Why are Illinois Democrats preparing to bail out bankers and cash-strapped local governments?

Why are Illinois Democrats preparing to bail out bankers and cash-strapped local governments?

Bailout bills moving in the Illinois General Assembly would attempt to turn Illinois’ massive debt problems into guaranteed profits for banks and bondholders and a lower standard of living for other Illinoisans.

Illinois Democrats have started talking tough about financiers, proposing a new “privilege tax” on investment income that would drive much of the financial sector out of the state. But the same Democrats who are publicly cheering for a tax on investors are quietly working to pass legislation that would bail out bankers and cash-strapped local governments.

Democrats are moving at least five bills in the General Assembly that would encourage more borrowing by local governments and would make sure banks and bondholders get paid first – ahead of social service agencies, pensioners and anyone else owed money – if those governments go broke.

Banks and local governments should bear the cost of their own mistakes. But the proposed legislation would bail them out if things turn south.

The bailout bills

Senate Bill 10, if enacted, would create a mechanism for a backdoor bailout of bondholders and broke governments. SB 10 would allow home rule municipalities, such as Chicago, to issue new debt that gives lenders special protection in case the municipality fails to pay them back. The protection would be a first lien on state distribution dollars that go to that local government. The language of SB 10 is clearly written to address issues of insolvency.

Bankruptcy attorney and former adjunct law professor Mark Glennon described SB 10 thus:

When I practiced law I taught secured lending and bankruptcy as an adjunct at the University of Texas Law School. I can imagine giving an assignment like this: “Draft a bill to make bondholders supreme by stiffing the public and taxpayers.” If somebody handed in Senate Bill 10, they’d get an A+.

SB 10 was included as part of the Illinois Senate’s proposed “grand bargain.” SB 10 is clear evidence that the grand bargain was never about ordinary Illinoisans. It was always about special interests – in this case, banks and broke local governments.

Senate President John Cullerton sponsored SB 10, which passed out of the Senate with all Democratic votes.

House Bill 278 complements SB 10 because it increases state distribution dollars to local governments by $300 million per year by boosting the Local Government Distributive Fund. HB 278, sponsored by state Rep. Anthony DeLuca, D-Chicago Heights, increases the very type of state distributions to local governments against which banks could make the first claim if SB 10 passes, making the two pieces of legislation a creative way to give a backdoor bailout to local governments and their bondholders. HB 278 had 33 cosponsors, all Democrats, and passed the Illinois House with the overwhelming majority of votes in favor coming from Democrats.

House Bill 2584, also sponsored by DeLuca, is yet another bill that gives banks and bondholders the first spot in line if a local government gets in trouble. HB 2584 is perhaps the worst of all the bailout proposals, because it puts a blanket mortgage on all of a local government’s future tax revenue in order to pay bondholders ahead of taxpayers and government services.

This is a huge giveaway to bondholders – it even gives the bondholders a statutory first lien on future tax dollars for bonds that were issued in the past under different terms. If HB 2584 becomes law, it will be a handout to bondholders likely worth millions or perhaps billions of dollars, courtesy of the Illinois General Assembly. HB 2584 passed out of the House Cities and Villages Committee on a unanimous vote.

House Bill 3004, sponsored by state Rep. Al Riley, D-Hazel Crest, extends a state treasury bailout mechanism to the Chicago Transit Authority, or CTA, and the Regional Transportation Authority, or RTA. The bill would also allow RTA to borrow more money for a longer period of time. Furthermore, HB 3004 creates a way for the Illinois treasury office to buy the CTA’s and RTA’s bad debts to bail out the CTA, RTA and their investors.

The bill says that if the state treasury invests money in CTA’s interim financing notes and CTA is unable to pay back those debts, the treasury can skim the state dollars that are distributed to CTA. The language of HB 3004 is clearly written to address issues of debt default.

HB 3004 also extends an increase in the amount of short-term borrowing RTA can undertake above and beyond its $800 million debt cap. Current law allows RTA to issue working cash notes that are $100 million beyond its debt limit, but the law says RTA can take on as much as $300 million in debt beyond its limit if it enters into those agreements before July 1, 2018.

HB 3004 amends current law to allow RTA to issue working cash notes and establish lines of credit of up to $300 million beyond its debt limit so long as those agreements are entered into before July 1, 2020, rather than July 1, 2018.

Another of Riley’s bills, House Bill 3005, expands a mechanism by which the state treasurer can purchase the bonds of broke local governments in order to bail out those governments and the financial institutions that hold the governments’ bonds.

This would allow the treasurer’s office to pick winners and losers in the municipal bond market. Like SB 10 and HB 3004, this bill creates a mechanism by which state distribution dollars would go directly to the treasury for debt service instead of to the local government. That means money will go to bondholders or the treasury before it will go to local government services, pension payments and taxpayer relief.

While Illinois law seemingly restricts potential treasury investments to high-rated bonds, the language of HB 3005 is clearly written to address issues of debt default. When a local government gets in trouble, it will take a simple amendment of law to allow the treasury to use its expanded powers to buy the bad debt.

Interestingly, HB 3005’s Amendment 2 specifically includes bailout provisions for the debt of the CTA and the RTA. The transit authorities have significant debt and pension problems.

Why are Illinois politicians preparing to bail out bondholders and broke governments?

As the state teeters toward bankruptcy and local finances fall apart, politicians shouldn’t be focused on moving legislation to bail out the banks and broke local governments that made mistakes – they should prioritize taxpayers and people who need government services.

These bailout bills are the exact opposite of how state and local governments should approach impending debt defaults. The reason governments default on debts is because they have out-of-control spending and owe too much money. They need to restructure their finances so they can lower spending, cut debts and give their people a fresh financial start instead of endlessly throwing good money after bad. That’s the purpose of bankruptcy. It’s not pretty, but it’s sometimes necessary.

These bailout bills would turn Illinois’ immense debt problems into guaranteed profits for banks and bondholders and a lower standard of living for other Illinoisans.

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