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Illinois is falling further behind the curve by ignoring the inevitable. It’s priority should be influencing Congress to amend the Bankruptcy Code to make it a fast, efficient, predictable means to a fresh start, with the general public’s interest made paramount.

By: Mark Glennon*

In the dozens of articles you probably read in the last few months about our fiscal crisis, what’s the universal omission? A solution.

No analyst, officeholder or commentator has offered one. No combination of survivable tax increases and spending cuts can solve Illinois’ consolidated state and local fiscal insolvency. There is none — unless debt, including pension debt, is cut (and economic growth restored).

Maybe we can kick the can for a few more years. Pensions assets can be bled down to nothing. Maybe there’s a feasible solution outside of bankruptcy for some of the individual, insolvent municipalities that overlap parts of Illinois. But, particularly for the Chicago area, the numbers, taken as a whole, are insurmountable, which we have documented inside and out on this site. It’s just the math, which we won’t repeat now. Chicago, most importantly, will go bankrupt.

Don’t be misled by the straw man argument that bankruptcy is a horrible option fraught with unknowns. Of course it is. The issue is whether it’s avoidable. Unless unfunded pension liabilities — which are entirely for services already rendered — are reduced, no sustainable fiscal path forward is open. A state constitutional amendment is possible, but it would be subject to credible challenge under the United States Constitution’s Contracts Clause and Ex Post Facto Clause, and would be litigated for years.

That leaves only bankruptcy, which trumps the Illinois constitutional protection of state and local pension benefits. The Illinois General Assembly has not yet authorized bankruptcy for municipalities, but it surely will have to, eventually, as more municipalities demand it.

Consequently, the imperative should be improving the Bankruptcy Code — and guarding against efforts to make it less in the general public’s interest. Those opposing efforts are already underway, which is why we are falling behind the curve. Some in the municipal bond industry are supporting changes to strengthen bondholder protection, retroactively, at the expense of taxpayers. Public unions have signaled their intentions to protect pensions by launching a national television campaign against amendments that would allow Puerto Rico to file, arguing that doing so would set a precedent for authorization for Illinois and other states.

Those special interests must not be allowed to control the direction of the Bankruptcy Code. Illinois should be working to stop them and, instead, to influence Congress to make changes that would promote a fast, genuine, fresh start for insolvent governments.

Below are some of the areas, broadly stated, where improvements could be made for the public good. This list is by no means complete or detailed. Others may have further ideas, and the specifics are for bankruptcy specialists, but here’s a start:

•  Taxpayer interests should be represented more consistently and more robustly throughout a Chapter 9 proceeding. A key question in a municipal bankruptcy is the feasibility of tax increases. Surprisingly, courts have been inconsistent in recognizing taxpayers as “parties in interest.” There should be no doubt about that.

•  Progressive pension cuts should be authorized. Under current law, all pension claimants must receive the same percentage reductions. Many pensions are excessive but some are not. The Code should be amended to allow smaller percentage cuts for smaller pensions.

•  The recent Manhattan Institute proposal for a “Proceeding to Protect Essential State Actions” should be pursued. That’s a sort of bankruptcy-light idea that Congress could authorize states, through the Bankruptcy Code, to cut pensions. This proposal could work for the state, not just municipalities. The proposal was summarized in a recent Chicago Tribune article.

•  “Eligibility” criteria should be clarified, expediting the initial stage of Chapter 9 cases, which is usually protracted and unpredictable.

•  Authorization for independent financial control boards should be considered, empowered to manage affairs during a proceeding and to submit a plan of reorganization. Under current law, the municipality itself has exclusive power to submit a plan, unlike a private sector Chapter 11 where competing plans may be submitted. The problem in Chicago and across most of Cook County is that if the same elected officials responsible for insolvency control a bankruptcy, beholden to the same, narrow interests to which they have traditionally answered, then bankruptcy would fail miserably.

This crisis is still in an early stage. As long as denial and delay remain the central strategies of Chicago’s leadership and the majority of Illinois General Assembly, the ultimate bottom grows deeper and darker. Making the Bankruptcy Code a reliable, fair, efficient route to renewal is essential.

*Mark Glennon is founder of WirePoints. Opinions expressed are his own.

 

 

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Jim W

The creditors have been in control of bankruptcy law for years. 2005 was the last nail in the coffin for debtors. Keep in mind that BAPCPA was the result of an effort that began many years earlier. The banks push and push for stronger protection for their interests in BK law and no one pushes back. They’ve turned BK into a giant minefield for anyone trapped under a pile of debt. No one cares about it until they go to file bankruptcy and realize how difficult it has become to navigate.

I wish it weren’t so, but I can’t see any way to reverse this trend.

S Moderation Douglas
“bankruptcy-light” ??? “Don’t be misled by the straw man argument that bankruptcy is a horrible option fraught with unknowns. Of course it is.” “The proposal does not hurt state bondholders and other creditors. It only gives state legislatures and governors an option to reform their public pension systems.” That should scare the bejeezus out of anyone. A single purpose bankruptcy? Bankruptcy …should… be a horrible option fraught with unknowns. It’s serious business when you default on your debts. Even more serious when you selectively default on only one class of debtors. But don’t worry, there are protections: “States would be authorized to enact pension benefit changes only… Read more »
Lisa
That is a tough sell when the politicians not only didn’t fund the pensions but borrowed money from it for corporate welfare and to pay for services they didn’t want to raise taxes for. The lack of the State making payments was challenged in Illinois court which ruled that the pensions had to be paid but the court couldn’t rule how the state paid into them. Also consider state workers are tax payers also, we paid into our pensions, most don’t get Social Security while often paying into SS from another job, we don’t even get Social Security survivor benefits. If the State doesn’t pay the required… Read more »
Tough Love

Were these Public Sector Pensions (AND benefits) promises not knowingly excessive, unnecessary, unfair (to Taxpayers) and granted by Elected Officials in exchange for Public Sector Union campaign contributions and election support ?

Taxpayers were never invited to “bargaining table” and certainly would never had agreed to such underhanded deal-making.

Such “promises” need not and SHOULD NOT be honored. ……. by whatever means necessary, bankruptcy or otherwise.

Rick

A federal bailout is much more likely to happen in Illinois/Chicago than any form of government bankruptcy. One only needs to look at who runs the legislatures here and in washington, the unions, and the country’s growing appetite for socialism. None of these groups would let government in any way admit to bankruptcy. If by some miracle these entities allow bankruptcy, then they will structure it to burn only the investors, and there will be no restructuring for the future, just a federal can kick instead of a city or state can kick.

Tough Love

Wow, are you in denial…..likely a Public Sector worker/retiree.

If still working, I suggest you don’t retire, and develop a Plan “B” for the materially pension reduction sure to come.

Rick

No not a gov sector worker, never took unemployment in 60 years, ran 4 businesses, owned 6 houses all in Illinois. I just know how things work here, Hillary will listen to Madigan and Rahm, and suggest a federal bailout of not just Illinois but the whole public sector pension deficit. Much like the previous bailout. After pensions, then tuition bubble will be bailed. The baby boomers have raised a crop of socialists, and it is their world to run now.

upper-middle loser

SPOT ON Rick!

Tough Love

Oh the terrible choices ….. Trump or Clinton (with Sanders even worse).

Steve-Oh
The legislators and govt officials in charge (particularly the Democrats) obviously put govt ‘ee interests ON TOP of the private sector workers who SUPPORT and PAY for all the govt ees and their lavish benefits. And since they put govt ‘ee interests first and foremost, there is no solution until bankruptcy crashes the house of cards. They’ll probably wait until pension funds go down to zero and pension checks are forced to be slashed. It’ll be a pay-as-you-go system. They might even cut active ‘ees and paychecks, which wouldn’t be the worst thing, either, unless it cuts police and fire too much. This will be interesting. The… Read more »
Andrew Szakmary
I am somewhat confused by the assertions made by many on this site that if pension contributions are stopped and the pension funds run dry as a result, why the courts could not order that the pension benefits that are contractually owed be paid out of current general revenues in prioritized fashion – i.e. Chicago, or the State, would simply be ordered to pay benefits, and interest and principal payments on bonds, before anything else is paid? Isn’t this what is essentially happening today regarding the state budget impasse, that some things (like pension contributions, interest payments, employee salaries) are continuing to be paid based on court… Read more »
Steve-oh

That could happen and to do it they’d have to lay off/fire perhaps 1/3rd or more of the firemen and policemen

Tough Love

Andrew, The choice will SURELY come to cut either the Pay of current workers or the pensions of those collecting them. Cut current worker pay more than marginally and they leave. What can retirees do if pensions are cut (except go to Court for a judgement than can’t be enforced because the money does not exist).

Whom do YOU think will get the bigger cut ?

Steve-Oh

It’s probably not possible to pay all the govt workers their current paychecks AND pay all the pensioners their current monthly pensions. Have you looked at the totals Andrew ?Almost certainly, something would need to be cut, maybe a combination of cutting current ‘ees, cutting their pay, and cutting pensions. Or maybe you’re saying pensions cannot be cut, therefore just cut # of govt ees by a significant fraction. There’s no good answer, and taxpayers are already being fleeced beyond max

Tough Love
Mark, I most areas we agree …. but some, not so much. Above, you stated ….. “Progressive pension cuts should be authorized. Under current law, all pension claimants must receive the same percentage reductions. Many pensions are excessive but some are not. The Code should be amended to allow smaller percentage cuts for smaller pensions.” While I understand your “point”, let’s not be so fast in NOT calling ALL Public Sector pensions “excessive”. The test for “excessive” should NOT be solely (or mostly) based on the dollar size of the pension. One easy way to make that clear ………….. while many would just automatically call a $30,000… Read more »
Larry T.

if you are correct that BK is the only alternative , then an idea I read here a few days ago might be worth thinking about. Why not just stop making contributions to the weak funds altogether. If I understand it correctly, that money would all be wasted, just like Rahm’s $500 million property tax increase. Throwing good money after bad only creates more harm in the long run.

J.A. Herzrent
I agree in a couple of ways. First, the money in the fund is going out faster than it is coming in (the leaking bucket metaphor) and, second, the money is going primarily to the “pension millionaire” group of those already retired in their 50’s or early 60’s. Stopping further appropriations would probably not stop that same group from depleting the fund down to zero but it would focus public attention more directly on the problem and it would alarm the teachers who are in active service … the food will all be gone when they finaly get to the bankquet table. It has not been possible… Read more »
Tough Love

Since the financially astute already realize that NJ’s Plans are unsalvageable, and what you are suggesting has been NJ’s approach for some years now.

NJ’s Taxpayer’s are “supposedly” on the hook for HUGE unpaid for (and clearly excessive, unnecessary, unfair, and unsustainable) pension “promises”. But so far, have paid little more than a reasonable contribution toward these (grossly excessive) pension promises.

Odds are somewhere near zero that these pension promises will be met, and certainly NOT via massive tax increases.

Illl’s Taxpayers should certainly PUSH for this an an option.

J.A. Herzrent
Are enough municipal bonds held by public pension plans that most taxpayers wouldn’t care whether the pension haircut occurred via benefit cuts or plan asset cuts? Failing that, much depends on the court’s perception of the general public’s interest. I’m fairly certain that the court in Chicago would place a fairly high priority on public safety with the result that police and fire pensions would have high priority. “Educators” have the power (if not the legal right) to shut down the schools and add to the general disruption. From my perspective, the public employee unions have gained far too much control over (what we laughingly call) civil… Read more »
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