Overcoming Economic Downturns and Fiscal Distress Part II: Alternatives Available to the State of Illinois and its … – MuniNet Guide

In theprevious part of this series on Overcoming Economic Downturns and Fiscal Distress, MuniNet Guides James Spiotto took us through the Gathering Storm of financial and economic challenges in state and local governments. Particular attention was paid to the casesof the State of Illinois and its municipalitiesfrom 2000 through today. In this next part in the series, focus is kept on the State of Illinois and its municipal governments,and the policies and institutions available to provide relief and solutions.Local Government Protection Authorities are explored in detail.

by James Spiotto

States that Provide Oversight and Assistance. At least twenty-eight states, the District of Columbia and Puerto Rico have implemented some form of municipal debt supervision or restructuring mechanism to aid municipalities.These range from Debt Advisory Commissions (e.g. California) and Technical Assistance Programs (Florida) which provide guidance for and keep records of issuance of municipal debt to the layered approach of Rhode Island and Michigan of oversight commission and fiscal manager or receiver.Examples of state oversight, supervision and assistance for fiscal emergencies of local government.

Evolution of Past Mechanisms that Worked. Under consideration by some states is the use of a local government protection authority utilizing some of the best aspects from the mediation process of the neutral evaluator and the oversight and supervision of financial control boards, emergency managers, and receivers.

State-Created Quasi Judicial Function. Under this municipal debt resolution mechanism, the state would establish an entity that would have a quasi-judicial function and power similar to a commission or special master appointed by a state supreme court or other objective nonpolitical process. The members of the authority would be independent, experienced experts in governmental operation or finance as well as in mediation and debt resolution techniques, including bankruptcy.

Initiation of Proceedings. The authority would start with those municipalities that petition for help or those municipalities that have triggered certain established criteria where the jurisdiction of the authority may be mandated by state law.

First Phase Mediation and Consensual Agreement. The first phase is mediation and consensual agreement by the municipality and the affected creditor constituencies similar to the neutral evaluator process.

However, participation by the authority may be voluntary by petition of the municipality or other affected constituencies asserting that a financial emergency exists or, under the most direct circumstance could be required, and negotiation and discussion of positions are strictly confidential.The state law establishing the authority may have an exception to its open meetings law and its freedom of information law to allow for open discussion of any sensitive and confidential topics.If additional tax revenues or loans or grants from the state are needed, recommendations to the state by the authority may be made. The authority may be empowered to likewise call for a referendum on a local basis for increased taxes or other actions.Specified time periods for resolution will be set forth and, if the voluntary process is not successful, the second phase may be requested or may be mandatory if the authority so requires.

Second Phase Determination of a Recovery Plan. In the second phase, the authority and its designated members turn into a quasi-judicial panel, and the municipality is required to set forth the actions proposed to be taken to address its specific financial problem (recovery plan) for authority approval.

Creditors, workers, and taxpayers will have the ability to comment and to attempt, through negotiation, to modify the recovery plan within a set period of time.Then, the recovery plan is presented to the panel members of the authority for determination of the plans feasibility and whether it is reasonably fair to creditors interests in relation to the requirement that, under all circumstances, essential governmental services, at least at an established necessary level, must be funded and maintained for the reasonable future.One of the triggers for the authoritys jurisdiction is the petition by the municipality, its workers, or taxpayers that a governmental function emergency exists. The municipality or petition must state that essential services as to the health, safety, and welfare of its residents are being threatened and that the forced reduction in services, given the municipalitys financial condition and its limited revenues, impairs the health, safety, and general welfare of its residents.

Power of the LGPA. The authority, after hearing all sides (municipality, workers, taxpayers, affected creditors), will determine:

Determination Process of the Authority.

To the degree state has effective and applicable mechanism to help prevent default or provide funds or assistance to prevent default or methods of solving financial problems of municipal issuers this is information important to the investor and should be considered to be disclosed to the investor. Such information may improve the perception of the issuers credibility in the market.

For a summary of what the various states have provided to assist their municipalities in financial distress, see the following chart summarizing a 50-state survey which indicates whether the municipality (i) can file Chapter 9, (ii) has debt limits and allows refunding bonds, (iii) has access to municipal restructuring mechanisms, (iv) allows for receivers, examiners, financial control boards, coordinators, etc. (v) has default resolution remedies, permits creditors to obtain through court proceeding an accounting, foreclosure, injunction, a writ of mandamus to levy taxes or other remedies, (vi) permits special revenues bonds, and (vii) authorized statutory liens. The chart provides an overview of the 50 state survey from the book Municipalities in Distress?:How States and Investors Deal with Local Government Financial Emergencies (2nd edition, 2016). For more information, including information on Municipalities in Distress, please visitChapman & Cutlers website.

* The language of the statute appears to strongly support a determination that it is a statutory lien

** While the language of the statute may appear to create a statutory lien further clarification would be helpful to reaffirm the intent to create a statutory lien

*** While the language of the statute may appear to create a statutory lien it is insufficient and additional language is required to clarify the intent and to create a statutory lien. The language could be read as just providing for perfection of a pledge or lien without the intent and effect to create a statutory lien

**** These numbers include both the District of Columbia and Puerto Rico where applicable and totals may differ from other materials that only review 50 states.

James E. Spiotto, Co-Publisher James E. Spiotto. All rights reserved. The views expressed herein are solely those of the author and do not reflect the position, opinion or views of Chapman and Cutler LLP or Chapman Strategic Advisors LLC.

Up nextSolving Financial Distress with Economic Development and Stimulus from Needed Infrastructure Improvements, Reinvestment in States and Municipalities, and the need to Address Legacy Costs of Unfunded PublicPensions and Deferral of Updates to Infrastructure.

Click here to read the introduction to this series,How State and Local Governments Can Overcome Economic Downturns and Fiscal Distress

Click here to read Part I:The Gathering Storm

Read more:

Overcoming Economic Downturns and Fiscal Distress Part II: Alternatives Available to the State of Illinois and its ... - MuniNet Guide