Municipal bankruptcies?

Apr 15, 2009 at 12:00 am

With the weak economy resulting in declining incomes for Michigan municipalities, could one of our villages, townships or cities go Chapter 9?

That's the Chapter 11 parallel in the federal bankruptcy code that provides a process for municipalities to address insolvency issues, much like Chapter 11 protections for private businesses. Chapter 9 requires that individual states authorize the municipality to file under the federal provision — an individual township, for example, can't just do it on its own.

Michigan, like some other states, has a middle process that allows the state to intervene when units of local government have financial problems. The Legislature in 1990 enacted the Local Government Fiscal Responsibility Act, creating the process for a state takeover before bankruptcy.

First, the governmental unit creates a plan to correct the situation. If it's deemed unsatisfactory, a hearing is held before the governor appoints a financial manager. That manager has complete control over all contracts and other fiscal matters, including labor contracts.

Here in southeast Michigan, Gov. Jennifer Granholm has appointed two such financial managers. In Pontiac, Fred Leeb started March 23, after the state projected a $12 million deficit this year. Robert Bobb is the manager for the Detroit Public Schools, which at last check faced a $300 million deficit.

If Leeb, Bobb or other managers to be named later cannot balance the books, they can pursue bankruptcy protection — which the state must authorize. But in doing so, the federal law takes effect.

So, back to our original question: With declining property values, the weak economy sending Michiganians scurrying to other states in search of employment, and other limits on revenues for local municipalities, could there be bankruptcy filings here?

According to the American Bankruptcy Institute, it's rare for a city to file bankruptcy. Across the country, just six municipalities filed for Chapter 9 protection in 2007, five in 2006 and 11 in 2005, according to the institute's latest data.

Over at the Southeastern Michigan Council of Governments, Dave Boerger joined the staff just a year ago to educate communities about fiscal issues related to the weakening economy, declining revenues and processes that can lead to bankruptcy.

He talks to local budget managers and elected officials about ensuring their fund balances are adequate and what actions they can take to improve their financial situations before the state would come in.

"We're trying to put it on people's radar screens," Boerger says.

News Hits is edited by Curt Guyette. Contact him at 313-202-8004 or [email protected]