* 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.