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Two towns fell through the cracks

Monday, Dec 8, 2014

* According to the BGA, there have been 660 Chapter 9 filings nationwide since 1937. Chapter 9 is a form of bankruptcy for local governments. Illinois doesn’t allow local governments to file Chapter 9 unless they successfully navigate a lengthy and complicated procedure (and even then, no towns over 25,000 are allowed into that procedure), but two small towns somehow got away with it

The village of Brooklyn, a town of 750 people across the Mississippi River from St. Louis, filed in 2003, in part to help restructure payments related to lawsuits alleging police misconduct and financial mismanagement.

In the wake of an embezzlement scheme, the town, in a cost-cutting move, dropped its insurance coverage, leaving it unable to afford mounting legal costs, according to court filings.

In 2005, the nearby village of Alorton, population 1,960, filed for bankruptcy around the time a police shooting victim obtained a $978,000 judgment against one of the town’s officers. The victim was one of Alorton’s largest creditors, court filings show.

“I’ll be honest, I just got away with it,” says Belleville attorney Stephen Clark, who filed Chapter 9 petitions on behalf of both towns. “Everybody either didn’t know [about the authorization requirement] or they knew and felt it was better to approve the plan.”

The village of Washington Park, another Clark client, wasn’t as fortunate.

A federal judge dismissed the town’s bankruptcy petition in 2010 because state officials didn’t authorize the move. Washington Park also filed in 2004 but later withdrew, Clark says.

A 2014 analysis by the law firm of Heyl Royster concluded that the bankruptcy proceedings “apparently survived because no one objected to the filing of the petition or raised this issue.”

Chapter 9 access has become a major issue for the Illinois Municipal League of late.

- Posted by Rich Miller        

19 Comments
  1. - Wordslinger - Monday, Dec 8, 14 @ 11:10 am:

    You wonder how places that tiny can be going concerns if one lawsuit can blow you out of the water.

    The quotes from the towns’ lawyer were hilarious. Basically, he just pulled a fast one and nobody noticed. Youd think the creditors would have beefed.


  2. - DuPage - Monday, Dec 8, 14 @ 11:15 am:

    =To be honest, I just got away with it.=

    If that lawyer knew it was illegal and went forward with it anyway, then he should have his license suspended. It wasn’t him defending someone else, he was an active participant in a fraudulent action before the court.


  3. - Stan in Ascent - Monday, Dec 8, 14 @ 11:18 am:

    = I’ll be honest, I just got away with it =

    I did not realize Jonah Edelman was also a bankruptcy attorney.


  4. - Anon - Monday, Dec 8, 14 @ 11:26 am:

    In the long run, there may be two possible answers to the terrible financial condition afflicting may local governments across the county: municipal bankruptcy/restructuring, or some sort of federal bailout. The later option would effectively penalize citizens of this local governments that acted in a fiscally restrained and prudent manner, as they will be forced to pay for the bailouts while never themselves enjoying the beyond-our-means spending. Same with state governments. Don’t expect the bankruptcy route to be embraced by legislators, who may ultimately hope for some big federal bailout down the road.


  5. - Norseman - Monday, Dec 8, 14 @ 11:55 am:

    So IML is looking for a way to renege on their members’ pension obligations. Sad.


  6. - Freddy - Monday, Dec 8, 14 @ 12:00 pm:

    - DuPage - good point, - Stan in Ascent - great line!

    I have a in-law who is a Chicago cop. He’s an arch conservative who always votes Republican…even for Republicans who don’t share his views on public pensions. A guilty pleasure of mine is hoping he helps elect a Republican president, who together with a GOP Congress, amends the federal bankruptcy code by remove the state authorization clause. Then, Chicago goes Chapter 9 and obliterates his pension. Payback for a lifetime of voting against his own economic interests.


  7. - Joe McCoy - Monday, Dec 8, 14 @ 12:24 pm:

    There are a raft of state laws that impose financial burdens on municipalities. This is especially the case with labor and personnel mandates. These are the biggest cost-drivers. The IML has proposed legislation in past sessions to reduce these financial pressures. The following is our position on municipal bankruptcy authority:

    “Illinois’ cities are suffering under the strain of declining revenues and costly state spending demands. Three choices confront state legislators: (1) approve the IML’s “Save Our Cities” agenda; (2) do nothing and allow the continued march toward fiscal insolvency; or (3) empower municipalities to restructure crushing financial obligations on their own through filing municipal bankruptcy in the Federal Court system.

    The first choice is the preferred solution and requires a new spirit of cooperation between state and local government officials. The second choice guarantees failed communities. The third choice, although undesirable, allows municipal leaders to restructure debt and place communities on the road to financial restoration.”

    Bottom line - cities need the state to step-up and help by either partnering with mayors on labor and personnel reforms, or the state needs to fully empower cities to address these financial issues on their own. Doing nothing (or making the problem worse) is not a sustainable policy.


  8. - Judgment Day - Monday, Dec 8, 14 @ 12:35 pm:

    “So IML is looking for a way to renege on their members’ pension obligations. Sad.”
    ——————

    No, IML is looking for a way to level the playing field. Remember, the retirement bennies for Police and Fire are set by the State of Illinois. Then it’s up to the locals to fund those costs.

    The State provides two property tax funds (Police Pension and Fire Pension), but both have a rate cap, and are subject to Property Tax Limitation limits.

    So, if you are not a wealthy (in property tax EAV terms) community, you are likely having to divert money from your general fund to make up the difference.

    You end up hollowing out your community infrastructure just to pay for police/fire pensions, which you have no control over. The only alternatives right now are getting rid of your police/fire services, or ‘outsourcing’ like places like North Riverside are trying to do.

    IML wants another alternative. The police and fire unions got their sweet deal, now the other side (municipality & taxpayers) want to set the playing field back to level again.

    It’s easy for the police and fire unions to get all righteous about it when they’re the ones on top and have been setting the retirement terms, and just expecting the taxpayers to be able to somehow fund it all.

    There’s 2 sides to the story.


  9. - G'Kar - Monday, Dec 8, 14 @ 12:45 pm:

    FWIW, Brooklyn has an historic past. It was the first town in Illinois chartered by African-Americans. In 1829 11 families, either escaped slaves or free African-Americans, founded the village. It was an important stop on the underground railroad. It was incorporated in the 1870’s.


  10. - VanillaMan - Monday, Dec 8, 14 @ 12:51 pm:

    We have dozens on tiny governments which cannot afford the mandates placed upon them by other governments, federal and state. Yet the leaders imposing these mandates upon these smaller local governments don’t seem to appreciate how their intentions are driving these little governments out of business.

    These small governments have other fiscal challenges as well and few of them are capable of taxing their way out of these problems. You see, many of these smaller localities are filled with voters who don’t want the mandates forced upon their local governments, voted against the political powers that imposed them, and aren’t in a position to raise their taxes. Many distressed and rural communities do not have the tax base available to handle these fiscal pressures forced upon them by larger governments.

    Citizens in small towns don’t need or want these costly mandates. They don’t want their small towns becoming bigger. We shouldn’t be forcing them out of business, yet we are.

    There needs to be a practical way out of these problems. Un-incorporating or dissolving these small governments into county government doesn’t work when the small county governments can’t handle the extra costs either.

    The folks favoring these costly mandates aren’t being directly effected by the secondary consequences of their good intentions. They need to be. Using higher governments to drive smaller governments out of business doesn’t serve citizens and doesn’t foster good government.

    There needs to be a better way to save our small towns and suburbs.


  11. - Anonymoiis - Monday, Dec 8, 14 @ 1:30 pm:

    ==FWIW, Brooklyn has an historic past. ==

    And now it’s pretty much just strip clubs and churches.


  12. - RNUG - Monday, Dec 8, 14 @ 1:31 pm:

    Although un-incorporating and letting the county take over doesn’t totally solve the problems, it does offer some economies of scale that permit some savings. A better solution might be to “out source” where it makes sense. Police departments and schools in very small towns are good places to find those savings. The problem is the town residents tend to have ownership issues in letting go of those institutions; the town’s “idenity” is wrapped up in those institutions, especially the school(s). I lived in a very small town for a decade or so and they went through eliminating both; the police was easy since it was just one officer who ended up on the county force and still lived in town but the elementary school was a real fight even though the next town where it was consolidated (and where there was already a consolidated high school) was only a few miles down the road.

    Even road maintenance could be done that way but I would suggest a hybrid solution where a small town (under 500 or 1,000 population) outsourced major construction and repair but kept just enough equipment to do minor repairs and snow removal (or hire idled farmers to use their tractors to clear the streets instead of maintaining township equipment to do it).

    Just a few thoughts from my time in a small town …


  13. - RNUG - Monday, Dec 8, 14 @ 1:32 pm:

    – “And now it’s pretty much just strip clubs and churches. ” –

    Or simply taverns and churches along with the Post Office.


  14. - Anyone Remember - Monday, Dec 8, 14 @ 1:32 pm:

    Judgment Day
    Wasn’t there some sort of “fix” negotiated by then Springfield Mayor Tim Davlin? The firefighters and police officers paid their part right up front (a semi Tier 2 set up), and the governmental part was due later. Now that is approaching, IML is squealing like a pig.


  15. - Demoralized - Monday, Dec 8, 14 @ 1:48 pm:

    Does anybody know if the creditors involved in these two bankruptcy’s can go back to court and have the bankruptcy’s invalidated based on the fact that state law was not followed?


  16. - 47th Ward - Monday, Dec 8, 14 @ 4:32 pm:

    VanillaMan, did you even read the story? Unfunded state and federal mandates didn’t have anything to do with these two cases. In the first, the bankruptcy was filed “in part to help restructure payments related to lawsuits alleging police misconduct and financial mismanagement.”

    In the second case, Alorton “filed for bankruptcy around the time a police shooting victim obtained a $978,000 judgment against one of the town’s officers.”

    Reading is fundamental.


  17. - Wordslinger - Monday, Dec 8, 14 @ 6:17 pm:

    Vman, is there any issue where you don’t see yourself as a victim? Isn’t it wearying to keep up that nonsense, young man?
    As a man in his prime, aren’t you supposed to be leading the charge about now?

    Dude, cowboy up.


  18. - Judgment Day - Monday, Dec 8, 14 @ 7:55 pm:

    “Does anybody know if the creditors involved in these two bankruptcy’s can go back to court and have the bankruptcy’s invalidated based on the fact that state law was not followed?”
    ——————
    As I understand it, depends if the bankruptcy cases are still active. If there was no appeal and the case got closed out, it’s pretty tough to get the case re-opened. The Bankruptcy court is probably going to ask “Why?” at this late date and “Where Were You?” when the case was active.

    Talking to a friend who referred to a number of cases in non governmental bankruptcies where appeals were made after-the-fact to re-open closed filings, and there was not a lot of success.

    Just sayin.


  19. - VanillaMan - Tuesday, Dec 9, 14 @ 9:44 am:

    My comments were not directed at the specific cases mentioned in the news article, and yet my comments are still worthy of consideration since they affirm what Mr. McCoy posted.

    Small governments are good governments. We need to ensure their survival.


Sorry, comments for this post are now closed.


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