Bankruptcy Code Amendments Should Now Be Illinois’ Imperative – WP Original
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.