Bankruptcy considered as controversial option for financially stressed public sectors
Facing $6 billion in long-term debt, solutions to the crisis facing the Chicago Public School (CPS) system are subject of fierce debate these days in the Windy City.
On the one hand, Chicago Mayor Rahm Emanuel would like downstate and suburban taxpayers to bail out the CPS with increased support.
Then on Tuesday, the Chicago teachers' union rejected a contract offer containing $100 million in cuts, calling it an "act of war."
Meanwhile, Gov. Bruce Rauner has proposed replacing the current CPS board with a panel he would appoint to restructure debt by way of bankruptcy, as well as to engage the union in collective bargaining.
Whether the Illinois legislature would have to enact provisions for municipal bankruptcy where no such law exists, or whether a governor's executive order would suffice, remains an open question.
But, the debt restructuring action being proposed for CPS is not the first time in recent months that the controversial proposal was discussed by a public sector entity. Two months ago it was considered by a few associated with a Metro-East park district facing tens of millions of debt incurred through reckless spending and lax oversight.
"If this was a business, I would have had them in bankruptcy a long time ago," Paul Evans, former attorney for the Collinsville Area Recreation District (CARD), said during an interview at his O'Fallon office last month.
Evans submitted his resignation as CARD attorney on Dec. 15, in advance of a meeting in which he says he would have been negatively targeted for his controversial approach to relieving property tax payers of the extraordinary burden they face -- $23 million in current liability, ballooning to $45 million compounded over the long run.
He said that a CARD restructuring plan would have meant that each bond holder that carries portions of the debt would have had to waive some of what was owed by taking a reduction.
Complicating matters during the period of time when Evans was discussing the bankruptcy idea with CARD commissioners individually was word from a local bank that it would not refinance the district's roll-over bond so that it could make an approximate $1.7 million payment due on Dec. 1.
Evans said that under normal circumstances refinancing plans would have been wrapped up weeks before a due date.
"We did not have a reason to expect they would decline," Evans said.
The local bank has been contacted for comment, but has not responded to the request.
Evans suspects the bank may have had concerns over the prospect that CARD would be dissolved by voters in the district, which includes all of Collinsville and parts of Glen Carbon, Maryville and Pontoon Beach. The attractiveness of refinancing CARD's debt may have faded due to a grass-roots movement to put a dissolution referendum question on the March 15 ballot, or so Evans believes.
Last October, local leaders in favor of dissolution held a press conference announcing the plan - but the daunting task of getting 5,500 signatures collected by mid-December failed and the effort is no longer active, according to local officials.
As a default deadline approached on Dec. 1, Evans said that CARD was able to secure financing from an alternative investor outside the area with just 15 minutes to spare.
"It was extremely difficult to refinance what should have been routine bonds," he said.
There was concern that "we were rapidly approaching default on bond payment," Evans said.
He said that one of the biggest concerns was the "cascading" effect that could occur upon default if one bondholder sued to recover assets, then others potentially could follow suit to recover what they can.
"We could have had possibly 40 different lawsuits," he said.
Dave Tanzyus is one of five CARD commissioners who was elected to the board in 2011 after the district's shocking financial picture -- deep and growing debt -- became clearer.
The main drivers of the debt include the $5 million acquisition of the Arlington Greens golf course out of bankruptcy in 2007, and construction and operation of the district's Splash City water park.
Tanzyus said that the current board has done a good job of getting costs down over the past four years, but that it has been a challenge sorting out "20 years of neglect - that's how we got to this point. "
He said that when the local bank decided not to engage with CARD so it could make an annual bond payment, "it changed everything."
It was the 11th hour moment before default that led Tanzyus to believe, "we needed to look at other options."
Tanzyus said CARD's debt is "way over" its equalized assessed valuation.
"We don't have $23 million in assets," he said.
While discussions were taking place between Evans and individual members of the board on possible legal scenarios that could follow, those who resisted the concept of bankruptcy raised moral objections and practical ones as well, such as what it would do to public bodies in Illinois seeking to borrow money.
Tanzyus said he had been open to the idea of exploring a bankruptcy plan, but had not yet committed to it.
He said that with CARD coming so close to defaulting, the option for bankruptcy was worth considering because the danger posed by a potential onslaught of suits from bondholders was too risky.
"I don't think you want to play the 'who's going to sue, who's not going to sue lottery," he said.
As counter to moral objections, Tanzyus said bankruptcy is "part of life."
He said arguments that bankruptcy would hurt cities or communities don't hold up.
"If a city is well run, then it is not going to have trouble getting lending," he said.
He said it might require public officials to think long and hard about advancing spending proposals.
"Maybe it wouldn't be so terrible if they don't get a loan," he said.
From a restructuring standpoint, bankruptcy seemed like an OK proposition to explore, he said.
But one of the most ardently opposed CARD commissioners, Mark Achenbach, said he does not support the concept of using bankruptcy as a means for restructuring debt, saying it is a matter of "personal responsibility."
Achenbach said he "totally disagrees" with how former employees and commissioners allowed costs to run up, but that it nonetheless is CARD's legal burden to bear.
"I don't see how you screw bondholders," Achenbach said. "There's no one sticking a gun to (CARD's) head to go out and borrow this money and spend all the money. So why would go back and stick it to the bondholders. It's a point of fairness."
He said there is a big difference between public and private bodies that get underwater.
"We're not in the business of making money," he said. "We pay our debt with tax money."
He said there could be special circumstances in which bankruptcy would make sense, such as in the event of a catastrophe where a significant portion of tax base was "wiped out."
Achenbach said he doubted how an entity such as CARD could plead insolvency. "How do you go to a court and say you can't pay your debt when you actually have" a tax base from which to pay, he said.
"It stinks for property owners," he said. "But that's not the bondholders' fault."
He wonders what would happen to bond rates for any public body seeking to borrow money for projects, if CARD were to file for bankruptcy. He also wonders what kind of precedent it would establish.
"Once CARD does it, who next," he said.
Public debt: 'Destroying lives and property values'
Chicago Public Schools' (CPS) $6 billion long-term debt grows to a whopping $17.4 billion obligation when combined with the district's pension and health insurance liabilities. In order to avoid bankruptcy, CPS currently needs to issue $875 million in long-term bonds. Just last week, however, it delayed a high-interest rate bond sale, with a spokesperson saying the delay "was simply to give investors more time to evaluate the terms," according to a Fox Business report.
Without taking into account any other services that approximately 2.7 million Chicago taxpayers support, the CPS per capita debt is estimated to be $6,407, according to analysis conducted by the Illinois Policy Institute.
For CARD, a district that serves approximately 40,000 residents, the per capita long-term debt is $1,800 without taking into account any other services CARD taxpayers support.
An obvious difference between CPS and CARD is the nature of the debt. But one thing the taxing districts have in common is the pressure their debt puts on property values.
Ted Dabrowski, an analyst with the Illinois Policy Institute, writes extensively about public pension reform. He often is critical of lawmakers who fail to fully take into account problems with the state's massive unfunded liabilities across the spectrum of public sector pension systems. He further advocates for moving these systems away from defined benefit to defined contribution programs, such as what is common among private sector employees -- 401(k) type programs.
Dabrowski also suggests that getting a handle on the state's fiscal crisis not only requires the political will to implement structural reforms, but also requires helping property taxpayers understand the problems they face.
"People are angry," he said. "But they don't know who to point the finger at. They don't know how to define the anger. It's too complex."
Dabrowski described the harm of public debt as "destroying lives and property values."
"Property tax is the one thing that politicians get them (the people) on," he said. "It's not like sales tax where you can choose whether or not to buy something. They attack where you live, because you are stuck."
He pointed to public sector salaries for teachers, firefighters and police that may not be in line with what a community can support, which puts downward pressure on property values.
Dabrowski said there's "something wrong with a system when someone comes in from outside of the district and earns a $90,000 salary, and over time they earn a $3 million pension."
He said that one of the reactions heard while trying to explain why that kind of math is problematic for communities, is, "Don't yell at them."
But, he said, "It isn't their fault.They're doing what their contract says.
"Yet, the people who have to pay for that may earn a lot less," and they may live in homes that are worth a lot less, he said.
When asked what happens to the real estate market when property tax bills continue to rise year after year, Dabrowski said, "Nobody is going to pay the property tax, so they buy the house at half the price."
Dabrowski also said another danger to communities is when people start disappearing.
That trend has been analyzed by the Illinois Policy Institute, and it concludes that the state is losing one person to another state every five minutes.
"The tax base goes...and you are done," he said.
Organizations in this Story
10 Gateway Drive
Collinsville, IL - 62234