Illinois’ Candidates for Municipal Bankruptcy

House Bill 298 would allow Illinois municipalities to adjust their debts through the Chapter 9 municipal bankruptcy process. The bill, endorsed by Governor Bruce Rauner, is currently in the house rules com-mittee.

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.

This article lists five municipalities that appear vulnerable based on information found in their audits. 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 Dolton.

In its 2013 financial statements, The 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.

The Village’s 2014 financials should have been available by now, but, its reporting has been chronically late. Moody’s withdrew the Village’s credit rating in 2011 citing a “lack of sufficient current financial and operating information”. Despite the lack of credit ratings, Maywood was able to sell $16.3 million of bonds earlier this year.

In its 2014 financial statements, Sauk Village reported an unrestricted net position of -$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. In most of the Illinois municipalities we reviewed, the interest/revenue ratio was below 10%. To the extent that interest expenses crowd out spending on resident priorities, political leaders have an incentive to default on debt obligations as a way to shift spending to more popular purposes. Furthermore, 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.

The City of Blue Island reported an unrestricted net position of -$15.2 million and a general fund balance of -$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. Government accounting standards require that municipalities report the present value of unfunded OPEB obligations on their balance sheets. This failure to report OPEB obligations resulted in the city receiving a qualified opinion from its independent auditor.

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:

Since the City did not maintain an accurate accounting of its revenue, expense/expenditure, bank reconciliations, and other assets and liability accounts, and we were not able to apply other auditing procedures to satisfy ourselves as to those balances, the scope of our work was not sufficient to enable us to express, and we do not express, an opinion on these financial statements.

WGN Television has repeatedly unearthed financial irregularities in Country Club Hills.  Most recently, the station reported that Mayor Dwight Welch was being audited by the IRS for not declaring as income his personal use of a city vehicle. The station also reported that the mayor incurred large restaurant bills on a city credit card, and that the city mistakenly retained $6 million in tax revenue that was supposed to be remitted to Cook County.

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. GFOA recommends that a government maintain a balance equal to two months of expenditures. 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. Finally, the village also received an adverse audit opinion. According to the city’s independent auditor:

We were unable to examine supporting documentation for numerous expenditures out of various funds of the Village. We were unable to test the Village’s allocation of certain revenues collected by the water fund but belonging to the general fund and sewer fund. We were unable to obtain an aged trial balance supporting the receivable balances in the water and sewer funds. We were unable to obtain sufficient support for certain local revenues. We were unable to determine whether a net pension obligation should have been recorded in the government wide statements with respect to the police and firefighters’ pension funds. We were unable to obtain supporting documentation for certain payroll related liabilities such as compensated absences. We were unable to determine whether a lack of infrastructure assets was the result of a failure to include such information on the financial statements or whether the infrastructure had been fully depreciated in prior years. Due to the omission of financial statements for the discretely presented component unit, we were unable to determine whether the omission is material to the financial statements of the Village nor were we able to perform any auditing procedures on the component unit. We were unable to obtain confirmation from legal counsel as to whether any known actual or possible litigation, claims and assessments should be recorded or disclosed in the financial statements. Finally, we were unable to determine whether bond proceeds from a prior year were spent in accordance with applicable ordinances and requirements.

If HB 298 becomes law, these five communities may be among the first to utilize the municipal bankruptcy option. Regardless we hope that local leaders and active members of each community review the financial records we have referenced, and begin to pursue policies that bring their municipalities back from the brink. 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.

This article was written by Marc Joffe on behalf of CivicPartner LLC.  CivicPartner is a Chicago-based startup that collects and analyzes government financial disclosures. Joffe is an independent researcher studying state and municipal fiscal conditions.