State can't declare bankruptcy
URBANA — Unlike the city of Detroit, the state of Illinois cannot declare bankruptcy. Federal bankruptcy laws don't allow it.
"It's not provided in the federal bankruptcy laws. There is a provision for municipalities and any other kind of organization in the state to go bankrupt, but not the state itself," said Professor J. Fred Giertz, an economist who is director of the University of Illinois' Institute of Government and public Affairs.
And although there has been some talk of changing federal law to permit states to reorganize their financial obligations through bankruptcy, it hasn't gone far.
"In the United States we have a federal system where the states have powers that are protected from the national government, so there's a real question about supremacy and whether the federal government can impose bankruptcy rules on the state, which is supposed to have powers that are protected from the federal government," Giertz said. "I don't think there's any likelihood it's going to be approved by Congress anytime soon."
The good thing about bankruptcy, Giertz said, "is that it structures an insolvency. Bankruptcy makes the bankrupt organization go to court and then there's an orderly process in dealing with the obligations they have."
That's part of Illinois' current financial problem where pension payment obligations are shoving aside budgets for education, health care, higher education, corrections and more.
Former Florida Gov. Jeb Bush has argued that states should be able to declare bankruptcy, Giertz noted.
"States can't go bankrupt, but they can become insolvent since they can't pay their bills. The question then is, what do you do then?" Giertz said. "I think what Bush would say is that when an organization becomes insolvent, it's probably better to have some rules about how to deal with it rather than just catch as catch can.
"I'm not saying the state of Illinois is bankrupt or should go bankrupt, but in bankruptcy it's a question of who gets paid and who doesn't get paid."
In Illinois, he said, lawmakers are facing a number of pension reforms, all of which call for some level of change in retirement payment obligations.
"We're basically talking about how do we give pensioners a haircut? When they talk about pension reform, it's really pension default, with the question being how do they handle the default. The argument could be that it might be better ... to have more structure to that rather just an ad hoc sort of thing."
Another rhetorical question from Giertz: "Why are state bondholders protected when state pensions are not? There might be a good reason for that, that you want to issue bonds in the future. But if the state is in such dire shape that it has to renege on its pension obligations, why not include the bondholders in the game as well? Now, it's sort of an hoc thing where if there was a bankruptcy, it would have been more formal."
Giertz believes there are many local governments "doing much worse than the state of Illinois. The fire and police pensions are usually done at the local level and there are all sorts of problems there in particular, a lot of municipalities have given away the store in terms of benefits. The state of Illinois, its problem has been underfunding. And the problem with local governments is that when you have a city, people can just move away. They're not probably all going to move away from the state of Illinois.
"So a city can be left high and dry. That kind of movement, like in Detroit, makes it even worse for a local government."