Illinois’ municipal distress is severe and we have witnessed the political maneuvers  to address Chicago’s ongoing fiscal dilemma.  In 2013, Chicago Mayor Rahm Emmanuel stoked bankruptcy fears citing the city’s ballooning pension obligations that he estimated could exceed $1.6 billion in 2016.  Pew Charitable Trusts has reported that among the nation’s five largest cities, Chicago has put aside the smallest portion of its looming pensions obligations.  While certain changes have been made to counter the pension funding deficit, including Governor Quinn’s hotly contested and subsequently litigated pension reform legislation now under review by the Illinois Supreme Court, attempts at meaningful pension reform have failed.  In November of last year, the Chicago Civic Federation (a non-partisan government research organization working to maximize the quality and cost-effectiveness of government services in Chicago) criticized the mayor’s failure to adequately address the City’s pension plans which the City reports are currently funded only at 50% level with a total current unfunded liability of $26.8 billion.  To put this in context, at this funding level in the private sector, the Pension Benefit Guaranty Corporation would likely step in.  There is no such entity to step in and address severely underfunded public pension plans.  Left with wholly inadequate pension reform, Chicago, as well as many other Illinois cities and other municipalities may find restructuring pension obligations in a Chapter 9 bankruptcy an attractive strategy.   But, could Chicago follow Detroit into Chapter 9 bankruptcy?

Current Illinois law does not permit Chicago or other Illinois municipalities to immediately file for bankruptcy.  That could change if a bill filed in the Illinois legislature this week becomes law.  In order for Chicago or any U.S. city to file for Chapter 9 bankruptcy, the city must be authorized by state law to file a bankruptcy case.  Without such specific authorization, the bankruptcy process simply is not available.

Currently, 11 states allow cities and other municipalities blanket authority to file bankruptcy.  These states include Arizona, Florida and Texas.  Another 17 states allow Chapter 9 filings but set certain conditions that must be met before the city may file.  These states include California, Michigan, New York, Ohio and Pennsylvania.  Currently, Illinois does not permit a municipality unchecked or immediate authority to file bankruptcy. Indeed, with the sole exception of the Illinois Power Agency, no Illinois municipality is authorized to file for bankruptcy.  Illinois would have to enact specific authorizing legislation to enable municipal bankruptcy filings.

On January 26, 2015, Illinois Representative Ron Sandack filed House Bill 298 with the Illinois House of Representatives that, if enacted, would allow Chicago and other Illinois municipalities to file for bankruptcy immediately without any additional action by the legislature or other state agencies.  Rep. Sandack was quoted by the Chicago Tribune as saying “House Bill 298 would allow desolate and debt-ridden municipalities in Illinois to seek bankruptcy protections through the federal bankruptcy law.  As more and more municipalities are looking for relief and ways to deal with rising pension liabilities and other costs, this is a tool that can help them stabilize and reorganize financial affairs in ways that benefit taxpayers.”

House Bill 298 has been referred to the Rules Committee for review.  It is far too early to know whether passage is likely.  But the bill is clearly intended to give Chicago maximum flexibility in devising ways to tackle its fiscal distress.  We will continue to watch developments on the legislative front and keep you informed.