I found this argument in favor of Chicago’s seeking bankruptcy by Richard Porter at RealClearPolitics interesting:
Chicago’s population is already shrinking, which is powerful evidence that the city is already taxing too much for too little service: for too many residents and potential residents, the cost imposed to live here now exceeds Chicago’s many benefits, and so Chicago shrinks while dozens of other cities grow. As population shrinks, property values fall, increasing the burden of future expected taxes, driving the population and property values down even further. Increasing taxes further only exacerbates this cycle of failure.
The city needs to lower taxes to start growing again, but lower taxes would mean Chicago can no longer service its debts. Federal law offers a procedure for reducing those debts by commencing a case in bankruptcy court. A bankruptcy judge has the power under federal law to reduce the city’s liabilities, change its pensions, reorganize its functions into a more efficient ongoing structure and eliminate some of its debts — but the judge does not have the authority to raise your taxes.
Bankruptcy is a painful process because it forces creditors who facilitated the city’s failure to take a loss: bond holders, such as hedge funds, Wall Street bankers that sold the bonds and the people who are waiting to be paid for goods and services sold to Chicago, including past and current municipal employees. (The city can and will still be able to offer generous pension benefits to its workers, but perhaps with a cap limiting pensions of well more than $100,000 and without the automatic 3% COLA; the exact terms of any new deal would be hammered out in negotiations under the auspices of the court.)
But, bankruptcy offers an upside: a future free from fear of ever-increasing city taxes and improved services. If government confronts its problems now while Chicago’s core retains its current vibrancy, the city will still offer benefits that make it a wonderful place to live — the lakefront, our skyline, our restaurants, museums, people and jobs — all at a lower expected future cost in taxes charged by the reorganized government. Bankruptcy offers Chicagoans relief from bearing the accumulated burden of a generation of imprudent administration.
I do not think there is any real prospect of this happening because I think that the politicians in Springfield would rather see Chicago fail than to risk their own jobs to save it. Mayor Lightfoot continues to claim that everything is on the table but so far only raising taxes and reducing city services have been on the table. Lucifer’s line in Milton’s Paradise Lost may apply here: “Better to reign in Hell than to serve in Heaven”.
The guy gives the textbook recitation of the purpose of bankruptcy. In a corporate setting the issue that tends to push a company into bankruptcy is inability to meet payroll. (A board member, by the way, is personally liable for withholding taxes. It focuses the mind). It was my understanding that perhaps two years ago Chicago was within a couple weeks of not being able to make payroll, when they floated something like 7-9% muni bonds. Wow.
Mr Porter claims a judge has the ability to modify pensions. It had been my understanding that was not the case. Anyone know for sure?
That’s actually a complicated question. Bankruptcy courts are Article I tribunals and I’m not sure what the limitations on their powers in equity are. On the other hand when Detroit declared bankruptcy, the city’s pension obligations were altered and Michigan’s law regarding public pensions and Illinois’s are similar.
Well. Until and if PD comes along, that looks like the best view. Just mechanically, the Chicago pension situation has no solution in realistic economics or finance. Or politically. Bankruptcy is a jam it down their throats solution. I think you are headed there.
Good luck.
AFAIK, pension obligations in municipal bankruptcies are treated as unsecured claims without priority. (I believe private pension beneficiaries are treated better or at least treatment is not completely analogous).
The most powerful provision authorizes the Bankruptcy court to set aside executory contracts (contracts that have not fully been performed yet). What I suspect that means is that there would be multiple classes of pension claimants, and the 52-year old retired school teacher from Chicago receiving a six-figured annual pension in Boca Raton would be treated vastly different than someone who started working as a custodian a few years ago because most of his or her pension benefits are conditioned on him continuing to work for many years.
The main limitation is that a municipality cannot file bankruptcy without the authorization of state legislation, and states condition such filing on various conditions. Would an Illinois law seek to condition bankruptcy on state Constitutional limitations? Would those conditions have any legal effect once bankruptcy is filed?
I started to write how public and private pensions are treated differently under the different Titles, and it was kind of a mess, but it left me wondering, why hasn’t Congress created an ERISA equivalent which requires adequate funding to be set aside and provides federal insurance when things head south? I suspect a lot of the impact of ERISA was to encourage businesses to switch to defined contribution plans, and that may be where everything needs to go. But state/local government lacks the money (or ability to print it) to make such a switch without federal carrots and sticks. At the same time, federal government relies upon state/local government to administer many or most national programs.
That’s where my point about bankruptcy court being an Article I tribunal comes in. If it were an Article III tribunal and given the multiple Supreme Court rulings about the primary of federal law, I would think that such a provision would have no weight. But I’m not so sure about a bankruptcy court.