Illinois legislators are considering a bill that would amend the Illinois Municipal Code to allow municipalities and other local government entities to file for bankruptcy. Representative Ron Sandack (R-Downers Grove) has called it a “measure of last resort” for municipalities with increasing debts, including police and firefighter pension obligations. Governor Rauner has indicated previously that he supports the concept, and local leaders are evaluating the need for such protection in light of dire fiscal projections. 

House Bill 298 would add the following language to the Municipal Code: “Any municipality may file a petition and exercise powers pursuant to applicable federal bankruptcy law.” The federal law to which the bill refers is Chapter 9 of the U.S. Bankruptcy Code, 11 U.S.C. § 109. Under Chapter 9, any “political subdivision or public agency or instrumentality of the State” may petition a federal court to reorganize and restructure its debt; this definition has been interpreted broadly to include cities, counties, townships, school districts, and public improvement districts. However, Chapter 9 only permits a municipality or local government to declare bankruptcy and reorganize if it has express and specific authorization from the State to do so. Additionally, the local government must demonstrate that it is insolvent. 

Between January 2010 and November 2014, a total of 47 local governments filed for bankruptcy under Chapter 9, of which eight were municipalities. Municipal bankruptcies have received increased attention as a result of the 2008 financial crisis and resulting recession. Most notably, in 2013, the city of Detroit filed Chapter 9 in what is the largest municipal bankruptcy filing in U.S. history.

Illinois local governments and political subdivisions have sought similar relief without success, due to the absence of authorizing legislation. In 2006, the Slocum Lake Drainage District of Lake County filed for Chapter 9 reorganization in federal bankruptcy court. In re Slocum Lake Drainage Dist. of Lake Cnty., 336 B.R. 387 (Bankr. N.D. Ill. 2006). Its creditors moved to dismiss the petition, arguing that there was no specific statutory provision in Illinois authorizing a municipality to file for bankruptcy as required by Chapter 9.

The court agreed, and held that, in contrast to other states, Illinois does not provide its local governments with statutory authority that is “exact, plain, and direct with well-defined limits so that nothing is left to inference or implication.” The Drainage District relied on the Illinois Local Government Financial Planning and Supervision Act, 50 ILCS 320, to justify its petition. Under that statute, a commission and financial advisor may be appointed to review a local government’s finances and may “recommend” that the unit of local government file a petition for Chapter 9 bankruptcy. However, the federal district court held that this was not sufficient legislative authority. In fact, the court found that, if anything, the Financial Planning and Supervision Act proved the Illinois General Assembly did not want to grant local governments the authority to file a Chapter 9 petition. In the court’s view, “[h]ad the Illinois General Assembly intended to specifically authorize [local governments or municipalities] to seek relief under Chapter 9, it could have easily drafted appropriate legislation, but has not done so.”

House Bill 298 would provide the “exact, plain, and direct” authority permitting an Illinois municipality or other unit of local government to file for bankruptcy. House Bill 298 never received a vote before the House Judiciary Committee, and was re-referred to the Rules Committee where it is likely to remain pending additional changes. Representative Sandack has indicated that he will seek to amend the legislation to create a commission dedicated to structuring settlements between a unit of local government and its creditors prior to the filing of any bankruptcy petition. Municipal bankruptcy will remain under contemplation as local governments struggle to balance their budgets in the face of soaring obligations and dwindling revenue streams.