By: Mark Glennon*
It’s now easy to find economists predicting the economy will shrink by at least 5% this quarter. That’s huge – worse than all but one quarter during the Great Recession twelve years ago. It means state and local revenue sources of all types will get slammed and pensions, already a crisis in Illinois, are seeing the value of their assets shrink rapidly. Illinois and Chicago were already rated among the worst prepared for a recession.
For Illinoisans, there are two parts to whether formal, government bankruptcies might result. First, for municipalities large and small, it’s a matter of whether the state would grant them the option of going to federal bankruptcy court. Chapter 9 of the United States Bankruptcy Code is for municipalities, but only in states that allow it. About half do so, but not Illinois.
We have long thought that Springfield should allow Chapter 9 for Illinois municipalities, but legislation to do so has consistently been rebuffed, with no real consideration, by the General Assembly. A key benefit of federal bankruptcy is the power to override the state’s constitutional bar to pension reform. Though pension reform is essential for most of our municipalities, it’s categorically off the table for both this General Assembly and Governor JB Pritzker. So, no bankruptcy authorization, either.
Bankruptcy is a last resort and it won’t work for all troubled municipalities, but there’s never been an excuse for refusing to let municipalities consider the option and at least use it for bargaining position. It’s tempting to be certain this downturn will force the General Assembly to act now, but history provides little comfort. Springfield looked aside as some of our worst-off cities slid past the point where even bankruptcy could help. Cities like East St. Louis and Harvey today are probably beyond rehabilitation.
Bankruptcy earlier might have helped them, but it’s now difficult to envision a workable reorganization plan for them that a bankruptcy court would accept as viable. Many other Illinois municipalities were already heading in that direction before this downturn. We simply don’t know whether Springfield will be content to let that continue.
How about bankruptcy for states as a whole?
That would require new federal legislation, but the idea is hardly far-fetched. A provision to authorize it nearly passed in late 2017, according to sources who were close to the process.
Today, the impetus for it might come from other troubled states. New Jersey and Connecticut are about as insolvent as Illinois and others aren’t far behind.
The biggest impetus for it might come when states start asking for bailouts, direct or indirect. The United States Senate and President Trump undoubtedly would oppose any bailout, but they’d probably be happy to offer bankruptcy as an alternative.
Congress has the power to authorize bankruptcy-for-states. A leading bankruptcy expert, Prof. David Skeel of the University of Pennsylvania Law School, wrote outright that, “The constitutionality of bankruptcy-for-states is beyond serious dispute.”
Bankruptcy-for-states could take different forms. Some have discussed modeling it on PROMESA, the special insolvency law passed for Puerto Rico, in which all debt is subject to adjustment. Others have proposed a full reorganization akin to Chapter 9 bankruptcy for municipalities. Still others have discussed a bankruptcy-light option that would address pensions only.
At Wirepoints we’ve endorsed none of those bankruptcy-for-states proposals because we’d have to see the legislation and assess it based on facts at the time.
Those facts are worsening each day as more of the economy shut down. We don’t know how long the coronavirus downturn will last or what permanent damage will result. The first priority must be to defeat the virus and end the downturn. However, when it’s over we certainly think the debate about bankruptcy-for-states should resume.
And we expect it will resume, with or without Illinois at the table.
*Mark Glennon is founder of Wirepoints.
For further reading on these topics, see the following articles by Wirepoints and others:
- Why a bankruptcy option for municipalities is essential – Wirepoints Testimony
- Is Bankruptcy for States Illinois’ Answer? A Primer.
- Stock market meltdown, collapsing bond rates will wreak havoc on Illinois’ weakest pension plans
- Trump Says He’d ‘Help’ Illinois, But How? A Wonderful Anecdote Might Be A Clue.
- Commentary: Bankruptcy looms for Chicago if there’s no pension fix – Chicago Tribune
- When Cities Are at the Financial Brink: The Case for “Intervention Bankruptcy” – Manhattan Institute
- Puerto Rico Reviving Bankruptcy Debate for Illinois and Other Insolvent States
- Bankruptcy: Pain With Gain for Chicago – RealClear
- Here’s What’s Really Going On With Bankruptcy-For-States Chatter
- Here’s What’s Really Going On With Bankruptcy-For-States Chatter – Real Clear
- Could Illinois be the first state to file for bankruptcy? – CBS News
- Would Congress Authorize Bankruptcy for Illinois and Other States?
- JP Morgan Expert: True Debt, Pension, Healthcare Payments Would Consume Half of Illinois Revenue, Bankruptcy Option Needed
- Could a Bankruptcy Court Cancel Chicago’s Hated Parking Meter Deal?
- The Case for Allowing U.S. States to Declare Bankruptcy – Bloomberg Business
- A Watershed Recommendation of Bankruptcy for Illinois and Chicago Goes Unnoticed
- Brace for reduced state and local revenues in Illinois
- Coronavirus could wreak additional havoc on Illinois