Muni Bankruptcy: Lawmakers Can Run But They Can’t Hide

Can Governor Rauner and state Republican leadership wrest control of the Chicago Public School system from Mayor Rahm Emanuel?

Can Governor Rauner and state Republican leadership wrest control of the Chicago Public School system from Mayor Rahm Emanuel?

The odds are against it.

But win or lose, this aggressive takeover effort will again force state lawmakers to confront a nagging legislative question: Should Illinois allow municipalities, and their related agencies, to declare bankruptcy?

Right now, they can’t. But declaring bankruptcy is at the crux of the Republican plan to overhaul the Chicago Public Schools in one fell swoop. Without that federal court-sanctioned authority, it’s unlikely their ambitious agenda to dismantle and rebuild CPS’ governance, union contracts, debt load and managerial structure goes anywhere.

Chicago School Closings CPS

While announcing the Rauner-backed plan last week, Senate Minority Leader Christine Radogno and House Minority Leader Jim Durkin spoke of the General Assembly giving Chicago and CPS the option of filing for Chapter 9 municipal bankruptcy in federal court.

Mayor Emanuel, CPS chief Forrest Claypool, public union leadership, many influential state Democrats, including House Speaker Michael Madigan and Senate President John Cullerton, say they abhor the idea of sanctioning municipal bankruptcy, especially for CPS.

But like it or not, it’s an issue that’s not going away.

Why?

Simply put, because our public finances, especially the debt burdens, are an unholy mess. Chicago, CPS, hundreds of public pension plans, scores of suburbs and downstate cities, villages and suburbs are swimming in vats of self-imposed red ink.

Chicago’s long and short-term borrowing obligations are mounting despite Emanuel’s avowed effort to rein it in. CPS’ budget is short $480 million and desperately needs help from the state. Under Rauner, Illinois is operating without a state budget and is pumping up its own deficit while its major pensions funds are $110 billion short and counting.


Related Article: Next Up: Illinois Municipal Bankruptcy?


And the BGA’s investigative team recently examined the police and fire pension funds of over 200 Cook County cities, towns and villages and found many were woefully underfunded.

Left unattended, such fiscal calamity poses a dire financial threat to the municipalities and their entities, everyday taxpayers and generations to come.

Many backers view bankruptcy as a financial tool of last resort. Just as businesses tap it when the bills get out of control, public entities could seek protection from creditors while mapping new strategies and alternatives.

Stretching payments, easing debt obligations and developing a reorganization scheme can occur while a municipality wends through federal court. That’s what went on recently during Detroit’s massive bankruptcy revamp.

Gov. Rauner has never been shy about his fondness for the municipal and public bankruptcy play.

A private equity executive in his previous career, the independently wealthy Rauner sees it as a golden opportunity to take a government structure, like CPS, down to the floor board and rebuild it to his specification.

That, however, is precisely the problem, argue his opponents.

Chapter 9 can easily morph from a useful financial tool into a dangerous club that can be deployed to beat the daylights out of unions by abrogating longstanding contracts and scuttling pensions, they contend. And controlling politicians despise the idea of a federal court or court-appointed monitor telling them what to do and how to do it.

In Illinois, the track record of municipal bankruptcy legislation has actually been   bipartisan. Since 2012, two Democrats and a Republican have sponsored such bills but each went nowhere.

Yes, a Chicago or CPS bankruptcy is a non-starter right now that smacks more of political grandstanding than policy agenda. 

But experts note that since 1937 there have been about 650 municipal bankruptcies nationwide.

Should Illinois lawmakers give the nod to municipal bankruptcy, one outcome is certain: That tally is going to grow.