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Behold the Chicago Cubs.


By: Mark Glennon*


The inevitable is here. The real importance of Governor Rauner’s proposal to authorize optional bankruptcy for Chicago Public Schools and the city is putting bankruptcy into the mainstream narrative. That’s good, and years overdue, but it also means we’ll be doubling down on the confusion, ignorance and political distortion that has plagued the debate about our fiscal crisis.


On this site we will focus hard on ensuring that all good articles about municipal bankruptcy for Illinois get posted, and we’ll try to cut through the fog.  It’s not an easy topic, as I know from when I taught it to law students and from my first career as a lawyer, when I did lots of it in large, private sector insolvencies. Moreover, Chapter 9, which is for municipal bankruptcies, is vaguer, so many questions are open. Consequently, you will not find many reporters who understand it.


That problem will be made worse because objective experts will be hard to find. While there are some good, independent analysts in the municipal bond industry, that business is overwhelmingly just a big sales organization for a long-only market. Some of the comments I’ve seen out of the muni industry lately about the safety of certain bond issues in the face of bankruptcy risk have been stupefying. Practicing lawyers in the field likely either won’t talk much to reporters or, if they do, will be conflicted by the side their clients are on. Before them lies the biggest gravy train they will see in their careers. They have a pretty good idea about who they could represent as the wheels come off.


And the wheels indeed are coming off. Bankruptcy, for better or worse, is inevitable for dozens of Illinois municipalities because they are grossly insolvent. They’ll gradually recognize that millions of dollars are wasted each day across Illinois on bonds, pensions and contracts that could be cut through bankruptcy. In the private sector, business owners usually overcome their emotional resistance to bankruptcy only when they realize they are just “working for the bank.” That is, they see that whatever more they put in will only accrue to their creditors’ benefit. Taxpayers and municipal politicians haven’t figured that out yet, but they will. For most of you who just got a new property tax tax increase, remember it’s almost certainly going to pensions.


Rational discussion about pensions, the core of our fiscal crisis, is already rare. Regular readers here know all too well that the press has been out to lunch on that. Now we’ll be adding the complexity of bankruptcy.


The baloney factories are already cranking up. Public unions are rushing to inflame the common misconception of bankruptcy, which is boarded up windows, mass layoffs and wrecked credit. The reality is that all bankruptcies are fact-specific; some fail but some produce the fresh start intended. GM and Chrysler, prior to their bankruptcies, went through the same scare stage. Detroit has investment-grade credit while Chicago does not.


Representing creditors in the past, I’d sometimes try the same baloney. “If you file for bankruptcy you’ll never get a dime of financing from anybody and we’ll take everything you have.” The smart ones would laugh in my face and say, “No, here’s the plan we’re gonna file, here’s what you’ll get and lenders are gonna be lined up once our balance sheet is clean.”


That’s not an endorsement of bankruptcy for CPS or any other particular municipality. Each requires a detailed, individual review. CPS has not done that nor has any other Illinois municipality I know of. That’s financial nonsfeasance. Politicians in charge should recognize a duty to explore the option.


Just remember the Cubs. They went bankrupt in 2010 but are now certain, as any fool can plainly see, to win the 2016 World Series.


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







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O. B. Server
Pensions add an additional level of complexity to any bankruptcy because nobody understands them, including bankruptcy judges. In Detroit, the judge required an approval of the bankruptyc plan by vote of active and retired public employees. The vote outcome was in doubt, so the actuaries changed a few assumptions. Based on the new assumptions, the ostensible pension haircuts were reduced. No new money was added to the pot, but the “voters” were told that the haircuts woulld be lower than originally proposed. So those “voters” approved the proposed settlement. The approval meant that the retirees would experience a smaller haircut for a few years. Sooner or later,… Read more »
Sandra Simmons

Hi mark,

Great article! I have questions-, if Chicago or any other municpality goes into bankruptcy protection- how do the bond payers get their money returned? And, if there is such a high risk of default, why aren’t the bonds paying well north of 7.5%? Thank you

mark glennon
Many bonds are very safe even in bankruptcy because they are secured — there’s a mortgage of sorts on some particular assets, and bankruptcy courts must honor that. They get paid according to their original terms or on terms of equivalent value. They are usually the ones bearing low rates. Unsecured bonds go into the pot with all other debt that has no asset securing it, which includes unfunded pension liabilities. They basically get whatever is left over — sometimes pennies on the dollar sometimes very high. In theory all unsecured debt gets cut at the same percentage, but in practice negotiated settlements sometimes change that, as… Read more »