Bankruptcy bill not supported during hearing

On January 21, the Maine legislature's Committee on State and Local Government held a hearing regarding LD 2009, a bill sponsored by Senator Marianne Moore of Calais that would allow political subdivisions, including municipalities and counties, to declare bankruptcy. Currently in Maine they may only do so if given express permission by the legislature.

Moore was the lone voice expressing support. She began by reviewing the Washington County government's financial troubles, including accounting changes dating from 2019 that used what appeared to be surplus funds from the previous year to reduce tax burdens for the following year. These accounting changes, however, did not take into account under‑collected revenues or overspent line items. In addition, funds from the American Rescue Plan Act, which were to be earmarked for a new sheriff's building, were mistakenly moved to general funds, making it appear that more money was available than there actually was. These errors were not discovered until 2025 due to a lack of annual audits. When it was discovered, the county "was underwater by $11 million," as Moore put it.

When these problems came to light, she had her staff research possible options. The option contained in the bill, currently allowed by 30 states, enables municipalities and counties to file for federal Chapter 9 bankruptcy. This involves debt reorganization, rather than liquidation. Moore gave examples such as Detroit, Stockton, Calif., and Jefferson County, Ala., that had undergone this process.

Moore acknowledged that Machias Saving Bank, the lender that provided Washington County's tax anticipation notes (TAN), was concerned about this option. She stated it would be a financial tool, not to be taken lightly. The bill contains guardrails, including a requirement that the entity would have had to try all other reasonable measures as well an amendment requiring it to satisfy any unfunded public retirement obligations. The state auditor would need to declare the entity insolvent, and county commissioners would need to vote to approve the procedure.

Committee members questioned Moore about the recent vote by the Washington County commissioners against supporting the bill and if this meant it was no longer necessary. She was also asked about where funds had gone and whether the bill should consider tools to prevent such a crisis, including forensic audits, instead of focusing on bankruptcy.

Moore replied that the county had looked "deep and hard into any fraud or misuse" and found none. She blamed delays in audits on problems during the pandemic when an auditor was fired for refusing to enter the building to collect paperwork and on the county's inability to find another in a timely fashion. Audits are now being completed as quickly as possible to bring the county up to date.

She continued that she originally had the support of the commissioners regarding the bill. "Yes, at the time, we were all kicking rocks, trying different things. When we researched Chapter 9, the commissioners were behind me."

Moore was "disappointed" in the commissioners' lack of support but felt the need to move forward. "We need to have this tool available in the state of Maine."

None of the remaining speakers, including representatives from the Maine Municipal Association, the Maine County Commissioners Association and the Maine Bankers Association, spoke in support of the bill. Their remarks discouraged consideration of bankruptcy as a financial tool and expressed deep concerns about how the risk of bankruptcy would affect currently low interest rates available to municipalities and counties.

Terry Hayes, executive director of the Maine Municipal Bond Bank, said she wished to speak in support of Senator Moore but in opposition to the bill. "Senator Moore has done her job ferreting out things that would help if an emergency occurred. Senator Moore moved these questions forward, and we have learned a lot."

Hayes expressed concern that, as is, the bill would inject a level of risk for any investor or bondholder. Hayes suggested another version of the bill be submitted in the first year of a legislative session so there is time to carefully consider possible unintended consequences.