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
2 months ago

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
2 months ago

Illinois is bankrupt.

Pension lawyer
2 months ago

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
2 months ago

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
2 months ago
Reply to  DantheMan

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 »

debtsor
2 months ago
Reply to  Mark Glennon

“Let me be clear, however, that I think the limitations so far imposed or suggested by the state and feds are appropriate, and I for one am complying.” They are not appropriate, they are blindly following the computer models of epidemiologists, and causing our second Great Depression. These restaurants aren’t suddenly going to reopen in 8 weeks, the small businesses that are shut down won’t come back, the jobs that are lost are gone forever. The governments will all go broke as most of the government workforce – former and current – are being paid to stay at home. This… Read more »

NB-Chicago
2 months ago
Reply to  Mark Glennon

I think we’re going to know just how deep-dutie were in when the ramped up testing results start rolling in

Pension lawyer
2 months ago
Reply to  Mark Glennon

I’m old but still getting my mail. Can the post-person be a vector via an envelope? I guess that’s where the hand-washing comes in. I see that teachers in public schools are relegated to handing out lunches while it’s clearly too much of a challenge for them to assign and collect homework. No doubt union contracts say [or would be interpreted to say] they get paid for the duration of their contract. So absent bankruptcy it appears that most of the public sector will glide above the economic disruption — probably being happy to stay at home as long as… Read more »

debtsor
2 months ago
Reply to  Mark Glennon

Illinois has 166 confirmed cases and its first death….from a 61 year old female patient with a long history of respiratory problems and pneumonia. Every death is terrible. But she could have died this season from the flu instead of the Wuhan corona virus. Right now Illinois’s death rate is 0.6%. Yes 0.6%.

Bob
2 months ago
Reply to  debtsor

This is just starting you idiots. Look to Italy to see where we will be at in a few weeks, which is Hell. It is spreading rapidly in the US. Italy just said they will be down past April 3rd. This situation truly could crash the entire global economy.

debtsor
2 months ago
Reply to  Bob

It’s already crashed the entire global economy because the world is unnecessarily shutdown, goofball.

The average age of an Italian that has died is 79.5. You got that right, 79.5. And 99% of them have major pre-existing conditions.

Not sure it’s a great idea to shut down the entire world for some old people who’ve already made their reservations to meet St. Peter.

Bob
2 months ago
Reply to  debtsor

The hospitals are overrun you self absorbed idiot. They are going to stop treating any new cases within two days. That is how bad it is. They can’t shut down the economy forever, but it is desperate there right now, and America is fatter and more unhealthy than Italy, and still very old as well. The Hell in Italy is coming to America within two weeks. A true collapse of the global economy means you are starving in the streets, so it has not collapsed yet, dope.

debtsor
2 months ago
Reply to  Bob

Nice job changing the goal posts, now Mad Max type scenario is the “global collapse”. This is totally overblown, The hospitals are treating quite a few non-covid cases as people with any cold like symptoms are showing up. Set up clinics for them on the outside and keep COVID cases (diagnosed by CT scans to the lungs, ground glass opacities, no COVID test needed). They need more mobile CT chest scanning machines. Of course, this is serious, very serious for old people, and it should be handled seriously. But destroying your, my, and our families lives and financial livelihood, for… Read more »

Bob
2 months ago
Reply to  debtsor

This is a real pandemic you complete idiot. The fact you don’t know that means I have no reason to keep talking to you. By the way, this strain is part of the SARS family. They will do this within a certain amount of time, and then they will open the economy back up, if possible. But when so many people are dying they can’t keep up with taking care of their bodies, and when your hospitals are completely full of sick people and you have to turn the rest away that become infected for weeks, normal society will be… Read more »

Juicy Smollier
2 months ago
Reply to  Bob

Then please explain why the South Koreans have had a low mortality rate. Either nothing makes sense (we don’t know) or … you’re wrong. At least be somewhat open minded, or humble about it, since the fact is that at best (worst?) we do NOT KNOW. How could we with just a couple months data and China the main source of it???

debtsor
2 months ago
Reply to  Bob

Just to let you know the death rate in Illinois just jumped to 0.25%. 4 deaths out of 400 cases. I’m totally freaking out.

The Truth Hurts
2 months ago
Reply to  debtsor

While I’m firmly in the “let’s not crush our economy” camp you need to honest when quoting fatality rate. 4 out of 400 is 1%. Also over 300 of those cases have been diagnosed in the last 3 days. My guess is some of those newly diagnosed will also die. It will probably be in the 1 to 3% rate when it is all said and done. Does that mean we should live under these conditions for the next 18 months? I don’t believe so but we are about to find out how much people are willing to put up… Read more »

debtsor
2 months ago

The Truth Hurts, its not that I was being dishonest, its that I did some bad math off the top of my head, and it was too late to go back and correct it.

You are right, 1%, not .025%, actually a little less, there’s 428 cases it’s four out of 428 IIRC. Right now I feel like those CNN commentators saying that $500,000,000 with 300,000,000 people in the US is like $1,000,000 a person…. FYI I didn’t comment about that, math on the fly making comments like this sometimes leads to little mistakes! Thanks for pointing that out.

The Truth Hurts
2 months ago
Reply to  debtsor

Poor word choice on my part. My intent was not to be “math police” but rather point out that the fatality rate will probably be in the 1 to 3% range. I feel like people are either minimizing this pandemic or they are blowing it out of proportion. Yes this is bad but we can’t stop living our lives. If you need to be out to conduct your business you should. If you can work from home and avoid large crowds it’s probably not a bad idea. I want individuals to make their own choices rather than government forcing their… Read more »

Riverbender
2 months ago
Reply to  DantheMan

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
2 months ago
Reply to  Riverbender

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 »