Capitol Fax.com - Your Illinois News Radar » Help or hindrance?
SUBSCRIBE to Capitol Fax      Advertise Here      Mobile Version     Exclusive Subscriber Content     Updated Posts    Contact
CapitolFax.com
To subscribe to Capitol Fax, click here.
Help or hindrance?

Tuesday, Feb 28, 2017

* From the Illinois Policy Institute’s news service

One portion of the state senate’s “grand bargain” would force many Illinois cities to place banks ahead of vital local services should an Illinois city go bankrupt.

Senate President John Cullerton introduced Senate Bill 10 as something to help cities borrow more for less.

“It’ll allow them to borrow at lower interest rates and help them save money,” Cullerton said.

But Mark Glennon, founder of the Illinois financial news service website WirePoints, warned that the bill forces any home-rule municipality to give lenders priority on any money it has, or will receive from the state, should it become insolvent.

A number of Illinois cities, including Chicago, are very close to insolvency due to out of control pension contributions, Glennon said. The bill would put banks ahead of the vital local services that are meant to be protected in the event that a city goes bankrupt. he said.

“This is like going to your bank and saying ‘Give me a bigger home loan at a lower rate, and I will give you ownership of all my future income,’” Glennon said.

If you’re in favor of squeezing Chicago and changing the law to allow municipal bankruptcies, then you’re definitely opposed to the bill. But if you think ratings agencies may be going overboard with downgrades of entities that can’t declare bankruptcy without special permission and you believe creditors should be paid, then you support it.

The state itself does this with Build Illinois bonds, which are directly tied to the sales tax and have therefore avoided some of the nasty downgrades suffered by general obligation bonds.

* From the Bond Buyer’s Yvette Shields

Under the legislation, a home rule municipality could enter into an agreement assigning a set amount of revenue it receives from the state to a special entity such as a public corporation or trust-like fund established for the “limited purpose of issuing obligations” for the municipality. The dedicated revenue would bypass a municipality’s general fund.

For example, the home rule municipality and an issuing entity would enter an assignment agreement for, say 0.25% of that municipality’s share of sales tax revenues. The home rule municipality would need to approve the agreement by ordinance. Bonds would be sold and all revenue from the 0.25% of dedicated sales tax revenues would go directly to special purpose entity for bond repayment.

The structure, by making the revenues owned by a special entity, is designed to shield the bonds from the threat of being dragged into a bankruptcy proceeding, and insulate them from a municipality’s general credit to obtain better ratings.

“It provides another mechanism of structured financing for a municipality which is intended to remove any bankruptcy risks as other states have provided,” said James Spiotto, a municipal restructuring expert and co-publisher of MuniNet Guide. “This type of securitization-like structure has had the effect of providing greater liquidity and better credit acceptance so you can reduce borrowing costs.” […]

Variations are in place in California, New York, and Rhode Island. It’s also a similar concept to Michigan’s state aid-backed bonds. Revenues used to repay debt issued under the program flow to the Michigan Finance Authority, not the municipality.

- Posted by Rich Miller        

23 Comments
  1. - NoGifts - Tuesday, Feb 28, 17 @ 11:19 am:

    Well if the banks have an interest in municipalities continuing to get state $$, I guess this is one way to make sure they keep flowing. Up until now I was getting the idea that the flow might come to a halt.


  2. - A Jack - Tuesday, Feb 28, 17 @ 11:24 am:

    Yes I do think the ratings agencies have gone overboard. Illinois is rated lower than AIG. AIG as you may recall precipitated a good part of the Great Recession. Illinois may have to do some painful things to get back on track, but no way is it a bigger credit risk than AIG.


  3. - Liberty - Tuesday, Feb 28, 17 @ 11:29 am:

    Sounds to me like bonds would get priority over pensions if a bankruptcy bill was later passed… how about a special purpose entity to pay pensions?


  4. - Anonymous - Tuesday, Feb 28, 17 @ 11:35 am:

    Does IPI not understand credit risk? Its not complocated: the lower the risk, the lower the interesr rate. Since municipalities haven’t had a bankruptcy option before, better to give them training wheels at first.


  5. - BK Bro - Tuesday, Feb 28, 17 @ 11:38 am:

    Again we have another situation where creditor groups are trying to get ahead in line when insolvency happens. Illinois NEEDS a structured bankruptcy process for municipalities. Without it, it’s a who’s who of interest groups (in this case, lenders) trying to cut everyone else in line. This is not an orderly process and will lead to an unstable de-facto bankruptcy process for municipalities.


  6. - Conn Smythe - Tuesday, Feb 28, 17 @ 11:39 am:

    The dude that shills for municipal bankruptcy everyday on his blog is mad about a bill that makes it harder to file for municipal bankruptcy. Dog bites man.


  7. - Dance Band on the Titanic - Tuesday, Feb 28, 17 @ 11:59 am:

    “Once a city is totally assetless due to insolvency, the lender would then be entitled to all future payments from the state through the Local Government Distributive Fund (LGDF), essentially putting all taxpayers on the hook for their debt.”

    This from the same group that argued the state should just take away the entire LGDF.


  8. - Anon Downstate - Tuesday, Feb 28, 17 @ 12:04 pm:

    “The dude that shills for municipal bankruptcy everyday on his blog is mad about a bill that makes it harder to file for municipal bankruptcy. Dog bites man.”
    ————–

    Nonsense. The whole governmental bankruptcy issue is likely to come to a decision point with Puerto Rico sooner rather than later.

    Angle that you might want to consider is that this legislation could create even more situations like what happened to Argentina, or what is currently happening to Puerto Rico.

    Argentina: Link is: https://en.wikipedia.org/wiki/Argentine_debt_restructuring

    IMO, very, very poorly thought out legislation. It puts a specific class of debt holders at the front of the line. And remember, ‘lenders’ in this case can be any number of different types of debt holders. Like, say a “Vulture Fund” that picks up the distressed debt for literally pennies on the dollar, then wants full repayment. See Argentina for details.

    What’s the plan if you have 3 primary classes of creditors, and you have financial coverage ($$$’s) for only (maybe) 60% of the total on-going current (not long term) financial obligations?

    Like, let’s say, Harvey, IL as an example.


  9. - PublicServant - Tuesday, Feb 28, 17 @ 12:24 pm:

    IPI wants to keep the squeeze on municipalities. This common sense bill would lessen that overreaction from the ratings agencies. It’s a good bill to allow municipalities some wiggle room during the Rauner misgovernance.


  10. - A Jack - Tuesday, Feb 28, 17 @ 12:48 pm:

    You do realize that Puerto Rico isn’t a state. It doesn’t matter what happens in Puerto Rico. It is not treated constitutionally the same as a state.


  11. - wordslinger - Tuesday, Feb 28, 17 @ 12:52 pm:

    The IPI objection is an overwrought stretch, at best, and reveals their true objective, which is muni bankruptcy.


  12. - TinyDancer(FKASue) - Tuesday, Feb 28, 17 @ 1:50 pm:

    So, how does this affect pensions? From what I understand, municipal bankruptcy laws make it difficult to reduce pension obligations. Is this an end-run around pension liability or would there still be protections?


  13. - Maximus - Tuesday, Feb 28, 17 @ 1:56 pm:

    Senate bill 10 is an attempt to allow Illinois to keep borrowing money and to now stiff the tax payers when it all falls apart.

    A Jack-
    Puerto Rico isn’t a state it is a territory but neither states nor territories are supposed to be able to go into bankruptcy. Instead Puerto Rico is in “receivership” which appears to be almost the same thing. Will Illinois ever be in receivership? Bond lenders seem to think so.


  14. - Anon Downstate - Tuesday, Feb 28, 17 @ 2:00 pm:

    “You do realize that Puerto Rico isn’t a state. It doesn’t matter what happens in Puerto Rico. It is not treated constitutionally the same as a state.”
    ————

    You do realize that the arguments being made in the entire Puerto Rico mess (and it is a mess) are substantially that there is either (a) vast, or (b) little difference between being a ‘State’ and a ‘Commonwealth’ where financial matters in both cases are being governed by the federal government. And what’s really fun is where the sides are the different parties are aligning with. Going to be a great case for SCOTUS to have to untangle.

    Fun times ahead. /s


  15. - RNUG - Tuesday, Feb 28, 17 @ 2:13 pm:

    == So, how does this affect pensions? ==

    Don’t know, but here’s a guess.

    State funded pensions (the current 5 funds of TRS, SURS, SERS, JRS and GARS) clearly won’t be affected since it is all State money in the first place.

    Local government pension funds might, repeat, might be affected. If it comes to that, it will be interesting to see which way the IL SC jumps. I guess we could call this the first step to “let CPS take bankruptcy” bill.

    Potentially complicating things would be something like the State trying to shift TRS to the local districts; that could lead to a real hair splitting case since they went from being clearly and absolutely protected to a yet to be legally determined status.


  16. - Mark Glennon - Tuesday, Feb 28, 17 @ 2:27 pm:

    Actually, my objection to the bill applies equally with or without bankruptcy, and pensioners, too, would be hurt. This is simply a matter of putting a priority — a mortgage — on future cash flows in favor of bondholders. It would assure they get paid out of that cash ahead of unfunded liabilities for pensions and everything else. The muni bond folks know how to play the insolvency game and they are miles ahead of everybody else’s thinking. My full article on it is here: http://www.wirepoints.com/illinois-bill-to-prioritize-bondholders-over-the-public-and-taxpayers-must-be-stopped-wirepoints-original/


  17. - Whatever - Tuesday, Feb 28, 17 @ 2:30 pm:

    ==Does IPI not understand credit risk? Its not complocated: the lower the risk, the lower the interesr rate. Since municipalities haven’t had a bankruptcy option before, better to give them training wheels at first.==

    Pledging receipts from the state to secure a bond will lower the interest on that bond, but, because those receipts will no longer be available to pay other bonds, the interest on other bonds will go up. And Liberty has a point. If they’re going to let municipalities give bondholders a special deal like this, they should be required to pledge receipts to their pension obligations before they pledge anything to bonds. Why let the bondholders cut in line if municipal bankruptcy becomes allowable? You could argue that doing so would be a breach of the pension clause. The old supreme court ruling that the clause does not require funding of the pension fund because the liability has to be paid, regardless, would no longer apply if bankruptcy is an option.


  18. - TinyDancer(FKASue) - Tuesday, Feb 28, 17 @ 3:06 pm:

    Bankruptcy? This is ridiculous alternate reality.
    The state can pay its bills. If the state is broke, it’s because the state wants to be broke.
    The state of Illinois has the power to raise its (relatively low) taxes and pay its creditors, it just doesn’t want to.
    This is like a debtor claiming that he can’t pay his bills because his checking account is empty, but his checking account is empty because he refuses to collect and deposit the funds that are owed to him.


  19. - TinyDancer(FKASue) - Tuesday, Feb 28, 17 @ 3:08 pm:

    Bankruptcy? Really? This is all ridiculous alternate reality.
    The state of Illinois has the power to raise its (relatively low) taxes and pay its creditors, it just doesn’t want to.
    This is like a debtor claiming that he can’t pay his bills because his checking account is empty, but his checking account is empty because he refuses to collect and deposit the funds that are owed to him.


  20. - City Zen - Tuesday, Feb 28, 17 @ 4:48 pm:

    ==This is like a debtor claiming that he can’t pay his bills because his checking account is empty, but his checking account is empty because he refuses to collect and deposit the funds that are owed to him.==

    I believe the owner of the the Bamboo Lounge in Goodfellas also refused to collect and deposit the funds that are owed to him. They ended up torching the place.


  21. - froganon - Tuesday, Feb 28, 17 @ 4:59 pm:

    This sounds like Detroit, sell out residents for the big lenders and hedge fund vultures. Give debt addicted politicians a way to postpone the need to institute a sustainable revenue stream and sell out the future at the same time. Illinois can fix it’s problems by raising the income tax and raising the minimum wage…just like the majority of voters directed in the (two) Referenda a few years ago.


  22. - Arthur Andersen - Tuesday, Feb 28, 17 @ 6:23 pm:

    RNUG, I don’t know that the cost shift hurts us as long as the State still has to write the annual “check” for the UAAL. If the cost-shift money is impaired (one of the reasons I oppose the cost shift) TRS follows its fiduciary duties and pays pensions out of the UAAL Check.

    As for Glennon, “moral obligation” and “fiduciary duty” don’t seem to be among his concerns.


  23. - TinyDancer(FKASue) - Tuesday, Feb 28, 17 @ 7:04 pm:

    ==They ended up torching the place.==

    The governor’s already torched the place.


Sorry, comments for this post are now closed.


* Question of the day: Golden Horseshoe Awards
* Pritzker roundup
* Cook County Public Guardian sues DCFS: "Abject moral and human rights failure"
* Mendoza signature clearance rate is high during first round
* Your holiday season moment of Zen
* Pritzker criticized over lack of Active Transportation Alliance members on his transition committee
* Color me skeptical
* Pritzker heading to White House today
* Sen. Schimpf wants Satanic sculpture removed from rotunda as Rep. Bryant introduces condemnation resolution
* SUBSCRIBERS ONLY - Supplement to today’s edition
* SUBSCRIBERS ONLY - Today's edition of Capitol Fax (use all CAPS in password)
* *** LIVE COVERAGE ***
* Yesterday's stories

Support CapitolFax.com
Visit our advertisers...

...............

...............

...............

...............
<


Loading


Main Menu
Home
Illinois
YouTube
Pundit rankings
Obama
Subscriber Content
Durbin
Burris
Blagojevich Trial
Advertising
Updated Posts
Polls

Archives
December 2018
November 2018
October 2018
September 2018
August 2018
July 2018
June 2018
May 2018
April 2018
March 2018
February 2018
January 2018
December 2017
November 2017
October 2017
September 2017
August 2017
July 2017
June 2017
May 2017
April 2017
March 2017
February 2017
January 2017
December 2016
November 2016
October 2016
September 2016
August 2016
July 2016
June 2016
May 2016
April 2016
March 2016
February 2016
January 2016
December 2015
November 2015
October 2015
September 2015
August 2015
July 2015
June 2015
May 2015
April 2015
March 2015
February 2015
January 2015
December 2014
November 2014
October 2014
September 2014
August 2014
July 2014
June 2014
May 2014
April 2014
March 2014
February 2014
January 2014
December 2013
November 2013
October 2013
September 2013
August 2013
July 2013
June 2013
May 2013
April 2013
March 2013
February 2013
January 2013
December 2012
November 2012
October 2012
September 2012
August 2012
July 2012
June 2012
May 2012
April 2012
March 2012
February 2012
January 2012
December 2011
November 2011
October 2011
September 2011
August 2011
July 2011
June 2011
May 2011
April 2011
March 2011
February 2011
January 2011
December 2010
November 2010
October 2010
September 2010
August 2010
July 2010
June 2010
May 2010
April 2010
March 2010
February 2010
January 2010
December 2009
November 2009
October 2009
September 2009
August 2009
July 2009
June 2009
May 2009
April 2009
March 2009
February 2009
January 2009
December 2008
November 2008
October 2008
September 2008
August 2008
July 2008
June 2008
May 2008
April 2008
March 2008
February 2008
January 2008
December 2007
November 2007
October 2007
September 2007
August 2007
July 2007
June 2007
May 2007
April 2007
March 2007
February 2007
January 2007
December 2006
November 2006
October 2006
September 2006
August 2006
July 2006
June 2006
May 2006
April 2006
March 2006
February 2006
January 2006
December 2005
April 2005
March 2005
February 2005
January 2005
December 2004
November 2004
October 2004

Blog*Spot Archives
November 2005
October 2005
September 2005
August 2005
July 2005
June 2005
May 2005

Syndication

RSS Feed 2.0
Comments RSS 2.0
WordPress




Hosted by MCS SUBSCRIBE to Capitol Fax Advertise Here Mobile Version Contact Rich Miller