Detroit did it in 2013. New York City almost had to in 1975. And now we’re wondering if Chicago, its school system and a slew of small and mid-size units of government around Illinois could be forced to do it:
Declare bankruptcy.
Government bankruptcy is a mystery to most of us in Illinois because there’s been no compelling reason to explore this arcane chapter of the federal bankruptcy code—until now.
With Chicago Public Schools and the City of Chicago on major begging, borrowing and belt-tightening sprees to avert imminent financial meltdowns, we need to understand how bankruptcy works, and whether it’s a viable way to restore solvency.
The State of Illinois is also teetering on the edge of the fiscal cliff, but there’s no legal way a state can declare bankruptcy—no applicable law on the books—so it would presumably take an act of Congress and a favorable Supreme Court ruling, or maybe even a Constitutional amendment, to change that.
As for local government bankruptcy, that could be possible in Illinois under certain circumstances, and the Better Government Association’s been looking into it.
Here’s a quick primer:
+ State lawmakers haven’t authorized bankruptcy yet. Municipalities like Chicago, and agencies like CPS, would need permission from the state to go into Chapter 9 federal bankruptcy reorganization, but the General Assembly hasn’t approved enabling legislation to allow it.
There’s talk in Springfield about passing a bankruptcy bill—it’s supported by Gov. Rauner and opposed by labor and many Democrats—so stay tuned because the issue’s not going away.
+ Even if the state passes a law, no one should rush into court. Bankruptcy is time-consuming, expensive and a last resort when negotiations can’t resolve the crisis.
And even if talks break down, governments should stay out of court until they’ve hammered out a comprehensive reorganization plan with major stakeholders, which is no slam dunk because it requires a consensus among often-competing factions: Top bureaucrats, employee unions, vendors, bondholders and pensioners.
The goal is to eventually reach a compromise and present it to a court for review and approval.
+ Bankruptcy is a tool, not a solution. A panel of experts at a recent BGA “Idea Forum” stressed that bankruptcy is simply one way governments can reorganize their debts and obligations.
But those who envision deep cuts in salaries and retirement benefits may face pushback in many courtrooms.
And, like it or not, most bankruptcy cases will include tax hike proposals.
+ So what’s the goal? Come out of bankruptcy in better shape than before—with a blueprint for stabilizing the government unit by improving cash flow, stretching payment schedules, covering essential services, rebuilding credit ratings and facilitating business reinvestment.
+ The stigma of bankruptcy is overblown. It may be a “scarlet letter” for politicians in the middle of it—a big “B”—but it’s not necessarily a permanent blemish if the reorganization plan is well executed.
It would be nice if watchdogs like the BGA didn’t have to raise the draconian specter of bankruptcy, but the time for wishing upon that star is long gone.
We’re realists, and bankruptcies may be in our future, so we should understand what that could mean for Illinois residents and their local governments.
In this case, ignorance is anything but bliss.
Andy Shaw is President & CEO of the Better Government Association. He can be reached at ashaw@bettergov.org. Find him on Twitter @andyshawbga.
