By: Mark Glennon*
For anybody seriously interested in the financial plight of Illinois, Chicago and many of the state’s other municipalities, the two-part interview of Jamie Sprayregen by Jeff Berkowitz is a must-watch.
Sprayregen is among America’s most respected lawyers and thought leaders on insolvency, restructuring and bankruptcy. His 35-year career included founding Kirkland and Ellis’ worldwide restructuring group and co-heading Goldman Sachs’ restructuring group. Today, he is Vice Chairman at Hilco Global, a preeminent insolvency and restructuring advisory firm.
In part one, he lays out the background and current financial outlook. Part two details two primary “tools” the General Assembly should provide — authorization of optional bankruptcy for Illinois municipalities and amendment of the Illinois Constitution to allow for real pension reform. He also touches on the more distant possibility that Congress could authorize bankruptcy for states.
His unsurpassed level of experience in the field makes his perspective invaluable. While most of his career focused on the corporate world, the financial and legal issues are largely the same for governmental entities, as he explains.
Longtime Wirepoints readers will find it all too familiar. We’ve written in enormous detail on every point Sprayregan makes. It’s quite remarkable, in fact, how precisely Sprayregen validates both our policy suggestions and our reasoning behind them. A few of our many dozens of research reports and columns on those matters , going back over ten years, are linked below.
Our earlier work was met with the usual response — denial, delay, extending and pretending. Since then, our crisis has worsened, which will make resolution more painful. As Sprayregen says in the interview, the gush of federal Covid relief money merely slowed the pace at which our finances were deteriorating. Nothing stabilized, as the deniers claim. We repeat what we wrote in 2017: “It’s happening.” Bit by bit, day by day, it only worsens. The most recent illustration is the City of Chicago’s request for vendors to voluntarily write off three percent of their invoices.
We can only hope that voices like Sprayregen’s finally will be heard.
Parts one and two of the interview are here and here.
PART 1:
PART 2:
Mark Glennon is founder of Wirepoints.
A few of Wirepoints earlier pertinent publications:
Expect no retraction or apology. This what they do.
The state’s existing buyout program for its own pensions is the precedent for Chicago, which should be a warning: Look out for similar exaggerated claims and shoddy analysis.
Where in the law books do we find the duties of cities and other municipalities? Public safety, public health, education, etc,? Do those obligations not have standing and priority equivalent to pension “contracts”? What does it take to make a contract? Apparently a health emergency can trump a lease. What happens to the landlord’s promise when the premises are destroyed? Courts can void unconscionable contracts or those that were coerced. Speaking of coercion …
Regarding separation of powers, the Supreme Court of Washington State purported to impose a fine of $100,000 per day on the state legislature for each day the legislature failed to adequately fund public schools. The fine was never collected, and it was a mystery where the legislature would have found the money to pay the fine. After about three years the court “found” that adequate funding had been appropriated and the fine was lifted. Details at Washington Supreme Court ends long-running McCleary education case against the state | The Seattle Times
Another long yarn on magical debt thinking from Leftist Democrats here, all of which is mostly malarkey. Yet the circular thinking of the Leftist Democrats and their minions continues regardless of the reality. Oh yeah, and Madigan is going to prison.
Bankruptcy is the only way out. Trump could change the law; he likes to file bankruptcy.
No Trump can’t change the law. That job is reserved for “lawmakers”. Trump runs the executive branch and not congress or the courts.
Trump can use an executive order to force lawmakers to pass a law. Just like some judge in DC can order Trump to turn a plane around full of illegals after they’ve left US airspace. Oh wait…
About the same likelihood of passing constitutional muster as the other plans. Good luck with that.
How many times as Trump file for bankruptcy? Huh?
How many successful businesses has he run and how many thousands of jobs has he created?
Don’t like bankruptcy laws? Work to change them
Why is this about Trump?
The State needs to fire-sale assets with future tax assessments attached at sale, so the buyers know what their future expenses look like; Libtards heads will explode at the thought of it, to which it will be explained that it’s THEIR policies that caused such drastic measures.
The situation will not need to be decided by the courts for the following reason: About 11% of all people working are employed by state or local governments, and most are members of unions, meaning they’re organized. Add spouses and my guess is that you’re up to around 17% of adults of working age. Add children and siblings who are of voting age and my guess is that 30% or more of adults either work for the government or have a very close relative working for the government. Most elections are decided by a few percentage points. A landslide is… Read more »
“Most elections are decided by a few percentage points.”
Most elections are decided by far more than a few percentage points and it’s gerrymandered that way. Maybe in municipal elections things are a little closer but not by much.
“Acts of Congress to be binding, must be made pursuant to the Constitution; otherwise they are not laws but a mere nullity, or what is worse, acts of usurpation. The people are not only not bound by them, but the several departments and officers of the government, both federal and state, are bound by oath to oppose these acts; for being bound by oath to support the Constitution, they must violate that oath whenever they give their sanction by obedience or otherwise to any unconstitutional act of any department of the government.” – St. George Tucker “The Congress shall have… Read more »
The one subject that they alluded to but did not discuss is what happens if a municipal pension fund becomes insolvent? With 650 downstate pension funds covering police and firefighters a small downturn in the markets and economy can reduce asset prices rather quickly and put the fund on pay-as-you-go. Most of these downstate municipalities are small and rural and don’t have a lot of ability to raise revenue for the pension funds. As they say in all law offices, you can’t squeeze blood out of a stone. The video pointed out that all pension promises are guaranteed by the… Read more »
Just to be clear, Illinois courts have said that, when the pension gets to near zero asset, the courts can force a tax increase. The sponsoring government entity has the liability. The sole exception is IMRF, which has no sponsor in that sense.
“the courts can force a tax increase.”
That sounds like a clear violation of the separation of powers. That’s what we have now with some judge in DC thinks he can tell Trump which illegal aliens he can and can’t deport under the powers given to him by the legislative branch.
Yes, it sure does sound like that, but that’s what our courts have said and they did it with Harvey. We wrote about it here:https://wirepoints.org/court-ordered-taxes-for-pensions-begins-in-illinois-litigation-turmoil-looms-wirepoints-original/
Since I’m sure that the idea of forcing the city to collect more tax money from it’s residents sounds like a great idea to Chicago and Illinois leadership (“it’s not our fault, it’s the court’s fault”) it would be interesting for you to do a follow-up on your Harvey story 8 years after that ruling came down. Did they ever get blood from a turnip?
I just spoke to one of the lawyers working on the mess there. The whole thing is an ongoing settlement among the bondholders, city, pensions and everybody else trying to get what money they can. That includes the property tax levy that was the subject of the court’s earlier order. Interestingly, he says the pension intercept is handled by a law firm that works on contingency, so they have gotten millions out of that, which they continue to file and refile. The pension intercept, as you may remember, is a state remedy that allows the Comptroller to seize money that… Read more »
WOW!!, sound’s like great material for WP story/ research piece as Harvey is only a harbinger of things to come for all Illinois municipalities and all of Illinois. Realistically when insolvency is reached for a bankrupt Harvey the only asset left in a forced state pension liquidation tax is property. When you write-“The whole thing is an ongoing settlement among the bondholders, city, pensions and everybody else trying to get what money they can.”, does anyone care about poor hapless Harvey homeowners who’s properties are now worthless. Who thanks to Illinois law, the home equity values will never be owned..… Read more »
It’s not a violation. The constitution guarantees these pensions and if the government won’t set aside the money as required then the courts will make them. Pensions will be paid first. Cut other spending or raise taxes. Those are your choices.
Contracts entered into by any government entity would end up having no meaning if they could get out of it by simply voting not to fund it.
Article I, Section 7, Clause 1: All Bills for raising Revenue shall originate in the House of Representatives; but the Senate may propose or concur with Amendments as on other Bills.
LOL the Supreme Court of Democrat Elected Judges believes they have the power to originate Bills for Raising Revenue to pay for their own pensions. What a crock of $***
The courts won’t tell the GA how or what taxes to raise. They will just demand payment is made before any other expenditures. At that point the GA will either cut spending or raise taxes. Don’t you worry though, when the time comes for more taxes it will originate in the house.
And while that was the US Constitution, here is the IL constitution, which is even clearer about where Revenue comes from:
SECTION 1. STATE REVENUE POWER The General Assembly has the exclusive power to raise revenue by law except as limited or otherwise provided in this Constitution. The power of taxation shall not be surrendered, suspended, or contracted away. (Source: Illinois Constitution.)Yes and the Illinois Constitution also outlines that pensions can’t be diminished or impaired. Also, they won’t need to raise taxes they can just demand payment which puts pensions in a priority position. Both components of the constitution would be followed. When Kansas was sued (Gannon v. State) to fund public schools the court didn’t require that taxes were raised but they required the funding. The state was forced to raise income taxes to cover the expense mandated by the courts to the tune of 1.2 billion over 2 years. The GA would be forced to raise taxes or the… Read more »
The “separation of powers” doctrine is normally interpreted to mean that a court may not order a legislature to appropriate money. Spending is constitutionally the responsibility of the legislature. Feel free to skip the case quotes, below, if this is too long! ***** Michigan has a similar provision on diminution or impairment and its supreme court has held [Musselman v. Governor :: 1995 :: Michigan Supreme Court Decisions :: Michigan Case Law :: Michigan Law :: U.S. Law :: Justia] that … The only defendant with authority to appropriate funds[23] from the treasury is the Legislature. … “No money shall… Read more »
Interesting point there. Separation of powers is interesting. Just as the Court cannot force by court order the General Assembly to spend money on pensions, the General Assembly cannot pass legislation forcing a court to make a ruling on a case. That’s what separation of powers usually means, but in 100% Democrat machine states, that’s often overlooked. It relates back to this concept going on with Trump right now and that plane full of illegal criminal aliens. The Court has no right to tell Trump how to handle foreign policy due to separation of powers. Imagine if Trump issued executive… Read more »
Nice Louisville Slugger you’ve got there.
PPF – I know you are an expert, especially in accounting as you tell others to take accounting courses, but the federal government has the right to terminate contracts for convenience and they frequently do so. Moreover, they most often enter into multiple year as opposed to multiple-year contracts due to fiscal laws, and can refrain from exercising options with no liability on the part of the government. So your broad sweeping statement cannot possibly be correct. What it appears you unwittingly mean is that pensions have an exalted status under Illinois, which indeed is the case.
PPF is correct that pensions in Illinois have exalted status. The Illinois Supreme Court unanimously (6D and 3RINO) said that pensions cannot be diminished. Under any circumstance. And that’s why Pensions shall be Paid First. But zir conveniently ignores other states that have diminished pensions and that federal law would interpret the Illinois Supreme Court’s opinion on pensions as complete and utter nonsensical garbage. Last February the highly partisan Hawaii Supreme Court wrote in an opinion that the US Supreme Court was wrong in interpreting the second amendment and upheld a gun conviction. They said ““Article I, section 17 of… Read more »
It was 4 Dem Judges and 3 Republicans. The Illinois Supreme Court only has 7 justices and it was unanimous. “Soon enough”??? When is that? You and others keep saying that but you’re completely wrong. Even if you ever were to change the constitution there is not guarantee that SCOTUS would ever weigh in. ILSC would still honor pensions as a contract and wouldn’t allow changes. They would hold the state to a higher level because they are a party to this contract. They already noted this in their last landmark decision in 2015 separate from the pension clause. You… Read more »
PPF, you are quite knowledgeable about IL pensions, but this is the point on which you are consistently wrong or, more likely, just refuse to admit to. After a proper amendment of the IL Constitutions which eliminates all state law issues, any legal challenge would be in federal court applying federal law only. You could then forget about ILSC, and it would not have to go to SCOTUS. Federal law does allow for reasonable, necessary contract modifications under exceptional circumstances like we have.
PPF is obviously very biased. Mark is 100% correct. The ILSC will have zero say in the matter when the pensions reach 0, and most of them will. No amendment needed once the pensions collapse. Math always wins. It will be a federal issue once the state pension plans collapse. Bailout or cuts, and with the feds being broke, it will be cuts.IL is an extreme example, so there will be extreme cuts to bonds and pensions. Also, insurance coverage will increase dramatically for state workers.
I know you want to believe that Mark but there is nothing that states the ILSC wouldn’t take this case after any type of contract reduction. There is also nothing guaranteeing that the feds take this issue up. You are correct that it would be reserved for “exceptional circumstances”. You have refused to acknowledge that the feds hold the state to a higher standard when seeking relief for a contract where they are a party. US Trust Co v. New Jersey provides you a glimpse of your outcome in federal court but you seem to ignore this ruling for some… Read more »
Mark, how would the judge enforce his order to the town of Harvey to raise taxes if Harvey declined to raise taxes. I’m assuming that the town council, or some other board, must approve tax hikes and if that council or board refused to raise taxes what recourse would the judge have against the town. And the board doesn’t have to vote down the tax hike, they just don’t vote for it. They all vote present rather than yea or nay.
I assume the judge could issue an order to the city to include the additional amount in the annual levy. Violating the order would subject the city to contempt of court with fines, etc.
My guess is payments will be reduced.
My guess is forced payment by the courts and use of the pension intercept law if the local government doesn’t have enough money. See Harvey Illinois for further details. Massive layoffs and pensions are paid first.
And let’s just say, hypothetically (very hypothetically) the general assembly tells them to FO. How is the Supreme Court going to force them to raise taxes to pay for pensions, especially if it’s during a recession? what if a general assembly the the future says “screw you we’re lowering taxes and cutting pensions, come enforce your order with your army” and what happens then? What I’m trying to say is that 9 geriatric Democrats in robes in some future date won’t be able to stop what comes next when pensions are slashed.
When it comes to municipalities, the GA wouldn’t need to tell them FO. They could simply allow bankruptcy so that wouldn’t happen. In terms of state backed pensions, if then GA refused to authorize payment, they would force the comptroller to pay pensions first. We saw the comptroller follow the courts during the Rauner budget crisis. The courts could also seize the funds directly upon revenue collection similar to the pension intercept law but on a state level. While this would no doubt be an extreme remedy so would telling the court to FO. Would elected leaders in the GA… Read more »
The whole state won’t be Harvey because then everyone would be gone anyway and the pensions are alreays cut in that scenario.
Harvey is a slum no one cares about. Your pension is doomed due to math. The ILSC won’t be reducing your pension, the Federal Supreme Court will. Remember, if the whole state turns to Harvey then your pension was cut long ago anyway. No one will live here anymore in that unrealistic situation.
You post here all day because you get a pension. It’s very obvious. Enjoy it being cut.
“No one will live here anymore in that unrealistic situation.”
People will still live here, fewer of course, and most of them will all be poor, and unable to contribute to pensions, much as the ‘migrants’ today earn money under the table and pay little taxes while consuming large amounts of government benefits.
“and unable to contribute to pensions” Yep. Thanks for proving me correct. No one worth anything will live here in that scenario, and the pensions would have been cut long ago.
You’re correct Will. The whole state won’t become Harvey. That’s because unlike Harvey, Illinois has vast powers to increase taxes to pay its bills. The math is very clear and taxes will be raised to pay for it. Raise income taxes, fuel taxes, license plate fees, maybe add a service tax, another try for a progressive income tax, maybe even a state wide real estate transfer tax for all those leaving the state? Plenty of taxes to be raised.
There are not plenty of taxes left to be raised in the highest combined taxed state in the nation. A state in which people are already leaving. In an economy of high inflation where raising taxes is much more difficult. You are wrong, and deep down you know you are wrong. Pensions will.be cut, including yours. Enjoy.
I should also have mentioned that there will be forced by math massive education cuts before the pensions are cut. You can enjoy that too. Math always wins. A high tax state where people are leaving can’t raise taxes in any significant way. More people will just leave. It’s called a death spiral.
I’ve said this before. As much as I don’t like it, I agree with PPF. The political reality in this state is that taxes will be increased until they can show that they decrease revenue. Much like the Philadelphia soda tax, it will take time between the cause and effect to be realized and corrected. (Hmmm…that is another tax IL has pondered…..maybe it will work on a statewide level…) This is going to take years before mathematical reality is realized. Taxes raised. Can kicked with more shenanigans. Eventually realization will hit and the constitution will be updated…but I think that… Read more »
I can’t say that watching the whole thing was very informative to someone who’s been following this on Wirepoints and elsewhere. Read the text summary on Youtube and you get the essence.
Sprayregen kepts saying that Chicago has “many assets… including human capital” but didn’t really explain what he meant. The parking spaces and Skyway are already sold. Does he suggest selling the water and sewer systems? The parks? Selling the residents into slavery?
(Of course Wirepoints has already noted that many schools could be declared surplus and sold.)
Right on both counts. Being a Wirepoints reader, it’s not new for you. And I fully agree that I would like to see him explain his optimism better. I’d like to see him pressed on the details of what a reorganization plan would look like.
Does CTU “technically” represent retirees, or only actively employed members? Biggest risk to those still working is that retirees will deplete assets before active workers retire. CTU should be more vigilant to preserve active teacher rights. I understand current law and court cases favor everyone’s full expectations, but doesn’t trust law permit “equitable” intervention to preserve assets for all beneficiaries?
Primacy at the trough, that’s their problem. Not to mention that turning out illiterate graduates means they are only producing their competitors at the trough, not the people who will pay for their pensions.
But they refuse to see it. They have created every problem they now bemoan. They own it.
This was a great discussion. If Wirepoints wants to go further with this, they need to put out simple infographics that explain his points further. This could be just like the report card campaign. For example, if you make this much and are expecting this much, you could reduce risk of losing your benefits by taking this deal or that deal. Lacking from this conversation was any mention of the inflation menace. Inflation will destroy your pension and balance the budget without addressing the problem. Creating inflation is easily the best option for billionaires and political elite, to the detriment… Read more »
Missing the URL links.
Links should be fixed at the bottom now.
The mouthy nut job deniers that come onto WP and act like no need to worry about insolvency and possible BK, they refuse to live in a real world. I include Pritzker, the union Bosses, and every Leftist Democrat in IL including their bought and paid for Supreme Court.
Looking forward to the interviews.