SPRINGFIELD – Last week, State Representative Allen Skillicorn (R-East Dundee) filed legislation that would allow debt-ridden municipalities the ability to petition the state to file for Chapter 9 bankruptcy. Through the legislation, House Bill 501, Illinois would become the 25th state to allow municipalities this option as a means to restrain runaway costs to taxpayers.
“If a municipal government becomes so debt-stricken it can’t pay its bills, taxpayers are the ones who end up suffering,” said Skillicorn.
Skillicorn said the proposal essentially follows the same bankruptcy filing process as if a municipality were going through bankruptcy like a person or business. A municipality would have to prove before the court it cannot pay its bills. If it can prove its delinquency, the municipality would have to file a plan according to a court-ordered schedule that divides creditors into classes and proposes treatment for each class. Creditors would get to vote on the plan and the court would approve the plan that has been accepted and is in the best interest of the creditors.
“Although bankruptcy comes with many of its own hazards and should only be considered as a last resort, this option provides an effective path back to financial solvency for a municipality without placing the burden solely the backs of taxpayers,” said Skillicorn.
The process of petitioning the state in the legislation is designed to prevent frivolous bankruptcy filings and to ensure it is only used as a last resort. The proposal also seeks to reassure investors against losses by placing bondholders at the front of the repayment cue in the case of restructuring. This will assure lenders and protect against excessive rate increases for future borrowing requests by municipal governments across the state.
Should House Bill 501 become law, it would provide a much needed avenue to solvency for some of Illinois’ most debt-ridden local government entities, including Chicago Public Schools.
For more information about House Bill 501, visit: http://www.ilga.gov/legislation/BillStatus.asp?DocTypeID=HB&DocNum=501&GAID=14&SessionID=91&LegID=100576.
With due respect to Mr. Skillicorn, and I completely respect his intentions, this legislation will provide virtually no relief to Illinois taxpayers.
The purpose of municipal bankruptcy is to allow municipalities to adjust their debts when they can’t raise the revenue needed to pay their debts, or paying their debts would leave them with insufficient revenue to pay for critical municipal services such as police and fire protection.
So the key focus in bankruptcy is whether granting relief increases revenue available for such services.
Would that work for Illinois municipalities?
Let’s look at the facts.
First, Illinois home rule municipalities (e.g., Chicago, Crystal Lake) have the legal authority to raise property taxes without limit for operating purposes.
How does a city with the unlimited legal authority to increase revenue go to court and claim it doesn’t have enough revenue?
“Yes, your honor, we COULD raise more revenue — we just don’t wanna. Please grant us relief.”
Good luck with THAT argument in court!
Second, almost all debt issued by municipalities is protected from municipal bankruptcy.
Allow me to explain.
The vast majority of Illinois municipalities’ debt is called “general obligation bonds”, and the revenues to repay those bonds comes from a tax levy legally segregated from the operating funds.
In other words, reducing debt would NOT increase funds available for operating purposes, like police or fire protection.
The second largest type of debt of Illinois municipalities is bonds issued for water and sewer systems are payable from revenues of that system and the municipalities have the legal authority to set rates for their utilities at whatever level they want.
This means, again, that using bankruptcy to reduce utility debt would not increase funds available for regular municipal operations such as police and fire protection.
“Yes, your honor, we filed bankruptcy claiming we didn’t have enough revenue for critical municipal services and, yes, cramming the debt won’t give us a penny for those services, but please reduce the debt anyway.”
Good luck with that argument in court!
Bankruptcy MIGHT provide relief from debt payable solely from the General Fund of the municipality, but there’s very little of that debt in Illinois.
Third, tax revenue for pensions is also from separate, legally dedicated tax levies unlimited as to rate or amount, so asking for relief from pension payments will also be denied in bankruptcy court because
(a) the municipality can raise the revenue needed to pay the pensions and
(b) reducing the levy doesn’t increase money available for operating purposes.
“Yes, your honor, we went bankrupt claiming we didn’t have enough revenue for critical municipal services such as police and fire protection, and, yes, cutting the pensions won’t increase revenue for police and fire protection, but please cut the pensions of widows and retirees anyway.”
Good luck with THAT argument in court!
The fact is that Illinois municipalities (and I include schools in this category) do not have a revenue problem.
They have a SPENDING problem or, more correctly, a lack-of-guts problem.
They COULD fix the problem any time they want. It would require cutting taxes and holding the line on salaries and benefits. But too many municipal officials are unwilling to do that.
Bankruptcy won’t fix that problem.
P.S. If any legislator wants to learn about municipal bankruptcy, we are fortunate to have in this state the country’s leading authority: James Spiotto. Jim retired from Chapman and Cutler but still maintains an office there. He is the experts’ expert.
I know Al Skillicorn, and as a person, I like him.
But he has fallen under the spell of Kane County Board Chairman (former state senator) who views himself as the great tax-cutter.
This all looks good “on paper,” but the facts are as Steve Wilson says. In the case of Kane County, Lauzen publicly portrays himself as the friend of the tax payers, but all he has power to cut is the tiny slice of the property tax bill that the county government itself actually receives.
BUT, in Kane County, members of the County Board are also members of the Kane County Forest Preserve Board so, when they agree to County Board tax cuts, they then take off their County Board hats, replace it with their Forest Preserve hats, and vote to put a FIFTY MILLION DOLLAR tax referendum on next April’s ballot, to take MORE land off the tax rolls and raise everyone’s property tax yet again, both to pay for the fifty million dollars, and to cover revenue lost when the Forest Preserve District takes this land off the property tax rolls.
This is how the game is played, at our expense.
The great irony is Illinois itself needs bankruptcy. Petitioning the State should not be required because it becomes a political mess at that point.