Half of states let cities declare bankruptcy. Here’s why Illinois might want to.

Illinois has some of the highest property taxes in the country. Chapter 9 would allow local governments to address the root cause.

“Bankruptcy” is a scary word, but it is a real option for cities in half the states in the country.

There are 24 states that authorize local governments to discharge their debts through Chapter 9 bankruptcy. With many cities suffering under the burden of unsustainable pension promises and reliant on federal funds that won’t be available in the future, Illinois should consider becoming the 25th. Here’s why.

Illinoisans’ property taxes are some of the highest in the country, and a leading complaint for people who want to leave the state. Those property taxes pay for irresponsible pension promises and unfunded mandates foisted on municipalities as much as they do for government services.

With no realistic way to reduce pension liabilities thanks to the Illinois Supreme Court’s rulings and state laws that put local pension funding above pretty much anything else, property taxes will continue to rise. But Chapter 9 bankruptcy authorization can change that.

Federal courts have ruled cities can discharge pension debt in bankruptcy despite restrictions in state constitutions. That makes Chapter 9 one of the few ways cities could reduce pension liabilities without an amendment to the state constitution.

While the term “bankruptcy” may provoke fear or helplessness, Chapter 9 is not like other bankruptcies. Creditors cannot force cities into bankruptcy. Municipalities cannot be forced to sell their assets and cannot be liquidated.

Illinois municipalities are struggling under mounting and unsustainable pension debt, and state or federal bailouts are likely. To support municipalities, Illinois should see bankruptcy authorization as a tool to build financial stability.

Illinois municipalities can look to other states across the country that authorize bankruptcy as a guide to success and caution against failure.

For example, cities in California declared bankruptcy with few conditions imposed by the state. These cities left pension debt untouched, leaving the underlying causes of their financial woes unaddressed and leading to the real possibility of a second bankruptcy. In Central Falls, Rhode Island, pensioners faced cuts while bondholders were protected. The result was a $1.7 million budget surplus three years later, but public pensioners lost up to 55% of their benefits. Detroit became the largest city to file for Chapter 9 bankruptcy in 2013, during which bondholders saw significant cuts as did pensioners. With strict state oversight and the aid of private philanthropy efforts, Detroit was able to cut over $7 billion of its $18 billion debt.

Illinois can learn from the perils of unconditional bankruptcy authorization in California, the unfair treatment of pensioners in Rhode Island and the benefits of state oversight in Michigan when crafting its own bankruptcy authorization statute.

With bankruptcy as an option, local governments crushed under the weight of immovable public pensions and taxpayers suffering under the resulting rise in property taxes would have some of the breathing room denied to them by the Illinois Supreme Court’s rulings. With enough state oversight to force cities to make the hard decisions necessary to regain financial stability, cities can avoid the ineffectual results seen in California or the unfair cuts seen in Rhode Island.