Updated 6/14/15 where indicated in italics.

By: Mark Glennon*

 

HB298,  a bill to authorize Illinois municipalities (cities, towns, school districts, counties, etc.) to file under Chapter 9 of the Federal Bankruptcy Code, was introduced in the Illinois House earlier this year by Ron Sandack (R-Downers Grove). The bill was assigned to the Rules Committee, often a procedural purgatory, though prospects seem to be brightening a bit.

 

When introduced, it was typically shrugged off by most of the General Assembly’s controlling Democrats, but today they at least seem to be taking it seriously. Last week I heard Illinois Senator Heather Steans (D-Chicago) indicate it will be studied closely later this year. She gave no opinion on it, but reiterated the usual concerns about the gravity of letting municipalities go bankrupt — which are understandable.

 

Update: The bill has now been amended in two ways. First, it would create a statutory lien to secure all bonded indebtedness. That’s designed to placate nervous municipal bond markets by making bonded debt secured debt, which has a priority in bankruptcy. This is a step some other states have already taken.  Second, a municipality would be eligible for bankruptcy only if it either ) participates in a “neutral evalutation process,” or 2) declares a financial emergency, which would require a resolution by the municipality that includes findings that the health, safety or well-being of residents is jeopardized and that obligations cannot be paid within 60 days of when they come due. Definition, details and other related changes are contained in the amendment, linked here. Expect further negotiations on these conditions.

 

Also last week, the Better Government Association held a panel discussion about municipal bankruptcy for Illinois. Participants included James Spiotto, probably the nation’s leading legal authority on Chapter 9,  Carole Neville, a lawyer who represented the Detroit Retiree Committee, and Rockford Mayor Larry Morissey.

 

Spiotto’s eyes lit up when I asked him afterwards about the extraordinarily important but under-reported question — whether Chicago and other municipalities are legally liable on their pensions if they run dry. It has been generally assumed that they are, but Chicago is arguing otherwise in court. He knows how consequential the issue is (we wrote about it in an earlier piece). The answer depends, Spiott said, on interpretation of rather vague language in the particular statute authorizing the pension considered (Illinois has 12 different ones for its municipalities). I could not get him to opine on a ‘right or wrong’ answer, but that doesn’t initially matter because it may be ruled on in July by an Illinois trial court. As we wrote in that earlier piece, Chicago is currently claiming it is not liable in the litigation over constitutionality of a reform bill covering two of its pensions. The court might, however, rule on grounds that wouldn’t require addressing the issue.

 

But that’s another reason why bankruptcy authorization could be so critical. If it were authorized and a municipality filed, it could raise the issue before a Federal bankruptcy judge, which would likely have a different inclination than sate court judges, who are political pensioners.

 

The two lawyers on the panel repeatedly emphasized the importance of attempting a negotiated deal instead of bankruptcy, or of coming to agreement on as much as possible before filing. Filing bankruptcy with no prior understandings of where it should end is indeed a trip into a dangerous no-man’s land. The problem is that, by taking so long even to seriously consider bankruptcy authorization, the Illinois General Assembly is also delaying those discussions. Bankruptcy should indeed be regarded as a last resort, but I think it’s inevitable for many in Illinois. The legislature appears willing to let them hit the wall before acting, which is irresponsible. Maybe that’s a waste of time anyway. Who can see unions giving away as much as would be needed to make some of Illinois’ worst off municipalities solvent?

 

Finally, it was Larry Morissey, Rockford’s mayor, who stole the show. He is bright, articulate and fully understands bankruptcy. He was among the first to call for it to be authorized, but he seemed sincere in claiming that he hopes to avoid actual filing for Rockford, using the authorization as a negotiating weapon to reduce costs.

 

Many of Rockford’s police and firefighters, he said, are moving outside the city to escape high taxes and into places with volunteer fire departments. In other words, they are unwilling to pay the taxes associated with the very services for which they continue to force up costs.

 

Rockford and other Illinois municipalities do not have a revenue problem, he emphasized. The problem is exorbitant costs — costs forced on the city through unfunded mandates from Springfield.

 

Further background on what we know and what we can’t know about municial bankruptcy for Illinois is in this article from April.

 

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

 

 

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Jim Palermo

Paul, which bondholders have been advantaged over pension plan participants? Detroit? Stockton? San Bernardino? Vallejo?

Paul

Jim your right so far….but read Marks artical. The bankruptcy bill pending is attempting to create a lien securing bonded indebtedness. Which is attempting to shield the bondholders from a bankruptcy haircut. Imagine that a municipality trying to claim its broke on one hand and cannot pay pensioners….but on the other hand paying bondholders every red cent. I know its hard to imagine; and just as crazy thinking a Federal judge would allow such gamesmenship.

Jim Palermo

It isn’t gamesmanship Paul; it is the municipalities’ attempt to comfort the bond markets. Next week the City of Chicago is coming to market with $1.1 billion in bonds to be used for debt restructuring and operating purposes such as paying back police office wages and litigation settlements.

http://www.chicagotribune.com/news/local/politics/ct-chicago-bond-issue-met-0612-20150611-story.html

When a city like San Bernardino issues bonds to fund pension deficits, declares bankruptcy, stiffs the bondholders and keeps pension participants whole, the markets tend to have a long memory. If municipalities can’t manage day-to-day operations without borrowing (and please spare me your ‘just raise taxes ‘refrain), borrowing will get more and more difficult and expensive.

Paul

Risk reward Jim….a bond investor DECIDES to buy bonds using risk reward analysis. A retired pensioner gave a lifetime of labor with the PROMISE of a pension. Gaming the system so the bondholder gets shielded from bankruptcy default while the pensioner is left unprotected is apparently what you favor.

Mike
The bondholders are likely at more risk than they realize due to the lack of transparency in Illinois Public Sector Pensions. The politicians, public sector unions, and special interests gamed the pension and pay system, and did not adequately disclose risks to bondholders or taxpayers. The Game was to maximize public sector compensation at the expense of long term sustainability. 1. Legislative benefit hikes to underfunded pensions. 2. Union lobbyists advocating during annual government budgeting to divert money from pension funding to the bucket used to hike salaries. 3. Benefit and salary hikes result in hiked pensions. Look at all the legislative benefit hikes and salary hikes… Read more »
mark glennon

Totally agree that bondholders are more at risk than they understand because of pensions. That includes many supposed experts in munis. This will be litigated forever.

Mike
Pensions are almost always a big driving force behind municipalities in fiscal distress. Since Illinois Pensions are so convoluted, it’s impossible to succinctly make all inclusive generalizations, so there are exceptions to the below, but in many cases, taxpayers outside Chicago pay property taxes for: 1. Downstate Police Pension Fund. 2. Downstate Fire Pension Fund. 3. Illinois Municipal Retirement Fund (IMRF) at the city / town / village, park district, library district level, school district (employees whom are not in the teacher and administrator pension fund), and sometimes township level. Taxpayers outside Cook County pay county property taxes for the Illinois Municipal Retirement Fund (IMRF). Plus such… Read more »
Paul

Two thoughts: 1) Watch people move away in droves…..if Illinois becomes the land of bankruptcy; 2) A federal Judge will not look kindly at a entity that shields its bondholders and ignores its tax base…then cries poor. Bankruptcy is ONLY an option when it is the ONLY option. Then it is a BAD option. Try raising taxes first and ONLY IF that fails proceed to bankruptcy. Going to bankruptcy before raising taxes will be seen as political gamesmenship to avoid debt….a Federal judge will see right through it.

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