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CIB Bankruptcy is Not an Option

by Chris Spangle ~ July 30th, 2009

I visited the Indy City-County Council meeting this past Tuesday night to hear LPMCer Sean Shepard speak in opposition to higher taxes to fix the CIB mess. At the meeting, the word “bankruptcy” kept coming up… And it really grinds my gears. Bankruptcy is a complicated issue for any business, but when you have a private/public partnership, it makes the scenario almost unworkable because of the addition of politics.

First, the bankruptcy code does not allow the CIB to file for bankruptcy without permission from the state of Indiana. According to the federal judiciary website, Congress created the Municipal Bankruptcy code in 1934 (Chapter 9) and it has been amended several times. There have been less than 500 filings since the law was passed, the most famous being Orange County, California back in the mid 1990s.

However because of separation of powers issues, a municipal bankruptcy does not operate the same way if we filed bankruptcy as individuals. There is no provision for liquidation of assets, distribution of proceeds to the creditors and the 10th Amendment strictly limits the Court’s ability to manage the bankruptcy. More importantly, no municipality can file for bankruptcy without the express authorization of the state government. Under Section 109 of the bankruptcy code, the municipality must be specifically authorized to be a debtor by State law or by a governmental officer or organization empowered by State law to authorize the municipality to be a debtor.

Both the Governor and the Legislative leader made it perfectly clear in the last session of the General Assembly that they were done dealing with the CIB issue. And even if the legislature would take up the issue, state lawmakers would NEVER give the units of local government of Indiana the power to file bankruptcy when property tax caps are going to fully kick in next year and local governments are strapped for cash.

And even in the very unlikely event that the Legislature would authorize the CIB to file for bankruptcy, what impact would that have on current and future events at the Convention Center? Conventions that are slated to come to Indianapolis whether they be Gen-Con or the FFA would now all have an out to break their deals and anyone looking to come to the City would likely bolt. And the convention center business is profitable and unlike the Colts and Pacers brings new dollars to Indianapolis. The Colts and Pacers make up a VERY small portion of revenue compared to many of these conventions. Yes, breaking the deal with the Colts is tempting, but breaking the deal with the FFA is less tempting.

Any solution Libertarians offer to solve the CIB issue must fit within that framework. We still have current restraints because Republicans and Democrats have been building a certain framework within our government.

Bankruptcy is simply not an option for both practical and political reasons. We can advocate privatization, more efficiency and transparency, reform of the CIB and even using corporate and individual sponsorships to underwrite costs are all viable solutions. But advocating a position that is not viable lessens our credibility. It is important that we as Libertarians offer ideas that stay true to our principles of limited government, but are also politically viable and can the public is willing to accept.

For a full discussion of municipal bankruptcy law, go to http://www.uscourts.gov/bankruptcycourts/bankruptcybasics/chapter9.html

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  • pogden297
    Chris, no one disputes that the legislature has to give authorization for bankrtupcy so I don't know why this continues to get raised. If CIB and City leaders went to the legislature and asked for the authorization they would likely get it. You even point out that they are tired of dealing with the matter and won't take it up again. That makes it more likely they would provide the authorization, if asked, not less.

    Any bankrtupcy authorization is an individual authorization that has no effect whasoever on any other unit of government's ability to file. Giving the CIB authority to declare BK, has no effect on Southport filing BK, for example. The CIB is not even funded by property taxes like other units of government.

    Even Pre-BK, it would give the CIB enormous leverage to renegotiate contracts. (Not that they understand the concept of leverage.) The argument that it will work in reverse to give others the opportunity to get out of theiir contracts, doesn't fly. They are contracts. The fact that the CIB is considering filing BK does not give them the right to get out of their contracts. And post-filing, they are still locked in and could only get out through the BK judge. Pre and post they have no leverage to renegotiate their contracts. The leverage would all be in the direction of the CIB.

    It's a more valid argument to say that it might affect future contracts. The problem with that argument though is that this is not liquidication bankruptcy but reorganization bankrutpcy under Chapter 9. There is not going to be any interruption in business. Further, those booking conventions are paying the money TO the CIB, not the other way around. It would be a different matter if those bringing convention business to the city were a creditor of the CIB, especially if the CIB were filing Chapter 7.

    I'm not sure you recall, but during the meeting Council attorney Elrod mentioned sometthing that keeps getting overlooked. The CIB may not have any choice regarding bankrtupcy. A creditor can force the Board into BK, even without an authorization from the legislature. The CIB would undoubtedly qualify for BK.

    As far as privatization, a private company is going to be stuck with the contracts the CIB negotiated. The CIB gave away almost all the income on LOS. Why would they want to take it over? Even if you did, you'd have to pay the company a management fee that would have to make it a profitable exercise for the company.

    Again, as far as privatization, there might be one or two companies that bid on such a venture and then we'd end up giving them a 10 or possibly 20 year contract. That's not privatization. That's monopolization. Privatization has to be about bringing market forces to the delivery of services. If it is not, you end up in worse shape than you were before. Have we forgotten the FSSA privatization disaster?

    Again, as far as privatization, it is envitable that it becomes a source of political patronage for politicians. Knowing this city's history, they'd give the contract to some politically-connected company and write such terms that everyone wins but taxpayers.

    Back to BK, my concern about it is as follows: 1) even if you got leverage through a BK authorization, the CIB would not know how to use it. There seems to be no understanding of how to negotiate and how to use leverage in negotiations. (Remember these are the folks still insisting on giving the Pacers $15 milllion more per year, in the midst of a huge deficit, when the team has no leverage to extract the money.); 2) it does not do any good to declare BK, rewrite contracts and restructure debt if the underlying behavior that led CIB to its situation doesn't change. It's the exact same thing with private individuals who declare BK. Often they simply run up the debt again.
  • pogden297
    I would add that although a BK filing would not have an effect on existing debt the CIB has, it would raise the price of the CIB borrowing more. Once the debt is restructured though the CIB should not have to borrow nor do we want them borrowing.

    A good point brought up is possible spillover affecting the bond rating of the City. We're all just speculating whether that could or would happen and what the effect would be. The fact is Chap. 9 BK is so rare, you probably can count on the experts in Chapter 9 on one hand. You'd want to consult with one of those experts.

    One of the good things about Chapter 9 is that, due to federalism, it is a one-sided process in favor of the muncipality. The BK judge, for example, can't order the CIB's property sold. You're suggesting that is a negative. That's actually what we want. We don't want a Chapter 11 filing and then see the judge sell of the CIB's assets. Again, Chapter 9 is very favorable to the municipality. It is the creditors who get screwed over in a Chap. 9.
  • moneyguy
    Then give Conseco and Lucas back to the state and dissolve the CIB. Drop it in the states lap and let Daniels and he Legislator run it more efficiently. It puts the city council (especially the Republicans) in a better light. That's what I would do! Opps I forgot no more free Colts and Pacers tickets. Darn good idea though :)
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