Make bankruptcy an option for Illinois municipalities

Make bankruptcy an option for Illinois municipalities

Local governments should structure themselves in a way that best meets the needs of their budget, taxpayers and public employees. And the state should give them the power to do so.

Under state law, local governments in Illinois don’t have the power to make necessary reforms to their pension systems. Even in the most extreme cases of fiscal instability, bankruptcy is not an option. This leaves local officials with few options, and often leaves taxpayers stuck paying higher taxes and fees when local governments don’t make spending cuts.

Local governments should have more control over how they operate. That means having the option to file for bankruptcy and it also means having the ability to reform local pension systems. A recent piece of legislation filed by state Rep. Ron Sandack, R-Downers Grove, would address the former.

Sandack’s proposal would give Illinois municipalities the option to file for bankruptcy. “I know what difficulty it is being in charge of a municipality … with ever-increasing police and fire pensions and very little in the form of power to do anything about it,” Sandack said. The goal of the proposal is simply to give towns in Illinois an additional tool that may be used to help control local finances.

As Sandack correctly points out, pensions are a driving factor in the conversation over municipal bankruptcy in Illinois. Municipalities across the state are struggling under the weight of rapidly increasing pension costs. Just between 2000 and 2010, the aggregate unfunded pension liabilities for local pension systems in Illinois grew to more than $12 billion from $1 billion.

The problem is local governments in Illinois also have their hands tied when it comes to pension reform. The Illinois state legislature sets municipal pension laws – retirement ages, cost-of-living adjustments and benefit formulas – with no regard to whether the local budget or taxpayers can afford them.

That means local governments can’t reform the largest cost driver in their budgets. And when pensions push local budgets to the brink of collapse, local officials aren’t able to file for bankruptcy either.

Outside of Illinois there have been a number of high-profile municipal bankruptcies in recent years, including Vallejo, California (2008); Prichard, Alabama (2009); Central Falls, Rhode Island (2011); Jefferson County, Alabama (2011); and Detroit (2013). That’s because local bankruptcy laws vary significantly between states.

Today, 12 states specifically authorize municipal bankruptcies, 12 states conditionally authorize municipal bankruptcies, three states allow limited authorization, two states prohibit filing and the remaining 21 states are either unclear or do not have specific authorization for Chapter 9 bankruptcy filings, according to municipal bankruptcy expert James Spiotto.

The ability to file for Chapter 9 bankruptcy in Illinois is reserved only for the Illinois Power Agency, which places Illinois in the “limited authorization” category, according to Morningstar, Inc.

Extending that power to Illinois municipalities is at least one step the state should take toward giving local governments more control over how they operate. Bankruptcy can help struggling municipalities because it can give them the opportunity to restructure their debt, renegotiate contracts and reform pensions.

Even with this power, however, bankruptcy is and will always be a last resort for municipal governments. That’s why the state must also give local officials additional tools that will allow them to take the steps necessary to avoid bankruptcy in the future – including the ability to pass local pension reform.

Local governments should structure themselves in a way that best meets the needs of their budget, taxpayers and public employees. And the state should give them the power to do so.

Image credit: Justin Kern

Want more? Get stories like this delivered straight to your inbox.

Thank you, we'll keep you informed!