By: Mark Glennon*
If you haven’t followed Puerto Rico’s financial crisis, serious debate now focuses on authorizing it to file a “Super Chapter 9” municipal bankruptcy. As a territory, Puerto Rico currently cannot file under the Bankruptcy Code. That can be changed easily by Congress with the President’s signature, however. They can also change Chapter 9 of the Bankruptcy Code to make it a faster, firmer and more predictable route to a robust recovery.
And the Bankruptcy Code, it’s widely accepted, trumps state limitations on impairing pension obligations. Federal power to make and change bankruptcy law is broad and expressly recognized in the Constitution.
Obviously, a precedent might be set for Chicago, Illinois, New Jersey and other other highly distressed local governments. That’s exactly why the debate has gotten hot. Read this MarketWatch article for some background. “This will spur other states from New Jersey to Illinois to ask for Super Chapter 9,” said one muni bond market participant quoted in the article.
I’m not saying the Super Chapter 9 proposed for Puerto Rico is right for Chicago or anywhere else, and I don’t know if it’s right for Puerto Rico. I certainly do think, however, that Chicago at least should be looking at amendments to Chapter 9 that would make sense for the city to ask for, and it ought to be threatening that to get voluntary concessions. That’s exactly what we said Rahm should have done if he wanted to deliver a serious budget address.
For Puerto Rico, discussion has included appointment of some form of financial oversight board, akin to the one that guided New York City through its financial crisis in the 1970s. That much certainly has potential merit for Chicago. Maybe amendments could also change what’s needed for a state to authorize its consent for a city to file. Currently, Illinois does not authorize it’s cities to file and the assumption is that state legislation would be needed to change that. I have not yet seen any discussion on how far Congress could go on loosening that up.
There’s no one form of what a Super Chapter 9 could take. Different amendments could distinguish cities from states, or cities of one size from another.
This much is clear: The debate is on, and that’s good. Resolution of the financial crises for state and local governments, primarily caused by pensions, may well be determined by amendments to Chapter 9.
*Mark Glennon is founder of WirePoints. Opinions expressed are his own.