Displaying Stark Divisions, Illinois Lawmakers Talk Chapter 9

The Bond Buyer reports:

The stark political divisions around the idea of allowing Chapter 9 bankruptcy in Illinois were highlighted at a recent legislative hearing.

Illinois lacks a general Chapter 9 municipal bankruptcy statute but Gov. Bruce Rauner has proposed adding such a provision to state law as part of a sweeping local government and state pension overhaul bill unveiled in July.

The debate in a Springfield committee room was polarized, with advocates saying Chapter 9 would offer distressed local governments a lifeline back to fiscal health and skeptics calling it an end run around labor contracts.

Rauner's proposal would establish a path to local government bankruptcy — billed as a last resort — following a third party assessment, declaration of a fiscal emergency, and exploration of other alternatives that would include creditor negotiations.

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.

Brandt likes the idea of a statutory lien protection offered outside Chapter 9 but made clear at a hearing late last month his general distaste for municipal bankruptcy.

"Its bad public policy — horrible public policy and it defeats the purpose of the relationship of government to its citizen when there are so many other vehicles we can use," Brandt told lawmakers. "I'm a great believer in alternatives to Chapter 9."

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