Glen Brown: Can the state of Illinois declare bankruptcy?

By Glen Brown.

Can the State of Illinois declare bankruptcy so it can renege on its public pension obligations? No, the State of Illinois cannot (no matter what Illinois Senator Mark Kirk and others have said previously).

Though the State’s liabilities continue to increase, and the State of Illinois has a cash-flow problem, bankruptcy is not an option. Why? Bankruptcy would destroy the State of Illinois’ credit rating completely and its ability to borrow at affordable interest rates; the State’s budgets would be slashed; bond sales would plunge, and the bond market would destabilize.

Two years ago congressional legislator Newt Gingrich asserted that U.S. law should be changed to allow a state to file bankruptcy, thus, giving it more leverage to renegotiate labor contracts. In other words, Gingrich and other legislators perhaps believed that state governments could break the unions’ resolve to protect public employee pensions by using bankruptcy as their trump card; moreover, Gingrich wanted us to know that the federal government was no longer in the “bailout business.” This is quite ironic, considering the depletion of trillions of dollars from taxpayers to bail out bankers, corporations, and the wealthy that had devastated the U.S. economy and the lives of millions of people.

Mark Kirk agreed with Gingrich and advocated for a law that would allow a state to declare bankruptcy, even though state bankruptcy would invariably rob public employees of their contractual right to an earned pension. It is true that if a state declares bankruptcy, all fiscal contractual obligations would be placed under court jurisdiction. State employee contracts would be under court authority and subject to its revisions, resulting in cuts not only to pension funds, but to salaries, benefits, and bondholder obligations. Thus, pension funds could be liquidated entirely, and the State bond market would be rendered ineffectual for earning further capital.

What might have prompted discussions regarding a state’s option to declare bankruptcy was a bill introduced by U.S. Representatives Paul Ryan and Devin Nunes, entitled the Public Employee Pension Transparency Act (H.R. 567) two years ago. This bill required more reporting from state and local pensions and prohibit federal bailouts of states: “…state or local government employee pension benefit plans are becoming a large financial burden on certain state and local governments and have already resulted in tax increases and the reduction of services.

“In fact, a recent study published in the Journal of Economic Perspectives found that the present value of the already-promised pension liabilities of the 50 States amount to $5.17 trillion and that these pension plans are unfunded by $3.23 trillion…

“Some economists and observers have stated that the extents to which state or local government employee pension benefit plans are underfunded is obscured by governmental accounting rules and practices, particularly as they relate to the valuation of plan assets and liabilities. This results in a misstatement of the value of plan assets and an understatement of plan liabilities, a situation that poses a significant threat to the soundness of state and local budgets…

“[Hence,] the United States shall not be liable for any obligation related to any current or future shortfall in any state or local government employee pension plan. Nothing in this Act (or any amendment made by this Act) or any other provision of law shall be construed to provide Federal Government funds to diminish or meet any current or future shortfall in, or obligation of, any state or local government employee pension plan” (H.R. 567).

We must be aware that it’s not only a few members of Congress that have lost their lucidity. As stated by the Center on Budget and Policy Priorities (January 2011), “various pundits [also suggest] enacting federal legislation that would allow states to declare bankruptcy, potentially enabling them to default on their bonds, pay their vendors less than they owed, and abrogate or modify union contracts. Such a provision could do considerable damage, and the necessity for it has not been proven.”

The Center on Budget and Policy Priorities affirms that “it would be unwise to encourage states to abrogate their responsibilities by enacting a bankruptcy statute. States have adequate tools and means to meet their obligations… Confusion between short-term cyclical deficits and debt, pensions and retiree insurance – and the overstatement of the magnitude of the latter set of problems – draw attention away from the need to modernize state and local budget and revenue systems and address structural problems that have built up over time in these systems.

“States suffer from ‘structural deficits’ or the failure of revenues to grow as quickly as the cost of services… Structural deficits stem largely from out-of-date tax systems, coupled with costs that rise faster than the economy in areas such as health care. Fixing these structural problems would help states and localities balance their operating budgets without resorting to [desperate measures]… It is far more constructive to focus on fixing these basics of state and local finance than to proclaim a crisis based on exaggerations of imminent threats.”

Consider in Lansing Michigan, “an Ingham County judge says Thursday’s historic Detroit bankruptcy filing violates the Michigan Constitution and state law and must be withdrawn…” (Michigan judgerules Detroit bankruptcy unconstitutional).

In Illinois, the State Constitution (Article XIII, Section 5) is quite explicit about public employees’ guaranteed pensions. Furthermore, “pensions will not run out of money… [That] assumes that at a future date, state pensions will just cease and all outstanding financial obligations will come due… Unlike a corporation, a state government cannot go out of business… [Accordingly,] state law empowers TRS (40 ILCS 5/16-158c)… Payment of the required state contributions and of all pensions, retirement annuities, death benefits…, all other benefits…, and all expenses are obligations of the state… The state has waved its sovereign immunity in regard to the teachers’ pension because TRS is a qualified pension plan under the tax-deferred provisions of the IRS code. Federal law would protect all claims… Pensions [are not] the problem [or] why Illinois has been unable to pay its bills. The reason is the dramatic fall-off in state revenues over the years, costing the state billions” (Dave Urbanek, Public Information Officer at TRS, 2011).

Most of this essay was originally posted in August, 2011.

For several constitutional analyses, please Click Here.

7 Replies to “Glen Brown: Can the state of Illinois declare bankruptcy?”

  1. The ill & Chicago interest rates are high relative to the market as a whole now, and it will only get worse. If the Detroit BK goes badly for bond holders, and it probably will, investors will not take the additional risk for a lousy 50 to 100 basis points. It will become extremely expensive to borrow, even for routine purposes. One solution will be for the unions to contractually subordinate the pension obligations to bond holders.

    Chicago & Ill are not Detroit, but Detroit is the canary in the coal mine.

    1. Detroit is now what the whole country will become brought to us by neo-liberal economic policies initiated by Reagan and put on steroids by Clinton and Bush. We are becoming a third world country caused by the loss of decent jobs through globalization, evisceration of labor unions, and technology. Third world status is hastened also by tax breaks and loopholes for the very rich and for multi-national corporations, and the loss of safety net programs which allow people to put money back into the consumer economy. I once thought the powers that be would eventually see that damaging the buying power of us by lowering wages and shipping jobs elsewhere would hurt them and thus they would stop this mess. But now I see they are turning to increasing middle class populations in developing countries to support their greed. They also have decided to go after public money through using our taxes to enrich private corporations as in prisons, charter schools, and privatization of water, etc. They haven’t got all the money yet, so they aren’t done.

  2. Pensions are a part of a worker’s earnings. Bonds are investments. The possibility of default assumed by an investor is rewarded by compensation in the form of interest.

    Why should a bankruptcy court equate these two very different things? So the City of Detroit can cheat it’s retired workers out of their earnings? Earned compensation is NOT an investment.

    The Federal government requires payment of other earned wages by law, but allows retirees to have their past earnings taken from them through bankruptcy? How is that fair?

    There seems to be a different set of rules for those in power. Everyone else gets to pay for their “mistakes”, while those in power lose nothing. They just hand us the bill. Unacceptable.

    1. Ah yes, it’s all the Democrats fault! Republicans had nothing to do with it. They only steal from pension funds and from the SS fund.and then run for re-election and say how they did this and did that without raising taxes- class acts they are!

  3. 3 Trillion is pocket change for the FED It spent 29 trillion in the 08-09 bailout and not just for banks it backed all the short term lending of several giant corporations like Mc Donalds. We will hear more about this with Bernie Sanders in the race ( along with 60,000 factory closings)
    Am I the only one that wonders if any of these giants corps whining about Illinois solvent themselves without a constant cash IV?

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