Municipal bankruptcy in hands of states

Stateline Midwest, Volume 20, No. 1- January 2011

In a sign of fiscal times for distressed local governments, talk of municipal bankruptcy has picked up in parts of the Midwest and across the country.

An Indiana proposal introduced in December would give the option of bankruptcy for cities and towns. According to the Gary Post-Tribune, the process would be run through the existing Indiana Distressed Unit Appeals Board, a state entity that helps distressed political subdivisions establish financial plans.

Currently, Indiana is one of 26 U.S. states that does not authorize Chapter 9 municipal bankruptcy in statute. The other six states in the Midwest without such authorization are Illinois, Iowa, Kansas, North Dakota, South Dakota and Wisconsin, according to a 2010 Bloomberg News article.

Late last year, then-Gov. Jennifer Granholm denied a request by the Michigan town of Hamtramck to seek bankruptcy protection, The Detroit Newsreports. In a May 2010 paper examining the issue of municipal bankruptcy, the Michigan Senate Fiscal Agency noted that the state in recent years has had to take over several municipalities due to “financial emergencies.” None of these emergencies has yet led to bankruptcy. Under Michigan law, state involvement — including the appointment of an emergency financial manager — is required before a bankruptcy filing can proceed.