The ultimate issue for broke Illinois cities surfaces: What kind of insolvency proceeding will the state allow? – WP Original
April 16, 2014 By: Mark Glennon*
If Springfield lawmakers eventually answer this right, an orderly, fair, though difficult proceeding would be available to desperate Illinois cities, but getting it wrong would be catastrophic: What form of insolvency proceeding will Illinois allow for its broke cities?
Some of the folks who matter aren’t just facing up to the ugly financial math but are raising that key question, which ultimately will drive dozens of issues critical to the future of many Illinois cities, perhaps including Chicago.
An insolvency proceeding of some kind that modifies debts and contracts will be needed for many Illinois cities, those folks know, but what? A terrific article yesterday in The Bond Buyer (reproduced below) spreads much light on how the debate ultimately will unfold.
First, a little background. Chicago and other cities in Illinois cannot, under current state law, file for bankruptcy, as Detroit did (subject to some minor exceptions we wrote about here). States must first authorize their cities to file a Federal bankruptcy. Michigan did but Illinois has not, and it’s not likely to this legislative session. I have it on good authority that a person of great influence in Chicago (not Rahm) suggested to legislative leaders that they consider making the authorization now. Their answer was something to the effect of “forget it, we just put our careers on the line voting to cut pensions, so we’re not going to think about that.”
The question is certain not to go away because some cities will soon have no choice but to ask — maybe beg — for some form of insolvency proceeding.
But there are alternatives to a simple bankruptcy authorization. Thoughtful people are now discussing those alternatives, which is what The Bond Buyer article describes. Chief among them is Chicagoan James Spiotto, a leading national bankruptcy lawyer who has long warned of the severity of our state and local financial crisis. His idea is to create a new state agency, the Illinois Municipal Protection Authority, IMPA, as an alternative to Federal bankruptcy. Much of IMPA’s work would be advisory but it might also have at least some powers comparable to that of a bankruptcy court to order changes. According to The Bond Buyer:
The comptroller, a local government, a creditor meeting certain criteria, or a pension fund could petition the proposed authority for intervention based on a set of financial triggers related to a municipality’s debts, pension funds, other obligations, judgments or defaults. The IMPA would be able to seek declaratory and injunctive relief regarding the exercise of its powers and implementation of its findings and recommendations.
Spiotto is not alone. The Civic Federation, a financially conservative group of who’s-who in Illinois business, has made IMPA one of its legislative priorities for this year, though it seems to envision fairly limited powers for the agency.
Regardless of how people like Spiotto and the Civic Federation envision what powers IMPA should have, all bets would be off once it becomes a bill in Springfield. Which debts would be given priority and which would be cut? Do pensions come before schools? Who would decide how much additional tax the city could expect to raise? How much further borrowing should it be allowed? Could collectively bargained employment arrangements be changed? What pension changes would be made? And how about loading IMPA’s board with political allies?
These questions and many more would rapidly become apparent to lawmakers. They would see the bill as an opportunity to cement their answers in, enforceable through the “declaratory and injunctive relief” Spiotto envisions, or some other power they add.
In short, any governmental issue with a financial impact would be on the table.
Good idea or not, expect to see the city fiscal and pension debate start centering on IMPA or something like it. Some city pensions are only 30% or 40% funded, and they are taking in less money than they need just to pay current retirees. Those cities have little hope of raising much more tax revenue. They may soon watch Detroit emerge from its bankruptcy with a clean balance sheet, the “best they’ve had in 50 years,” according to Kevin Orr, its Emergency Manager. You can be sure desperate cities will start telling Springfield they need authorization for bankruptcy, too. Springfield would reasonably respond by considering IMPA, or something like it, either as a substitute or optional alternative to Federal bankruptcy.
If all this sounds exaggerated or arcane, or you wonder why you haven’t read about it, know that influential financial people apparently have already figured out just how important this topic is. The Federal Reserve of Chicago and The Civic Federation and the are sponsoring a forum on it next week that includes James Spiotto, but it quickly sold out!
And here’s the most important point of all: Under absolutely no circumstances should any IMPA-like bill be drafted by the current leadership in Springfield — Madigan, Cullerton, and Quinn. They would write their friends into controlling positions over the agency, and the agency would impose their grand design on any city that became subject to its reach. That would be truly catastrophic.
If you need another reason why it’s essential to put veto power in the hands of a new governor this November, that’s it.
From The Bond Buyer, April 15, 2014:
CHICAGO— With Chicago and other local governments worried about the weight of pension obligations on their finances, the Civic Federation of Chicago is promoting creation of an authority designed to intervene before dire fiscal strains reach crisis stage.
The quasi-judicial authority would help Illinois local governments deal with pension-related and other fiscal burdens threatening their solvency. The goal is to avoid defaults and Chapter 9 bankruptcy while putting a government on a sustainable path, said the proposal’s author, James Spiotto, co-chair of the Civic Federation’s pension committee.
The agency’s mission would be to pursue a balanced recovery plan to help struggling municipalities to deal with debts and pension costs outside the court system in a manner that protects their abilities to provide essential services. The assistance could involve bringing creditors and other parties to the table to mediate a solution.
“The real goal isn’t just debt adjustment. It’s a recovery plan,” said Spiotto, who helped launch Chapman Strategic Advisors LLC after his retirement from law firm Chapman and Cutler LLP at the end of 2013.
Spiotto will discuss the proposed Illinois Municipal Protection Authority at a forum co-hosted next week by the Civic Federation and the Federal Reserve Bank of Chicago called “After Detroit: How Will Illinois and its Communities Respond?”
Spiotto says the framework could also be applied in other states and has offered up the idea in presentations and papers he’s authored, including one examining Chapter 9 bankruptcy compared to other potential resolutions for cash-strapped municipalities.
Creation of the Illinois authority is among the Civic Federation’s 2014 legislative priorities. Under the proposal, the authority would be designed to provide “venue, encouragement and supervision to aid in finding creative, voluntary solutions for financially challenged local governments.”
The authority’s mission would include examining essential government services and post-employment benefits for affordability and sustainability and recommending cost-cutting measures to make services and benefits affordable.
The authority could help governments explore needed contribution levels for post-employment benefits and promote arbitration for contractual or labor disputes. Additional help could be provided by exploring a government’s structure and whether some services or costs could be consolidated or transferred to other governmental bodies.
The authority would be charged with recommending whether the state should authorize a municipality to file Chapter 9 and whether its plan of adjustment can be prepackaged or pre-negotiated. It could identify and recommend potential tax increases, helping make the case for need, and pursue mediation or a state intercept on aid.
The state could potentially also offer some form of insurance or wrap to protect employees’ pensions at the level they would receive if they participated in Social Security. The program would use the federal Pension Benefit Guaranty Corporation as its model.
“By creating IMPA, the state is able to offer an alternative to bankruptcy which will allow local governments an opportunity to solve their critical problems related to providing essential government services,” the Civic Federation writes.
The ultimate aim is for all participating municipalities to fully fund essential government services and make sustainable contributions to post-employment benefits by a specified date in order to maintain the credibility of Illinois municipalities in the capital markets.
“The idea is to help municipalities determine what is affordable without crowding out essential services,” Spiotto said. “The real goal isn’t just debt adjustment it’s a recovery plan that is affordable.”
Though the authority one of the Civic Federation’s legislative priorities, the current 2014 session is crowded with work on a new budget and a vote looming over whether to make permanent a temporary 2011 income tax hike.
The federation offered up a draft proposal several years ago and Spiotto said it was revised and updated last year but lacks a legislative sponsor. Supporters believe it could pick up steam following Detroit’s historic Chapter 9 and heightened public and legislative attention on the impact of pension strains.
The proposal suggests nine members govern the authority, four appointed by the Illinois Municipal League and one appointed each by the governor, the speaker of the Illinois House, president of the Illinois Senate, and minority leaders of the House and Senate, with members serving staggered six-year terms.
Funding for the authority could come from a fee paid by participants and the state comptroller would provide administrative and operational support for the authority. Illinois Comptroller Judy Baar Topinka’s office currently serves as a repository for local government financial reports.
The comptroller, a local government, a creditor meeting certain criteria, or a pension fund could petition the proposed authority for intervention based on a set of financial triggers related to a municipality’s debts, pension funds, other obligations, judgments or defaults.
The IMPA would be able to seek declaratory and injunctive relief regarding the exercise of its powers and implementation of its findings and recommendations.
Pension strains are a central challenge for local governments. Chicago and other area governments, including Cook County, the park district, and school system, sit at the center of the pension storm for local governments.
All have been hit with downgrades due to their underfunded pension obligations and the woes are exacerbated by their overlapping burden on the same tax base. State statutes set benefit and contribution levels, so local governments must win state approval for any changes.
The General Assembly previously approved pension reforms for the Metropolitan Water Reclamation District of Greater Chicago and the Chicago Park District. Chicago just won an overhaul for its municipal and laborers’ funds but Gov. Pat Quinn has not said if he will sign it.
Chicago also faces a $600 million increase in its fire and police pension contributions that Mayor Rahm Emanuel has warned the city can’t afford. Cook County is preparing its own reform package and the school system has been attempting to negotiate an agreement with its teachers’ union.
“Many are so severely underfunded they may run out of money if nothing is done to further reduce benefits or increase contributions,” the federation warns in its legislative agenda. “For other funds, the employer contribution level has become so high that it threatens to crowd out spending on government services.”
The federation urges state lawmakers to “pass further legislation to reduce benefits for current employees of local governments facing a pension funding crisis and to increase employer and employee contributions.”
The April 23 forum will host a panel on Chicago and its fiscal future, the success of pension reforms elsewhere and how they might impact city reforms.
Another panel is focused on how state intervention either helps or hinders local governments from a local and national perspective. It includes a discussion on the proposed IMPA. The keynote speech will be delivered by Detroit’s chief financial officer, John Hill, on charting Detroit’s future