Last week, Illinois Gov. Bruce Rauner suggested giving municipalities the power to file for bankruptcy as a way to tame pension debt.
The idea is that even if towns and cities don’t follow through, the threat of bankruptcy could give them leverage in pension negotiations with workers.
But the proposal, if it ever comes to fruition, will face legal and political obstacles, according to an analysis by Bond Buyer:
Illinois statutes don’t grant any general legal authority allowing for a Chapter 9 filing, said municipal bankruptcy expert James Spiotto, a managing director at Chapman Strategic Advisors LLC. The one exemption is for the Illinois Power Agency.
The state offers assistance for stressed communities with a population under 25,000 through its Fiscally Distressed City Act. The local government must ask the General Assembly for the appointment of a special commission to consider whether the municipality meets the act’s criteria. If approved, the municipality can qualify for state financing assistance.
Spiotto said the establishment of a Chapter 9 provision could offer some benefits, but he cautioned it should be used as a last resort when all alternatives are exhausted. Any statute best serves a state and its local governments when it includes additional layers of review and is written with market access in mind.
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Municipal Market Analytics partner Matt Fabian said given unions’ historically strong influence on the Democratic majority in the state, he thinks a Chapter 9 law faces a dim chances.
“In Illinois, it’s unlikely that a bankruptcy law would be passed, and even more unlikely that what might be passed would protect bondholders over employees,” Fabian said. “The cost of capital would very likely rise.” Illinois’ local governments already pay interest rate penalties for the financial distressed of the state government.
Read the full Bond Buyer piece here.
By Steven Vance [CC-BY-2.0 (http://creativecommons.org/licenses/by/2.0)], via Wikimedia Commons