City bankruptcies should be state's responsibility, think tank says
Even though the state of Illinois cannot declare bankruptcy, it has raised the question of whose responsibility it is to fix this continuing issue.
Stephen Eide, Manhattan Institute senior fellow and expert on tax and budget policy, recently offered his insight into city bankruptcies in Illinois and the impact they could have at city and state levels.
He also spoke about whose responsibility this is as well as how the situation could be improved.
“The fact that Illinois — because it’s a state — cannot access bankruptcy will ensure that state-level problems with debt and deficits will persist for many years, and this is bad news for all Illinois localities,” Eide told the Sangamon Sun.
According to Chapman and Cutler LLP, attorneys at law with an office in Chicago, “Under current bankruptcy law, units of local government cannot voluntarily petition for municipal bankruptcy under Chapter 9 without express and specific authority from the state.”
The state has faced financial struggles since 2002, Illinois Policy Vice President Ted Dabrowski reported. He also reported that Illinois has the “highest borrowing rate of any state in the nation.”
“Illinois has the worst credit rating in the nation and sits just three notches away from a junk rating,” Dabrowski explained.
Eide made clear that Chicago as a city is not bankrupt; however, when faced with a situation that affects the whole state, it does not allow for many options.
“It seems like this impacts decision-making,” he said. “We take on more and more debt because we don't have an option of failure.”
He explained that with this legal process, “federal law makes it much more difficult for cities, even fiscally distressed ones, to access bankruptcy than corporations and individuals.”
Even though the state is in dire financial need, it continues to take on more spending, Dabrowski noted. This is apparent with the $500 million in bonds set to pass for infrastructure maintenance and updates, he said.
This process of taking on more debt lies in a “combination of political paralysis and inability to reign in public pensions,” Eide said. “In contrast to bonded debt, which must be authorized by some sort of deliberative process, public pension liabilities grow automatically, through workers gaining more retirement credits each year and when pension fund investments underperform.”
Dabrowksi credits the state’s financial status to a “lack of balanced budgets.”
With respect to who should be responsible and accountable for this, Eide made clear he believes it should be the state's responsibility in Illinois.
“Because municipal insolvency connotes a failure of state policy and state authorities, though not perfect, are better-positioned than mayors and city councils to make the kinds of tough decisions necessary to make municipal bankruptcy effective,” he said.
Eide concluded that if the state took over city bankruptcies, the system would be more effective.
“If you have a locality that is insolvent and has exhausted all other options, state government should appoint a receiver who will file the Chapter 9 petition and direct the bankruptcy process,” he said.
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