Riverdale, Illinois is in line to sell off its share of state income tax coming from the state of Illinois as part of an upcoming $10 million bond offering.
It’s the third Illinois municipality to use the new authority given by the state last year to sell its ownership in future tax revenue to a separate entity, which will hold that money to ensure repayment of the bonds. The new structure is carefully designed to ensure that, even in bankruptcy, the bank — bondholders — gets paid no matter what the consequences.
We’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 because bondholders may own everything. Further background is linked here.
Chicago and Bridgeview were the first to use the new method. A Bloomberg article put it this way: “Alchemy turns Chicago’s junk into gold.” Many other Illinois towns and cities will be doing the same because the law makes the new structure mandatory whenever a home rule municipality wants to use its revenue from the state as collateral.
Details on the Riverdale bond sale are in today’s Bond Buyer article linked here. Per that article, Riverdale suffers from “’severe fiscal distress’ because of persistent deficits and a limited tax base. The village’s population has declined by about 1% since 2010 and is now at 13,400 with about 30% under the poverty level.” It’s in south suburban Cook County where many distressed municipalities are located.
Maybe Riverdale will turn things around because, according to The Bond Buyer, it’s operating with a surplus for the first 10 months of fiscal 2018 after cutting costs and implementing a gas use tax.
But I expect many other municipalities will continue to be stripped down by the new structure and other means by which muni bond purchasers are able to pick any meat off the bones, dooming them to assetless bankruptcies.
*Mark Glennon is founder and Executive Editor of Wirepoints. Opinions expressed are his own.