credit crunch

Bill Introduced To Permit Illinois Municipalities To File For Bankruptcy

Since I started blogging about a U.S. financial crash back on Memorial Day Weekend 2007, I’ve believed one casualty will be municipal government. Particularly in Illinois. So imagine my non-surprise when I spotted an article on the Chicago Tribune website a couple of days ago about proposed legislation at the state level granting Illinois towns the authority to file for bankruptcy. Nick Swedberg of the Associated Press wrote on March 26:

Stressed by pension debt, other financial issues and the possibility losing a chunk of their state aid, some Illinois cities want the option to file for bankruptcy. They’ve found an ally in a Republican lawmaker, who’s proposed legislation to allow municipalities to follow in the footsteps of Detroit and other cities in restructuring debt and paying back creditors…

Rep. Ron Sandack is sponsoring legislation that would grant authority for communities to file for bankruptcy under Chapter 9 of the federal code. The Downers Grove Republican says it’s a “measure of last resort,” especially with Gov. Bruce Rauner’s proposal in next year’s budget to cut in half the local governments’ share of state income taxes by 50 percent.

“It’s just giving time and space to do things right,” he said…

Swedberg added later in the piece:

Municipal bankruptcies are rare, NCSL data shows. Of 37 local government filings since 2010, only 8 were cities, with the majority filed by utilities and special districts.

Detroit filed for the nation’s largest municipal bankruptcy in July 2013, looking to restructure $12 billion of debt…

It’s true. Municipal bankruptcies haven’t happened too often. But keep in mind what Eric Weiner wrote on the NPR website back on February 28, 2008:

For most of U.S. history, cities and towns were not eligible for bankruptcy protection. But during the Great Depression, more than 2,000 municipalities defaulted on their debt, and they pleaded with President Roosevelt for a federal bailout. “All they got was sympathy,” reported Time magazine in 1933. Instead, Roosevelt pushed through changes to the bankruptcy laws that allows towns and cities to file for bankruptcy. They even got their own section of the bankruptcy code: Chapter Nine…

(Editor’s note: Bold added for emphasis)

There’s also this from Robert Slavin on The Bond Buyer website back on January 14:

For the municipal bond industry, 2015 marks the midpoint in what may turn out to be the decade of the bankruptcy.

Four of the five largest municipal bankruptcy filings in United States history have been made in roughly the last three years, a trend analysts attribute to the aftereffects of the 2008 credit crisis and Great Recession, as well as changing attitudes about debt.

“The crash of 2008 and five years of stagnation preceded by years of escalating wages, pensions and Other Post-Employment Benefits set the stage for our recent Chapter 9 filings,” said Arent Fox partner David Dubrow.

Chapter 9 municipal bankruptcy was adopted in 1937 but had been rarely used, particularly by large governments. However, since November 2011 San Bernardino, Calif., Stockton, Calif., Jefferson County, Ala., and Detroit have filed four of the five largest bankruptcies as measured by total obligations.

(Editor’s note: Bold added for emphasis)

Could the specter of Meredith Whitney, the “Diva Of Doom,” be returning to take revenge on the municipal bond industry?

I’m not surprised Illinois municipalities would be interested in House Bill 298. From Patrick Rehkamp and Andrew Schroedter on the website of the Chicago-based Better Government Association back on December 6, 2014:

Reasons for filing vary but often include troubled public development projects, unanticipated hefty legal judgments against a taxpayer-backed entity, or massive pension and bond debt payments that leave a municipality cash-strapped and unable to cover operating costs of employee salaries, vendor payments and other expenses.

(Editor’s note: Bold added for emphasis)

The public pension crisis in Chicago and Illinois has been well-publicized for some time now. And while such entitlements are supposedly protected by a provision in the 1970 Illinois Constitution, the BGA noted in their piece:

In Illinois, public employee pensions are guaranteed by the state constitution. But in the Detroit and Stockton, California bankruptcy cases, federal judges have ruled that pension benefits can be adjusted, the same as other debts, despite a constitutional guarantee.

(Editor’s note: Bold added for emphasis)

You can track the progress of HB 298 on the Illinois General Assembly website here.

Christopher E. Hill
Survival And Prosperity (www.survivalandprosperity.com)

Sources:

Swedberg, Nick. “Bill pushes for possible municipal bankruptcies in Illinois.” Associated Press. 29 Mar. 2015. (http://www.chicagotribune.com/news/sns-bc-il–closer-look-bankruptcy-20150329-story.html). 3 Apr. 2015.

Weiner, Eric. “What Happens When City Hall Goes Bankrupt?” NPR. 28 Feb. 2008. (http://www.npr.org/templates/story/story.php?storyId=60740288). 3 Apr. 2015.

Slavin, Robert. “Why So Many Big Bankruptcies?” The Bond Buyer. 14 Jan. 2015. (http://www.bondbuyer.com/news/markets-buy-side/why-so-many-big-bankruptcies-1069539-1.html). 3 Apr. 2015.

Rehkamp, Patrick and Schroedter, Andrew. “Next Up: Illinois Municipal Bankruptcy?” Better Government Association. 16 Dec. 2014. (http://www.bettergov.org/next_up_illinois_municipal_bankruptcy/). 4 Apr. 2015.

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TARP Update: $119 Billion Still Owed, Could Eventually Lose $60 Billion

The Troubled Assets Relief Program, which was widely reviled as a $700 billion bailout for Wall Street titans, is now expected to cost the federal government a mere $25 billion – the equivalent of less than six months of emergency jobless benefits.

Washington Post, November 30, 2010

The government’s bailout of banks may cost U.S. taxpayers nearly two times more than originally estimated, according to the Congressional Budget Office.

The Troubled Asset Released Program, better known as TARP, will cost the federal government $34 billion, the CBO reported on its director’s blog.

-Huffington Post, December 16, 2011

$25 billion. $34 billion. These days, the U.S. government thinks TARP could eventually lose $60 billion. From Ronald Orol on the MarketWatch website early this morning:

Taxpayers are still owed $119 billion in outstanding Troubled Asset Relief Program funds, a watchdog for the government crisis response program said Wednesday in a quarterly report to Congress.

That number is down from $133 billion in TARP funds owed as of January, according to the author of the report, the Office of the Special Inspector General for the TARP. The government expects TARP to lose $60 billion.

The program was set up during the height of the financial crisis of 2008 to stem a growing credit contagion by providing taxpayer-funded capital injections into big and smaller banks.

(Editor’s note: Italics added for emphasis)

Opponents of TARP have argued that the bailout would end up wasting a huge chunk of taxpayer funds. Supporters of the program have responded that the U.S. financial system was in serious danger if these funds weren’t provided.

Source:

Orol, Ronald D. “Taxpayers still on hook for $119 bln in TARP funds.” MarketWatch. 25 Apr. 2012. (http://www.marketwatch.com/story/taxpayers-still-on-hook-for-119-bln-in-tarp-funds-2012-04-25). 25 Apr. 2012.

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Wednesday, April 25th, 2012 Bailouts, Banking, Credit, Government No Comments

Quote For The Week

The 2008 crash vindicated the theory of the Austrian school economists, who had predicted precisely such a credit crunch in remarkably specific terms. Yet the official response, even from notionally Centre-Right governments, was overwhelmingly Keynesian…

It’s paradoxical: at the moment they have most demonstrably lost the argument, Keynesians have assumed almost total control of public policy. Only when we see the long-term price of our current policies – statism, sclerosis, inflation and bankruptcy – will their ideological grip finally be loosened.

Keynes was famously nonchalant about this drawback. “In the long run,” he observed, “we are all dead”. But this isn’t true. Or at least, it isn’t true from the point of view of those of us who, unlike Keynes, have children.

-Daniel Hannan, British legislator, journalist, and author of Why American Must Not Follow Europe, in the online edition of The Telegraph (UK) last Friday

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