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By: Mark Glennon*

It’s dangerous, but get used to it. Many more Illinois towns and cities will follow.

Bridgeview, a junk-rated Chicago suburb, priced a new $47 million bond offering yesterday. It followed Chicago in using that new borrowing structure authorized by Springfield earlier this year: It sold its ownership in future sales tax revenue to a separate entity, which will hold that money to ensure repayment of the bonds. It’s an attempt to make sure that, even in bankruptcy, the bank — bondholders — gets paid no matter what the consequences. Details are in a Bond Buyer article linked here.)

I’ve written often here criticizing this new structure. It’s like selling your future income to the bank so they’ll give you another loan at an acceptable rate. It raises the risk that even bankruptcy can’t offer a fresh start to broke municipalities. The bank — bondholders — may own everything.

Bridgeview is desperate, but it’s not alone. It’s straddled with an impossible debt burden, largely due in its particular case to borrowing for a soccer stadium that hasn’t worked out. In a sane state, Chapter 9 bankruptcy would be authorized for municipalities and Bridgeview, like many other cities and towns across Illinois, would be considering that option. I emphasize “considering” because whether bankruptcy will help is always a fact-specific, case-by-case matter.

And among those facts is whether all major assets are mortgaged to the hilt in a manner that even a bankruptcy judge may not be able to undo. That’s where the state law authorizing the new borrowing structure is most troubling. If any home rule municipality wants to use its share of sales tax or other revenue that flows from the state as collateral it must use the new “full sale” structure. Worse, the state bound itself by statute not to try to undo the ownership position of bondholders. (See our earlier article linked here for details.)

Now, it’s not entirely clear that even the new structure will hold up in bankruptcy. (Interestingly, Bridgeview’s new bonds did not price as well as Chicago’s, as the Bond Buyer reported).

Still, it’s unquestionably true that the new structure makes it far more likely that bondholders will prevail and come ahead of other creditors, taxpayers and service recipients, even in bankruptcy.

To summarize, many other Illinois towns and cities will follow Bridgeview and Chicago. Instead of addressing their debt burden or reorganizing in bankruptcy, they will be doubling down with more borrowing that puts bondholders first and reduces chances for a fresh start.

The Bond Buyer, always polite and restrained, said some critics think the new borrowing structure “could be abused by borrowers that lack fiscal restraint.” I’d rather put it this way: This is nuts!

*Mark Glennon is founder and Executive Editor of Wirepoints. Opinions expressed are his own.

 

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NB-Chicago

or, since the state open the can of worms by bailing out CPS, then what stops every other underwater municipality and 7000 taxing bodies from suing the state for a similar bailout deal? then, maybe the state would be force to allow municipal bankruptcy?

Mike

Village of Bridgeview (Cook County). The Board Agenda and Minutes for the December 6, 2017 Regular Board Meeting indicate the following. Agenda Item VIII (Standing Committee Reports), B (Finance – Trustee Pticek), Resolution Number 17-R-03 (A Resolution Approving a Services Agreement Between the Village of Bridgeview and Bridgeview Finance Corporation) was approved. This Resolution was also identified in the Minutes as 2017-M-158. Each of the six village board trustees voted in favor of Resolution 17-R-03: Norma Pinion, James Cecott, Patricia Higginson, Mary Sutton, Michael Pticek, and Claudette Struzik. Mayor Steve Landek was not a voting member for this resolution. http://www.bridgeview-il.gov/assets/1/7/12.06.2017_Agenda.pdf… Read more »

Advocate

The alternative you propose is simply unavailable under the law. Period. Your alternative is the route of defaulting instead of revenue. Default and bankruptcy WITHOUT INSOLVENCY is the route of, excuse me, a deadbeat. Bridgeview choose to pay the bill and found means to raise revenues, yet you criticize thier means because it interferes with a UNAVAILABLE alternative bankruptcy. This is not reasonable. I suppose, your suggesting a strategy based upon HOPE of a currently unavailable option, someday becoming an option. Your hoping for a change in the law;yet you dont know if or when that change in the law… Read more »

Mark M

I don’t interpret Mr. Glennon’s piece as advocating for fiscal default, but rather as a siren call to look at what will indeed to a certainty happen in the near future – Bridgeview and others like it will flat out run out of money, with no capacity to borrow, and with an out-migration of people at an incredible pace. What can such entities do? Receive a rescue from the State? Really? The State itself belongs in a financial ICU. The Feds? Why bail out the State for their poor governance? I am a practicing attorney like others who post here,… Read more »

Mike

The separate entity is named the Bridgeview Finance Corporation, 7000 S Harlem Ave, Bridgeview, which is the same address as the MLS soccer stadium built by the village. The village owns 100% of the stadium, financed with a $134M (plus interest) municipal bond issue in 2005. That bond issue was approved only by the village board (not voters via referendum), an action made possible because village voters approved a home rule referendum on March 19, 2002. The official statement (OS) for the $47M (plus interest) securitized sales tax revenue bond issues (Series A and B) is not yet posted on… Read more »