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* The Bond Buyer has a long article about a recent House hearing on legislation pushed by the governor to allow local governments to declare bankruptcy…
In what is viewed as a favorable provision for bondholders, the Local Government Bankruptcy Neutral Evaluation Act would offer them a statutory lien for general obligation and revenue bonds on property taxes collected, or the debt’s pledged revenues. The lien would automatically attach from the time of the pledge with no further action needed and is “valid and binding” from the time of issuance, the proposed legislation says.
With such a statutory lien provision in place “you are making the purpose of the Chapter 9 for one singular purpose…to visit it upon labor,” said William Brandt, the former board chairman of the Illinois Finance Authority and the longtime owner of corporate and municipal restructuring advisory businesses. The sole purpose is the “rejection of labor contracts,” he said.
Gee, what a surprise. The big New York City firms which bought bonds and should’ve known better are protected, while local workers get the shaft.
* Proponents say the statutory lien language would bring down borrowing costs…
“We’re paying a penalty for the public crisis that we have in finances” at the state level, said State Rep. Jeanne Ives, R-Wheaton, adding she’s been advised that the addition of a statutory lien to state books could cut local government borrowing penalties in half.
* But…
The debate adds to the attention statutory liens have received across the country following Chapter 9 bankruptcies in California and Detroit and legislative efforts to protect bondholders. Fitch Ratings recently warned that despite its growing use in U.S. municipal debt, the presence of a statutory lien will not enhance a municipality’s debt rating.
“While the presence of the statutory lien will enhance a creditor’s post-default recovery prospects, it doesn’t avoid the interruption of payment upon a bankruptcy filing by a municipality,” said analyst Thomas McCormick. “The simple reason is that in a bankruptcy scenario, the pledged tax revenue could be subject to interruption and default would be likely.”
posted by Rich Miller
Wednesday, Sep 2, 15 @ 9:31 am
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Municipal bankruptcies are another poison pill? What a surprise.
Comment by Tournaround Agenda Wednesday, Sep 2, 15 @ 9:38 am
Governor Rauner’s constituents don’t live in Illinois. Only his voters.
Comment by LizPhairTax Wednesday, Sep 2, 15 @ 9:42 am
A federal bankruptcy judge would decide among competing claims. The opinion of Rep. Ives would heavily, I’m sure.
Why do the “conservative” big brains pushing bankruptcy think they’re “statutory lien” language would trump a unanimous decision of the state Supreme Court interpreting the constitution’s pension clause?
Comment by Wordslinger Wednesday, Sep 2, 15 @ 9:45 am
“The big ________ which ________ and should’ve known better are protected, while local ______ get the shaft.”
The Turn-Around Agenda in a nutshell.
– MrJM
Comment by @MisterJayEm Wednesday, Sep 2, 15 @ 9:45 am
Rich, do you really want to make an argument that anyone who loans Illinois municipal governments money for schools, roads, [insert preferred capital project] “should have known better”? That risk is why borrowing costs are going up, which takes money away from other spending needs. I have no problem with a law that says, going forward, municipalities that make promises have to keep them. Most people here are enthusiastic about that rule for pensions. After all, the [bondholders] paid all the money into the system they agreed to do, it’s the [local governments] that didn’t keep their commitments…
Comment by Put the fun in unfunded Wednesday, Sep 2, 15 @ 9:52 am
To add to word, or a federal Judge’s willingness to shaft a retired teacher over a millionaire investment banker?
Also, these guys are getting paid interest because there is supposed to be some level of risk involved. Don’t like that risk, get out of the Muni business. And the thought the issuers would see lower yields with Chapter 9 and some lipstick on a pig type protections versus essentially no access to Chapter 9 is pure applesauce.
Comment by Juice Wednesday, Sep 2, 15 @ 9:52 am
== Municipal bankruptcies are another poison pill? What a surprise. ==
Hey, if you can’t get what you want via negotiation in the legislative process, find some other way to do it.
Comment by thunderspirit Wednesday, Sep 2, 15 @ 9:52 am
Sandack represents an area with a lot of educators and first responders..Im sure they are happy with his sponsorship of this Rauner idea..
Comment by Not Rich Wednesday, Sep 2, 15 @ 9:58 am
para 4.
“Rauner’s proposal….following a third party assessment,…”
Wait. Aren’t we watching a death duel today about the Rauner World coming to an end over third party assessments?
Nobles must be paid, regardless of the condition of the crop, my dear peasants…
Comment by cdog Wednesday, Sep 2, 15 @ 10:00 am
A governor who favors bankruptcy as a legitimate governing tool probably sees tornadoes, floods, earthquakes and wildfires as opportunities for interior decorators.
Rauner is the kind of guy whose company would raise cost of life-saving drug for babies 1,300% - and smile all the way to the bank.
Comment by VanillaMan Wednesday, Sep 2, 15 @ 10:01 am
– I have no problem with a law that says, going forward, municipalities that make promises must keep them.–
That is the status quo, except in the rare instance of state approval for Chapter 9 filing,
The muni bankruptcy bill seeks to alter that for certain classes of creditors, namely, employees.
These silly reactionary mushrooms are in over fheir heads if they think they can dictate via state law to a federal judge how to treat competing claims in a bankruptcy proceeding.
It’s good to be a federal judge.
Comment by Wordslinger Wednesday, Sep 2, 15 @ 10:02 am
The bankruptcy does little or nothing…All obligations remain in place and owing…..Hand wringers will able to put that noose around the local town’s neck forever….which will look nice in the flyers.
Comment by Anonin' Wednesday, Sep 2, 15 @ 10:02 am
Thunderspirit, you are right–instead of participating in the governing process, this Governor will do anything he can to change policies and/or legislation without negotiating or compromise It is either “his way or the highway.” This
Local Government Bankruptcy Neutral Evaluation
Act and SB 1229 are two examples of this Governor
displaying poor leadership and governance skills
Comment by Earl Shumaker Wednesday, Sep 2, 15 @ 10:07 am
Wordslinger - Wednesday, Sep 2, 15 @ 10:02 am:
– I have no problem with a law that says, going forward, municipalities that make promises must keep them.–
But they need not keep promises made in the past.
Comment by anon Wednesday, Sep 2, 15 @ 10:08 am
This strategy must be ecause of the pension ruling that puts pensions off limits. This layman has come to the conclusion, after reading about Michigan and Detroit (which didn’t cut pensions as much as was proposed and a compromise stopped the legal process) I am convinced that a bankruptcy bill that doesn’t include pensions exemptions (need that for the feds) won’t get past the ISC.
Comment by LIberty Wednesday, Sep 2, 15 @ 10:09 am
A statutory lien is a thumb on the scale but a Federal bankruptcy court is not bound by it. In recent bankruptcies (Detroit, San Bernardino, Stockton), when push came to shove the muni and the court recognized that credible retirement benefits are necessary if a muni is to hire and retain the workforce that is essential to their ongoing operations (and that is part of what the Chapter 9 judge has to look at, by statute), whereas credit markets have always been very forgiving of post-bankrupts if their financial houses are now in order.
There is a logic to all that which is far more compelling than playing tricky games with statutory liens… or for that matter, hiding behind State pension protections (which Stockton and CALPERS tried to do and the judge laughed them out of court).
Federal bankruptcy is in the US Constitution and is supreme over State pension protection or statutory liens. Part of Chap. 9 is that when it emerges from bankruptcy the muni must be able to survive and prosper, which means is it needs to be able to hire and retain the necessary workers–hence, it needs a decent and CREDIBLE retirement plan. Pensions will take a haircut but bonds will probably get hit worse–because that is what the law and the facts require.
Rauner and the business/Wall Street types can try, but they can’t get around that logic and in the end this is mostly pointless.
Logic–maybe our governing establishment should try it some time… for a change.
Comment by Harry Wednesday, Sep 2, 15 @ 10:11 am
This is so sad. Protect the people who can afford to take a hit by punishing the people who can’t.
Comment by Norseman Wednesday, Sep 2, 15 @ 10:13 am
More of the Rauner venture capitalist approach - tear a company down (in this case a state or municipality), by lowering wages, stripping services, declaring bankruptcy.
Comment by Joe M Wednesday, Sep 2, 15 @ 10:23 am
I’m not shocked by much, but the pursuit of this muni bankruptcy scheme by some elements in the Illinois GOP continues to amaze.
There’s nothing “conservative” or “fiscally responsible” about this scam.
The old Main Street GOP of my youth would have ran the grifters pushing this out of the party on a rail.
Comment by Wordslinger Wednesday, Sep 2, 15 @ 10:23 am
“The sole purpose is the rejection of labor contracts.”
Highly exaggerated and doubtful that this would be the “sole purpose.” Nice to see everyone losing their heads and brains yet again in the current political standoff in Springfield.
I have the classic poison pill that will be popular with the voters but hated by the status quo types. How about we try a government bankruptcy bill which mandates the resignation of all elected officials of that government? A vote for bankruptcy would need to be accompanied by a resignation letter and some understanding that person could never run for public office again. That would be the ultimate poison pill.
Comment by Louis G. Atsaves Wednesday, Sep 2, 15 @ 10:30 am
As an investor in muni’s this is just plain wrong. I invest knowing the risk and that tomorrow I could lose my investment. It’s money I can lose without losing any sleep.
However, those who are vested in muni pensions have their retirement at stake. For them it’s a difference between living on cat food in their golden years or having a comfortable old age. It was a promise that was made when they took that municipal employment. Taking that pension away because an elected official can’t budget goes against the fundamental American value of fair play.
Comment by A Jack Wednesday, Sep 2, 15 @ 10:34 am
“This bill is just an attempt to force both parties at the bargaining table to negotiate in good faith.”
-Sound familiar? Pot meet kettle.
Comment by phocion Wednesday, Sep 2, 15 @ 10:37 am
GASP!!! Supporters of this legislation want to make public employees pay for the misdeeds of local government? To say that municipalities would not want to do this because of the stigma of going to bankruptcy is ridiculous, outrageous, and slanderous. There would be a long line the first day this became law so these zealots (IPI types) could rip off the pensions of firefighters and police.
Comment by Obamas Puppy Wednesday, Sep 2, 15 @ 10:39 am
=could cut local government borrowing penalties in half.=
I don’t see any actual numbers attached to Ives’ statement or any of the others. Our Bond rep said Illinois is paying a “penalty” of an extra .5% to borrow (bonds) due to the fiscal issues. If that is accurate, we are going to save .25%?
That savings in exchange for legislating even more fiscal irresponsibility?
And more people carrying the flag for the billionaire economic elites. Makes total sense.
Comment by JS Mill Wednesday, Sep 2, 15 @ 10:40 am
A statutory lien may provide some additional priority to bondholders in Ch 9.
One thing to remember is that the lien would not exclusively protect the reviled Wall Street “fat cats.” Many mom and pop investors and retirees rely on munis in retirement. Also, do the government employee pension plans hold munis?
And what about the moms and pops that rely on modest annuities whose income relies to some extent on munis?
Comment by Cook County Commoner Wednesday, Sep 2, 15 @ 10:45 am
Need some HEADLINES in common people publications about this. Bond Buyer is too far away from the average reader.
Comment by cdog Wednesday, Sep 2, 15 @ 10:48 am
=== Highly exaggerated and doubtful that this would be the “sole purpose.” ===
Sure Louis, the cost of toilet paper is so high the municipality needs to get out from under such a bad deal.
Don’t try to make us use that costly commodity by shoveling your baloney on us. This is about protecting the wealthy investors while sticking it to employees and retirees because of the ineptitude of the municipal officials.
Comment by Norseman Wednesday, Sep 2, 15 @ 10:50 am
Wordslinger - “But they need not keep promises made in the past.”
Illinois Supreme Court has ruled to the contrary, and I don’t think this legislation changes that. Actually, the commenters are flipping me into a “no” - instead we should pass legislation that local governments can repudiate any obligations to the billionaire economic elites. That, at least, will stop the borrowing.
Comment by Put the fun in unfunded Wednesday, Sep 2, 15 @ 11:00 am
Louis: You’re deliberately avoiding the point, and positing a strawman.
Currently the risk with the local bankruptcy idea being pushed by some Republicans, is that it is seen as a way for local entities to get out from under pension, salary, and overdue operating accounts payable, but often results instead in favoring those over bond payments. This is trying to move the needle so that bond payments are more favored, and pensions and operating expenses less favored. This is part of an anti-government-union and pro-investor movement. If that isn’t true, why do it?
Might be of little practical effect, but every little bit helps.
Comment by walker Wednesday, Sep 2, 15 @ 11:03 am
Note: Bill Brandt is a well-respected expert, having made his millions in the private sector in this arena.
Rep. Ives has memorized a couple of IPI talking points.
Who ya gonna believe?
Comment by walker Wednesday, Sep 2, 15 @ 11:10 am
Let’s not forget that Rauner also wants to freeze the property tax AND cut the Local Government Distributive Fund in half, thereby creating a situation where even the most fiscally responsible local governments may be forced into a crisis where bankruptcy is a necessary option.
Comment by Bluefish Wednesday, Sep 2, 15 @ 11:37 am
@walker, just to make things clear, I oppose government bankruptcies. They need to own up to their responsibilities. As a Republican, I believe in personal responsibility.
I also remain firm in my questioning of “The sole purpose is the rejection of labor contracts” comment. The “straw man” is the “sole purpose” argument here adopted without questioning by many.
Comment by Louis G. Atsaves Wednesday, Sep 2, 15 @ 11:46 am
== Let’s not forget that Rauner also wants to freeze the property tax AND cut the Local Government Distributive Fund in half, thereby creating a situation where even the most fiscally responsible local governments may be forced into a crisis where bankruptcy is a necessary option. ==
In the eyes of Governor Rauner, that’s a feature, not a bug.
Comment by thunderspirit Wednesday, Sep 2, 15 @ 11:51 am
This is horrible.
Comment by Formerly Known As... Wednesday, Sep 2, 15 @ 11:54 am
Louis: Thanks, got it. The “sole purpose” was a bit much.
Comment by walker Wednesday, Sep 2, 15 @ 2:06 pm