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Federal judge to decide if Boise County can declare bankruptcy under rare municipal filing

A federal judge will decide soon whether a sparsely populated Idaho county can declare bankruptcy in a bid to stave off paying a legal judgment worth more than half of the county’s annual budget.

U.S. District Bankruptcy Judge Terry Meyers heard arguments the week of June 27 between Boise County leaders — who contend the county is insolvent and bankruptcy is their last, and only, option — and developer Oaas-Laney LLC, which contends the county actually has a surplus of cash and is using shoddy book-keeping as an excuse to try to avoid paying their legal debts.

Boise County filed for Chapter 9 bankruptcy in March, a type of bankruptcy reserved only for municipalities and only rarely used. Statistics from the American Bankruptcy Institute show that only about 230 municipalities have filed Chapter 9 since 1980.

If Boise County is granted the bankruptcy, county officials will be allowed to restructure and possibly reduce the county’s debt to the Boise-based developer, which won $4 million in a federal lawsuit last year accusing the county of violating the Fair Housing Act.

The jury also awarded Oaas-Laney $1.4 million in attorneys’ fees. The $5.4 million judgment accounts for more than half of Boise County’s annual $9.4 budget, or roughly $720 for every man, woman and child living within county borders.

The lawsuit came after Oaas-Laney tried to build Alamar Ranch, a proposed 72-bed treatment center and school for teens with mental illness or substance abuse problems. The developer said the county worked with neighbors who opposed Alamar Ranch and set impossible planning and zoning requirements — such as building a helicopter landing pad and new bridge — to keep the ranch from being built.

In December, a federal jury agreed with Oaas-Laney, saying the county violated the federal Fair Housing Act by creating a series of unreasonable expectations for the developer.

It wasn’t long before Boise County leaders were discussing the possibility of bankruptcy.

In a three-day federal hearing over whether Boise County can move forward with their bankruptcy claim, county clerk Mary Prisco said the county’s books were a mess when she took office in January of 2011. At least one annual report for a 2010 county fund used numbers from 2008, Prisco said, and county departments weren’t reconciling their books with the financial record of the main office.

Prisco also said the county’s indigency fund — money used to help cover the emergency medical expenses of very poor residents — was basically ignored in 2010, a move that violated state law and may have exposed the county to full liability for those claims. The IRS was also contacting the county over payroll errors and problems with tax forms, Prisco said, and some county assets were improperly recorded as revenues.

Prisco first learned that the county was considering bankruptcy during a commissioner’s meeting in February, she said.

Prisco testified that the county commissioners went into executive session to discuss the possibility of declaring bankruptcy, without first notifying the public. While in closed session, they talked about the possibility of holding a bond election, raising taxes or setting up a long-term payment plan to pay off the debt.

But all those options were rejected, Prisco said: The elected officials didn’t think a bond would get the supermajority vote needed to pass. They believed that under Idaho law they could only set up a promissory note or payment plan with Alamar for a one-year period, not enough time to pay off the debt. Taxes could only be raised by 3 percent without voter approval each year, Prisco said, and the officials also didn’t think they could pull cash from dedicated county funds to pay Alamar.

Under cross-examination, Prisco also acknowledged that many of the county’s various funds have money left in them at the end of the year — a surplus totaling $6.7 million. She also projected that the county would end its fiscal year in September with a cash balance of more than $5.4 million.

But in court documents, the county says it’s been operating at a shortfall for several years and that it has several hundreds of thousands of dollars of liabilities that aren’t on the books. It has proposed that under the bankruptcy plan, it would pay Oaas-Laney half a million dollars, saying that any additional payments would have to be recovered from the county’s insurer — which has denied its claim for coverage.

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