model for both Michigan and Rhode Island.

Let's hope Rhode Island governor-elect Lincoln D. Chaffee, an independent, has his head screwed on straight and asks the legislature to allow municipal bankruptcies. It is the only hope for Central Falls.

 


 

Mike Shedlock

Author: Mike Shedlock

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Mike Shedlock

Michael "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Visit http://www.sitkapacific.com/ to learn more about wealth management for investors seeking strong performance with low volatility.

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