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By: Mark Glennon*

Now widely reported, initially by the Chicago Tribune, Illinois Gov. Bruce Rauner made some public comments last month that he talked to members of the United States Congress about federal legislation to allow Illinois to reduce some pension benefits, overriding the state constitutional ban thereon.

But what Rauner is saying and doing is only part of the story. There are two broad ideas afoot in Washington. Other states also have pension crises so this is about more than Illinois.

One major, national, blue chip law firm is actively talking up the idea Rauner spoke about and another major, national blue chip law firm is actively promoting a broader concept.

Here are the specifics:

Rauner said, “We’ve got a bill now. We’re working with Congress to pass a law. We’re lobbying right now that would allow states to reorganize and restructure their pensions.” He added, “If we can get this bill passed in Congress, and I’m hoping to get it done with this tax overhaul that we’re doing, if we can get this bill passed, [it will be] transformative to Illinois taxpayers.”

He’s referring to a pension-only concept along the lines of what the Manhattan Institute has been promoting for about a year. See their article on it linked here. Let’s call it “Bankruptcy Lite.” It would give states the option to file for a limited form of bankruptcy under which just pensions could be reformed. It’s premised, however, on the federal bankruptcy power which is express in the Constitution.

The other concept is a fuller bankruptcy proceeding like the current Chapter 9 for municipalities or PROMESA, the bankruptcy-like statute passed for Puerto Rico. Specific modifications would be included for states themselves to file bankruptcy, but the basic elements of a full bankruptcy would be maintained, which include the power to adjust all debts (not just pensions), power to cancel contracts and a stay on litigation. For more background on the this concept, see our earlier articles linked here and here.

The municipal bond community would be delighted with Bankruptcy Lite. It would relieve states of some of their pension debt, leaving other debt untouched and freeing up more money for bond payments. Pensioners obviously would prefer the broader bankruptcy option because the losses would be spread among other creditors besides themselves.

Both concepts may seem extreme to most folks, which is to say they prefer a third option of doing nothing.

For now, that is.

But they’ll eventually see that doing nothing will devolve into the disorganized chaos of mass creditor litigation with arbitrary winners. More importantly, they’ll understand that bankruptcy-for-states is anything but a “bailout,” as some critics have said.

To the contrary, denying states the option to adjust their debts is the bailout. Broke states like Illinois are a drag on the national economy. Their contribution to to the federal taxes is reduced and they suck up more Medicaid, food stamps and the like than they would if they were in recovery. When they try to tax their way out of their problems, as Illinois is doing, those taxes are deductible at the federal level so the rest of the nation is shouldering part of those tax increases.

None of this is to say that either option being discussed is a good one. This is about what’s unavoidable and inevitable. The facts dictate the options, and they are very, very narrow.

It will take time to sink in.

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

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