Southern California Bankruptcy Law Blog

Will The City Of Chicago File For Bankruptcy?

Posted in Debt

My last post was motivated by an interesting article in the L.A. Times, written by Chris Megerian, Melody Petersen, and Dean Starkman, that discussed the recent ruling by Judge Christopher Klein, the judge in the Stockton, California Chapter 9 bankruptcy.  As you may recall, the ruling put pension payments on the bankruptcy chopping block.

In that post I predicted that more municipalities would seek Chapter 9 bankruptcy protection due to unsustainable public retirement commitments.  I suspect that Judge Klein’s ruling will add fuel to the Chapter 9 fires.  And I am by no means the only one with that opinion.  In the October 2, 2014 L.A. Times, the perspicacious Melody Petersen reported:

Financially pressed California cities might turn to bankruptcy as a way to cut their increasing pension costs after a judge’s ruling, experts said Thursday.  Analysts from Moody’s Investor Services, a bond rating firm, said that Wednesday’s ruling by a federal judge considering Stockton’s case could open the door for cities to cut retirement obligations — once considered sacrosanct.  In that ruling, Judge Christopher Klein said cities could walk away from their pension obligations — just as they can from other debts.

While I am convinced that other California cities are eventually going to seek Chapter 9 protection — Madhu Ravi’s analysis suggests that an Oakland bankruptcy is on the horizon — there is a very big city in Illinois that I am watching:  Chicago is sitting on the pension obligation edge.  If Chicago were to file, it would undoubtedly displace Detroit as the largest municipal bankruptcy in the country’s history.  How likely is a Chicago bankruptcy?

Consider Jerome R. Corsi’s comments on what Chicago’s mayor, Rahm Emanuel, had to say on the subject:

Chicago, America’s third largest city, could follow Detroit into bankruptcy, warned Mayor Rahm Emanuel in the city’s “Annual Financial Analysis 2013” released last week.  “Until we pass meaningful pension reforms in Springfield, the outlook for future years is unsustainable,” Emanuel concluded bluntly, anticipating a current budget crisis that could develop into a full-fledged budget meltdown within the next four years.  Emanuel noted that Chicago’s current budget deficit of $338.7 million is expected to grow to $1.6 billion by 2016, due largely “to ballooning obligations under current pension legislation.”  Compounding the fact that pensions for public employees are less than 40 percent funded, a decline in business activity during several years of prolonged economic downturn and an exodus of higher income residents from the city have resulted until recently in a dramatic decline in Chicago’s tax revenue. . . . In July, Moody’s downgraded Chicago’s debt rating by an unexpected two grades because of the city’s large and growing pension obligations and budget pressures related to the pension crisis.

In my last post, when I discussed the cutting of pensions in Detroit’s bankruptcy, I quoted Article IX § 24 of Michigan’s Constitution which prohibits the cutting of public pensions:

The accrued financial benefits of each pension plan and retirement system of the state and its political subdivisions shall be a contractual obligation thereof which shall not be diminished or impaired thereby.

Article XIII, section 5 of Illinois’s Constitution has a similar provision:

Membership in any pension or retirement system of the State, any unit of local government or school district, or any agency or instrumentality thereof, shall be an enforceable contractual relationship, the benefits of which shall not be diminished or impaired.

In Detroit’s bankruptcy the pension cuts were approved by a vote of the city workers.  I don’t know if Chicago’s city workers would follow suit.  If they don’t, then although Judge Klein’s Stockton bankruptcy ruling won’t have the force of precedent in the Seventh Circuit, his reasoning might provide the legal rationale for a similar ruling in a Chicago bankruptcy.  And keep in mind that federal bankruptcy law trumps any state constitution because of Article VI, of the U.S. Constitution:

This Constitution, and the Laws of the United States which shall be made in Pursuance thereof; . . . shall be the supreme Law of the Land; and the Judges in every State shall be bound thereby, any Thing in the Constitution or Laws of any State to the Contrary notwithstanding.

If Chicago does file for bankruptcy protection, it might set the stage for a seriously needed housecleaning throughout Illinois (State motto:  “Land of Corruption”).  I remember a conversation I had with an attorney from Louisiana who told me that Louisianans had a saying:  “We elect our governors to two terms:  one in the state house, the other in the big house.”  Well, four of the last seven Illinois governors went from the state house to the big house.  Hah!  See if you can beat that, Louisiana!

And it’s not just the governors.  Corruption is a way of life at all levels of government.  As reported by NBC News before (former) Governor, Rod Blagojevich, was convicted:

[The Culture of corruption’s] persistence was documented in Sept. 7, 2006 by the Chicago Sun-Times, which reported that at least 79 current or former Illinois, Chicago or Cook County elected officials had been found guilty of a crime by judges, juries or their own pleas since 1972.  The paper provided this tally of the tarnished: three governors, two other state officials, 15 state legislators, two congressmen, one mayor, three other city officials, 27 aldermen, 19 Cook County judges and seven other Cook County officials.  The article noted that so many aldermen had been jailed that the newspaper ran a front-page-story in 1991 when the year passed with none being indicted or convicted.

A Chicago bankruptcy might be just the move to bring to light the shenanigans that have led to insolvency at all levels in the state, from the state government itself, to Chicago, to other localities like Rockford.

Stay tuned.

 

Image courtesy of Flickr (Licensed) by Tiffany