By: Mark Glennon*

Guess what was hidden in the 756-page Budget Implementation Bill that just became law in Illinois?

It’s roughly the same as the “bill that must be stopped,” as we called it earlier. That was Senate Bill 10, the bill about which I wrote this:

When I practiced law I taught secured lending and bankruptcy as an adjunct at the University of Texas Law School. I can imagine giving an assignment like this: “Draft a bill to make bondholders supreme by stiffing the public and taxpayers.” If somebody handed in Senate Bill 10, they’d get an A+.

It’s a naked asset grab at the expense of citizens designed  to allow municipalities to kick the can by borrowing more and giving first dibs to municipal bondholders on public assets.

It’s the ticket to an assetless bankruptcy, which is the worst of all conceivable outcomes for broke Illinois towns and cities, including Chicago.

It’s Section 8-13-10, “Assignment of receipts,” in the implementation bill.  It is intended to eliminate the risk of mortgages being undone and assure that bondholders come first, hell or high water, regardless of the need for essential government service. It would do that by forcing (not just authorizing) municipalities that want to use, as collateral, funds that come to them from the state to transfer complete ownership of that money to a new, separate entity created solely to pay bondholders.

By doing that, the bill would create a form of mortgage that would be bulletproof even in bankruptcy. The bill would apply to all home rule muncipalities (which are all towns and cities with more than 25,000 residents plus those that have voted to become home rule).

Worse, it binds the state itself to “non-impairment.” That means the state would be required by statute to refrain from doing the very things it should already be doing — working to undo mortgages that prioritize bondholders over the public. And it prohibits municipalities from mortgaging their state money in any way other than the bulletproof manner created by the bill.

We’ll no doubt be finding more bombshells in the hundreds and hundreds of budget and tax bills dumped on the General Assembly just prior to their vote, which few members ever reviewed and the public doesn’t know about.

The muni bond industry is going all out to keep raising the credit card limit and sucking every ounce of blood out to ensure it gets repaid.

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

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F.V.
2 years ago

Does Madigan or any other lawmaker own muni bonds directly or indirectly

Advocate
2 years ago

What is needed is a new federal bankruptcy law that, that allows States to file bankruptcy;still;even more is required. The Democrats will still be in-control of the administration of the Bankruptcy….so we also need the ability WITHIN the new federal bankruptcy law/amendment TO REMOVE THE SOVEREIGN GOVERNING ABILITY of the State of Illinois. Michigan and Detroit had thier EMERGENCY MANAGERS superceeding local sovereignty. This would be needed to stop Madigan and the Dems from controlling the Bankruptcy process. Yes…..we would revert to a territory…..with citizens without a vote…..the emergency manager appointed by the Feds(I guess and not Madigan) would then… Read more »

Advocate
2 years ago
Reply to  Wirepoints

Interesting ….Still:Can a State’s citizenry maintain Sovereign Autonomy, if the States current elected officials cede that to a Federal Authority in Bankruptcy?. Such cessation of Sovereignty and the voluntariness of such will be an untested road indeed. The historical intransigence to STATE Bankruptcy is this unavoidable Marriage to the loss of Sovereignty. When a State losses its Sovereignty by definition it losses its Statehood. Bankruptcy= loss of Sovereigity= Loss of Statehood=Federal annexation=cannot avoid the Federal Bailout one way or the other= Feds come in to police and maintain=occupation. Not likely orderly at all. Many examples from history. State Bankruptcy WILL… Read more »

Mike
2 years ago
Reply to  Advocate

Time = more interest = hiked total costs.

Advocate
2 years ago
Reply to  Mike

Yes Mike absolutly!

We are using basic economics…..the length of the borrow adds to the borrow cost……but what else does length of loan or time do?……lowers the payment….or kicks the can…..both are used here interchangeably. This is a favorite tool.

Puts the beamer in the drive! Amortization.

Mike
2 years ago
Reply to  Advocate

Here’s some basic economic facts. Fully funded pensions result in no pension interest. Unfunded liabilities result in pension interest. More specifically, as mentioned in another post, COGFA projected the annual unfunded liability on the 5 state pension funds from 2017 – 2045 in its November 2016 Special Pension Briefing. Using 7% interest, the cumulative interest on that unfunded liability is $252 billion dollars. How many beamers can $252 billion dollars purchase. Better yet, what government services could alternatively be purchased with $252 billion dollars. Thus, pension interest is the taxpayer cost of unfunded liabilities. One would think, more pension interest… Read more »

Advocate
2 years ago
Reply to  Mike

Mike you lay it out clearly and precisely.

Now, we probably both can argree that can kicking, and adding length to debt is HORENDOUS State fiscal management.

Only to be used in the most DIRE of periods. When a State faces insolvency we no longer have the CHOICE but must stack more debt on top of debt.

Not by choice but because of necessity.

One tool in our tool box, a major one is time. The strength of time is mostly ignored in the equation because of the undesireability of questionable fiscal management.

Mike
2 years ago
Reply to  Advocate

Expending $252 billion dollars on pension interest from 2017 – 2045 is the cost of your time strategy, and it is primarily due to benefit hikes to underfunded pensions.
The pensions should have first been fully funded.
Then benefit hikes should have taken place, if there was funding for the hikes.
Time was the enabler to this scam, not a strength.

j.a. herzrent
2 years ago
Reply to  Advocate

If you really have an interest in this issue of sovereignty and how the state’s inherent power to protect the public can sometimes permit an impairment of contract, read Home Building & Loan Assn. v. Blaisdell, 290 U.S. 398 (1934) linked at https://supreme.justia.com/cases/federal/us/290/398/case.html This was a case involving the Federal contract impairment clause, but is instructive in determining how to construe similar clauses in state constitutions. No doubt a law enabling state bankruptcy would engender lots of litigation. Lawyers would probably use pension funds as a source of fees to keep the litigation going for years. (They’d “represent” the plans… Read more »

Advocate
2 years ago
Reply to  Wirepoints

Well who owns the keys to the kingdom Mark? We the people do. Our elected officials are temporary servants.

Those temporary servants, Governor, Legeslature, do NOT own the keys to the kingdom and thus cannot co-opt them away. Surely not as an act of voluntary sovern abandomnment, that which we the people own ourselves, and we the people can only give away;akin to a constitutional assertion.

j.a. herzrent
2 years ago
Reply to  Advocate

Yes, but … In our system, legislators CAN make contracts that can’t be impaired. However, legislators cannot enact laws that tie the hands of future legislatures. Sometimes a paradox. This is the crux of the legal issue: Can Legislature One enact a law or approve a contract about future pension expectations that is beyond the power of Legislature Two to repeal or modify? The Illinois Supreme Court has ruled that the pension promise together with the constitution make the pension promise forever. That is to say, it’s a contract that can’t be impaired. Only a [federal] bankruptcy court can invalidate… Read more »

Advocate
2 years ago
Reply to  Wirepoints

If congress creates a Bankruptcy law for States, the sovereign will of the people to take that leap will have to be clearly expressed, and that aint by an action of the Governor, or a simply majority’s of the legeslature. The authority and legitimacy of a Financial Manager superceeding the will of the people of the entire State could only come from the Illinois citizenry themselves. That law, as with the Bankruptcy, would be untested and frozen in court for years. This expression, and abdication of sovereignty, could only be legitimized through a Constitutional Convention where the will of the… Read more »

j.a. herzrent
2 years ago
Reply to  Advocate

Precedent in the Detroit bankruptcy is otherwise. A financial manager appointed by the governor pursuant to legislative authorization was sufficient and challenges in court have not (to date) succeeded. You may be right that the sovereignty issue will not go away. This is because stakeholders will be able to find a lawyer to keep litigating until there is no more money to pay them. After that, there will probably be some that are willing to work “pro bono publico.” Consider school segregation, voting rights, clean air and abortion. I don’t mention these as analogous other than by way of observation… Read more »

Advocate
2 years ago
Reply to  j.a. herzrent

Settlements, Plea negotiations, Bankruptcy plans, State saving budgets, Whatever, it is usually us hated lawyers and litigators, inevitably, who pick up the messes others made, and reach resolutions across the bargaining table…or not.

After three decades of courtroom litigation, If I have learned anything …its not possible that all cases settle… even if most cases should. Laws and equities all a mish mosh.

Mike
2 years ago
Reply to  Advocate

Can kicking = more interest = hiked total costs.

Mike
2 years ago

So SB 42 / PA 100-0023 allows (but does not require) a home rule municipality issuing bonds (called a “transferring unit”) to create an “assignment agreement” with the “issuing entity” to “convey” all or a portion of the revenues or taxes the municipality receives from the state, to an escrow account (called a “deposit account”) at a trust company or bank holding trust powers, at which point said revenues or taxes are labeled as “transferred receipts.” The transferred receipts would be off limits to pensioners, for instance, police, fire, and IMRF. That does not seem to violate the pension sentence… Read more »

Fresno Bob
2 years ago

The bondholders should be afforded every possible level of protection. Muni bonds are the grease that the machine needs to operate. Protect those who purchased them.

Fresno Bob
2 years ago
Reply to  Wirepoints

Tell us something, Wirepoints. Where else would municipalities get the money to build necessary public projects such as schools, roads, seaports, airports, and infrastructure-related repairs etc. People who provide such funding should be protected to the maximum extent possible.

j.a. herzrent
2 years ago
Reply to  Fresno Bob

My opinion — probably supported by facts, but facts don’t count as they used to: 1) There’s not enough money to do everything (funding pension obligations is already crowding out other appropriate public expenditures). 2) Use of the money raised via bond sales is determined by politicians, a largely venal group elected via a gerrymandered system of organized voters looking out for personal interests. So why increase public debt for politicians to spend? 3) Big dollars from these loans (via bond sales) goes to consultants, brokers, bond lawyers and the next tier at the banquet includes labor unions spending the… Read more »

erik
2 years ago

Someone please help me out. I’m not an attorney. If a federal court through bankruptcy proceedings can supersede the Illinois constitution and Illinois law generally, how can a clause in this recent “budget” which protects bond holders survive the bankruptcy proceedings. I thought bankruptcy wiped out any and all previous contracts or agreements made by the state. I don’t understand the mechanism by which the bondholders would escape unscathed. On a different note, I find it ironic that the public sector unions, which worked extremely hard to keep Madigan and his cronies in office, were just sold down the river… Read more »

j.a. herzrent
2 years ago
Reply to  erik

I think a bankruptcy specialist would have to answer this. However, there are different levels of priority in who gets paid from the debtor’s assets when a debtor goes bankrupt. Debtors who have liens on property are generally in a higher priority category. A lot of claims, however, are settled through negotiation and people who are owed money put their cards on the table during negotiations. I am told that a significant factor in the Detroit bankruptcy was the threat (and corresponding fear) that public safety officers would suffer from blue flu and other lack of motivation … with the… Read more »

Crabcakes
2 years ago

Wow, incredibly frightening. maybe this sounds crazy but one cane only wonder if this is part of a more insidious strategy by Madigan type Dems in Ill and other debit ridden states who realize with a changing supreme court, some type of ruling on allowing states and municipalities to declare bankruptcy is inevitable. And if bankrucy was ever pressed on Ill the home owner wold be held hostage–and would pay thru the nose to save his home.

Sean
2 years ago

So, what would this do to public sector pensioners? Would this put them behind bond holders in line? Is this in any way the bond market learning its lesson from bankruptcies like San Bernadino, or totally unrelated and just another of Illinois invention? Just curious.

Mike
2 years ago

It is Senate Bill 42 (SB 42) which became Public Act 100-0023 (PA 100-0023) on July 6, 2017 per the General Assembly override of Governor Rauner’s veto.

65 ILCS 5/8-13-10 new

65 ILCS 5 is the Illinois Municipal Code.

Article 8 is the Finance Section.

Division 13 (Assignment of Receipts) is entirely new.

Search on “DIVISION 13. ASSIGNMENT OF RECEIPTS” and begin there for context.

http://www.ilga.gov/legislation/publicacts/fulltext.asp?Name=100-0023&GA=100

——–

Politicians have too much power when they are allowed to pass such huge bills on such short notice.

Doug
2 years ago

The Democrats, Madigan, and the likes of Steve Andersson are doing this not the bondholders. No one would lend their own money to Illinois now without such clauses, the Dems are doing it anyway.

Michael
2 years ago

The muni bond industry couldn’t do this without the help from the demo(c)rats and the surrender (Prime Minister Chamberlain appeasement) republicans. It becomes even more difficult and messy to correct.

Michael
2 years ago

The criminal intent is clear. When a Federal Bankruptcy Judge gets involved as in Detroit, he / she may see the situation much as we do and declare it invalid. Who knows what will happen? We know what is going to occur and may happen much sooner than we expect. As in the Wizard of Oz, head for the cellar when the tornados come. I’ve never seen any fiction written this way.