How Illinois Could Declare Bankruptcy

In what I would take as the first (but not the last!) article to examine the issue of whether Illinois will be able to evade its responsibility for paying public employees the pensions they’ve been promised by declaring bankruptcy, Michael S. Greve, writing at Library of Law and Liberty, remarks:

A committee of the U.S. House of Representatives is considering a bill that would make Chapter 9 available to Puerto Rico’s public agencies. Those agencies carry upwards of $70 billion in debt; their bonds trade at something like 60 cents on the dollar. Existing bankruptcy law doesn’t cover them. The pending bill would change that, but it has little chance of enactment. (Some Republicans are opposed.) I don’t know the details but I’m inclined to favor the bill. The real question here is who is not going to get paid, and how and when. The sooner that gets resolved, the better.

Meanwhile up north in Illinois (politically and economically a kind of Puerto Rico without surf but, huzzah, with statehood) the legislature is considering proposals that would make it easier for municipal governments (including large-ish Chicago) to avail themselves of Chapter 9. Here, too, the question is who will not get paid. That includes not only creditors but also, and foremost, current and former public employees, whose pension and other post-employment benefits are wreaking havoc on local finances. The move to restructure—i.e., partially abrogate—those debts in Chapter 9 proceedings is prompted in no small measure by Stockton’s experience: earlier this month, the city obtained judicial approval for its bankruptcy plan. Creditors took a small hit; the unions, a very large one. Like, a cool half-billion.

That’s just about all there is to the post.

IMO bankruptcy protection should be extended to the states but the need for it would be rare which explains why no state, even the poorest, a characterization which certainly doesn’t include Illinois, at least not yet, has never needed to declare bankruptcy even in the bleakest of economic circumstances, as for example Mississippi after the American Civil War. I do not believe that extending the possibility of bankruptcy protection to states would help Illinois.

Illinois’s problem is political not fiscal and bankruptcy protection is not the tool that will protect Illinois’s legislators from the consequences of their own folly. There are all sorts of measures they could take

• They could amend the state’s constitution. In Illinois for practical purpose only the legislature can do that.
• They could cut other spending. Admittedly, as the pension obligations rise that is becoming harder to do.
• They could raise taxes. My opinion is that raising rates is unlikely to result in enough revenue to plug the hole but it’s at least theoretically possible.
• They could take much more serious steps to curtail the pension benefits of future public employees. Its name is legion.

and that’s just off the top of my head. Why don’t the legislators do any of those? The answer is simple: because it might cost them their jobs. Bankruptcy is not the right tool to insure legislators against needing to make difficult, unpopular decisions. That’s what they’re elected to do and sometimes you’ve just got to grasp the nettle as me auld mither used to say.