Illinois faces unfunded pension liabilities, and the cities and towns of the state are responsible for those pension obligations.
“The states have to authorize the state and/or local governments to take advantage of Chapter 9 and if a state does not provide authorization, then local communities are prohibited from declaring bankruptcy or utilizing a Chapter 9 proceeding,” explained Glenn Thomson, partner in Alston & Bird’s Public Finance Group.
He said detractors are likely “in part [to be] everybody that holds either a bond obligation or some other pension obligations for a city and is expecting payments and does not want the city or county to have a mechanism whereby their payments can be reduced. Whether or not some people think that’s short-sighted, you can debate. But if you’re a bondholder, you may feel there is some benefit in holding bonds for a municipality that is prohibited from filing for Chapter 9.”
Thomson also noted that some of those who oppose changes allowing municipalities to enter bankruptcy court could be those holding city pension and unions, in addition to bondholders.
Thomson highlighted that some states are getting “creative” in how municipalities should deal with distress, citing Michigan as an example and its adoption of an emergency manager process that was implemented in the Detroit bankruptcy case.
“Different states are looking at different solutions to this kind of problem,” he said.