The Wall Street Journal has an article today on the controversial new method by which Chicago is raising money. The concept is pretty simple: The city sells full ownership of certain future income, in this case, some of its future sales tax revenue that comes from the state. The purpose is to assure bondholders that, even if the city goes into a formal bankruptcy, the sales tax revenue will be locked up for bond payments.
That article, like others that have appeared lately, misses a couple key things:
1. The state statute that authorized the scheme obligates the state never to attempt to reverse or undo the scheme (65 ILCS 5/8-13-15). The Journal correctly points out that bankruptcy courts haven’t fully tested the scheme so it’s not certain it will hold up, but to undo it the state’s cooperation in court and by statute would be important. The Journal should have pointed out that the “non-impairment” language in the statute will make it harder to favor taxpayers and service recipients over bondholders
if when the city goes bankrupt.
2. It’s not just Chicago. The statute also says that if any home rule municipality in Illinois wants to use money coming from the state as collateral, it must use the new method. (65 ILCS 5/8/13/20). Municipalities have long used that money as collateral, but now they will be forced to try to make the mortgage bulletproof in favor of bondholders using the new method if they want to use the collateral in any way.
Why is all this important? It heightens the risk that even bankruptcy might not help a broke municipality. That’s because the “bank” will own key assets — they’ll be locked up in favor of bondholders unless a court somehow invalidates the scheme. All other creditors, including pensioners to the extent of unfunded liabilities, would be subordinated to bondholders.
This legislation was stuck, at the last minute, into the state’s 756-page budget implementation bill passed in July, which almost no lawmakers read. We criticized it an similar legislation to favor bondholders as it went through the legislature, and I wrote about it in this Crain’s piece.
-Mark Glennon is founder and Executive Editor of Wirepoints. Opinions expressed are his own.