Illinois House Bill 298 would allow Illinois municipalities to file for Chapter 9 bankruptcy. That bill is endorsed by Governor Bruce Rauner, and currently rests in the house rules committee.

As soon as Illinois passes Bill 298, a number of Illinois cities are highly likely to file bankruptcy as noted by Bond Buyer in Illinois’ Candidates for Municipal Bankruptcy.

If HB298 was enacted, which local governments might use the new bankruptcy option? To help answer this question, our team reviewed audited financial statements that all but the smallest municipalities must file. Most of these financial audits can be found on the state comptroller’s local government Finance Warehouse.

Among the indicators we considered were government-wide unrestricted net position and general fund balance. The first indicator shows the degree to which assets held by the government entity as a whole exceed its liabilities and are not locked up in buildings and other illiquid forms. The second indicator, general fund balance, focuses more narrowly on the government’s main fund – which is roughly analogous to an individual’s checking account. Low or negative general fund balances were cited in the bankruptcies of Vallejo and Stockton, California. It is worth noting that the five municipalities we identified are all located in Cook County, which also faces fiscal challenges. Our list does not include Chicago. Although that city’s financial struggles have made frequent headlines, several of its smaller suburbs appear to be in much greater fiscal distress. The five communities we identified are: Maywood, Sauk Village, Blue Island, Country Club Hills and Dalton.

Distress Summary

Maywood: Village of Maywood reported an unrestricted net position of -$47.4 million, and a general fund balance of -$8.2 million. While we found a number of jurisdictions with negative balances, these levels are quite pronounced for a relatively small municipality. With general fund revenues of only $23.3 million and government-wide revenues of $44.1 million, it will take the village a long time to eliminate these shortfalls.

Sauk Village: Sauk Village reported an unrestricted net position of negative $36.7 million – a very large negative position considering that the village had only $29.6 million in assets and government-wide revenues of $13.4 million. Sauk Village also showed a negative general fund balance and unusually high interest costs. The village’s $2.1 million of interest expense accounted for over 15% of total revenue. The Village received an adverse audit opinion for its reporting of “Aggregate Remaining Fund Information” and a qualified opinion for its reporting of “Governmental Activities.” The Police Pension Fund information was not included and has not been subject to an actuarial evaluation since May 1, 2011.

Blue Island: The City of Blue Island reported an unrestricted net position of negative $15.2 million and a general fund balance of negative $10.5 million in its 2013 financial statements – the latest available. The negative general fund balance is especially pronounced because the city only recorded $16.3 million in general fund revenue during fiscal year 2013. The city’s negative net unrestricted position appears to be understated because Blue Island did not report an Other Post-Employment Benefit (OPEB) liability.

Country Club Hills: The City of Country Club Hills has yet to file audited financial statements for the 2013 fiscal year – making it the most delinquent filer among the municipalities we reviewed. The city’s 2012 financial statements show a slightly negative unrestricted net position and a large negative general fund balance. Further, the city’s auditor was unable to render an opinion on the accuracy of these statements, saying:

Dolton: The Village of Dolton reported a small negative net unrestricted position in its 2013 financial statements – the latest available. Although its general fund balance was positive, the amount was well below Government Finance Officers Association guidelines. Dolton’s $1.3 million general fund balance would cover less than a month of general fund expenditures, which were $22.1 million for the 2013 fiscal year. Further, the village reported a $5.2 million general fund deficit. If this deficit persisted into 2014, Dolton may now be facing a negative general fund balance.

Modification to Bill 298 Needed

The Bond Buyer concludes “As Detroit and other cities filing Chapter 9 have found, municipal bankruptcy is an expensive process that transfers community resources to lawyers and financial advisors. While it may be unavoidable, bankruptcy should always be treated as the least best option.

I agree with that statement and that is why I advocate a rules change to Bill 298 that will give bondholders, not pensioners, a secured first lien.

Such a provision would lower borrowing costs to the benefit of taxpayers and it would get public unions to bargain upfront rather than drag processes out for years as happened in Detroit.

For further discussion on Bill 298 and why bondholders should have first lien rights, please see Calpers Wins Pension Lawsuit, Not Good News for Chicago (or Bondholders in General).

In the case of the five cities listed above, bankruptcy appears inevitable although the village administrator of Dolton strongly rebutted the report’s findings as noted in a separate Bond Buyer article on Illinois Bankruptcy Candidates.

Bankrupt Candidate Populations

  1. Maywood: 24,160 (2013)
  2. Dolton: 23,333 (2013)
  3. Country Club Hills: 16,866 (2013)
  4. Blue Island: 23,793 (2013)
  5. Sauk Village: 10,549 (2013)

I am aware of at least one other Illinois city potentially ready to file if allowed, and I suspect there are far more waiting in the wings.

Meanwhile, the outlook for the Illinois economy is not a good one. For details, please see Chicago PMI Unexpectedly Crashes: New Orders, Production and Employment Down by More Than 10%

Mike “Mish” Shedlock