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.

Bankruptcy?

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:

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Poor Taxpayer

What Destroyed Illinois is the Democrats and they never change.
Move to a zero income tax state and enjoy the fruits of your labor.
I am a multi millionaire just on the tax savings over the last 40 years.
It really does add up over a lifetime of saving and investing.
Illinois greedy cops, teachers and firemen have robbed the honest working taxpayer of their retirement.

Poor Taxpayer

Illinois is bankrupt.

Pension lawyer

Is there a way to reconcile municipal and state bankruptcies — which I agree are desirable — with the apparent political consensus (Trump, Biden and Sanders) to hold everyone harmless by printing money? For as long as it takes? My rudimentary understanding of economics is that this will lead to Weimar-type inflation but the mechanics evade me. Yet I don’t see the presidential candidates offering “temporary” relief. They seem to presume that the virus disruption will end near term. But, if it doesn’t, the politicians and the voters who elect them seem increasingly prepared to run the presses. Also, if… Read more »

DantheMan

In nature, fire burns away old growth so new growth can emerge. In capitalism, a recession ruins the financially weak so the stronger (well managed) can take over. Unfortunately, the public sector of our economy doesn’t really follow the model of capitalism. Such is the case of Chicago and Illinois, both currently on financial life support. It is time for both (in their present form) to die. It’s time to take them off life support and let nature take it’s course. The first step Illinois leaders must do is simply admit all they are doing is delaying the inevitable. Unfortunately,… Read more »

Donna Rudins

BINGO, YOU HIT THE NAIL ON THE HEAD…I don’t know many that have saved for a rainy day, many I know live well beyond their means and paycheck due to vanity, pride, greed… We have lived within/below our means and have managed to save to survive, can’t say that for many, so how can we convict our state/politicians for spending beyond our means? They work for us and did it anyway, greed, vanity, prideful, politicians and greedy people, (less the poorer people in Illinois who are just surviving). Everyone will want a bailout, even the scammers who may not need… Read more »

Riverbender

Not certain where this will end up posted on this lengthy thread but in answer to the Italian question I have read that the current speculation in the medical world is that there may be something in the Italian genetic structure that makes it more damaging to them than others. I have also read comments to that argument claiming xenophobia and racism meaning naturally science must be wrong because it isn’t politically correct.
Lord help us all.

debtsor

Ironically, the same Italian genetics that allow them to live so long is the same genetics that make them succumb to coronavirus. The average age of death is 79.5 years old. I’m not making that figure up. Also, I’m not making this figure up either, but 99% of the deaths had a major co-morbidity that would have killed them soon anyways, including COPD, diabetes, heart disease and bad hypertesion. Now, I don’t want to get this disease, and reasonable social isolation is reasonable, but the shutting down of the economy is crazy. And don’t forget, the italian socialized medicine is… Read more »