Bankruptcy: Pain With Gain for Chicago
“Bankruptcy” is a dirty word that connotes failure, an ending — the antithesis of opportunity. For many, it’s unthinkable “to go there,” as if it were a dark place, replete with shame.
And indeed bankruptcy was once all of that. Those unable to pay their debts were thrown into dark jails to rot until relatives came up with money to pay off their debts.
Chicagoans should know that this barbaric treatment of debtors hasn’t been our law for hundreds of years. In a great innovation that unleashed capitalism, the law turned the tables on creditors and set debtors free.
Bankruptcy erases burdensome debt, requiring those who finance and facilitate failure to bear the losses associated with that failure. Bankruptcy means freedom, a new beginning and fresh opportunities. Bankruptcy is a painful process, but it’s pain with gain: a future free of excessive debt.
Mayor Lori Lightfoot revealed that the City of Chicago faces a deficit of nearly $1 billion, driven by debt, including bonds, unfunded pension and retiree health obligations and tort judgments. So far, she’s only talking about increasing taxes on, or cutting services to, Chicagoans, but there’s no upside to that strategy: It offers Chicagoans nothing but more pain. Instead, she should be talking about strategies for restructuring and reducing the city’s debts now, including bankruptcy, before things get even worse.
While “Chicago” is a (beautiful!) geographic place, the “City of Chicago” is actually an entity, akin to a business corporation. The city’s debts are solely the obligation of that entity, but the city passes its costs on to Chicagoans by imposing taxes and fees. These residents bear the municipality’s costs only while they remain Chicagoans; when people leave, they owe nothing to the city. Our individual freedom to choose and move thus limits the city’s power to pass on excessive costs through taxes. When government charges too much for too little service, residents search for and begin to choose alternative places to live.
Chicago’s population is already shrinking, which is powerful evidence that the city is already taxing too much for too little service: for too many residents and potential residents, the cost imposed to live here now exceeds Chicago’s many benefits, and so Chicago shrinks while dozens of other cities grow. As population shrinks, property values fall, increasing the burden of future expected taxes, driving the population and property values down even further. Increasing taxes further only exacerbates this cycle of failure.
The city needs to lower taxes to start growing again, but lower taxes would mean Chicago can no longer service its debts. Federal law offers a procedure for reducing those debts by commencing a case in bankruptcy court. A bankruptcy judge has the power under federal law to reduce the city’s liabilities, change its pensions, reorganize its functions into a more efficient ongoing structure and eliminate some of its debts — but the judge does not have the authority to raise your taxes.
Bankruptcy is a painful process because it forces creditors who facilitated the city’s failure to take a loss: bond holders, such as hedge funds, Wall Street bankers that sold the bonds and the people who are waiting to be paid for goods and services sold to Chicago, including past and current municipal employees. (The city can and will still be able to offer generous pension benefits to its workers, but perhaps with a cap limiting pensions of well more than $100,000 and without the automatic 3% COLA; the exact terms of any new deal would be hammered out in negotiations under the auspices of the court.)
But, bankruptcy offers an upside: a future free from fear of ever-increasing city taxes and improved services. If government confronts its problems now while Chicago’s core retains its current vibrancy, the city will still offer benefits that make it a wonderful place to live -- the lakefront, our skyline, our restaurants, museums, people and jobs -- all at a lower expected future cost in taxes charged by the reorganized government. Bankruptcy offers Chicagoans relief from bearing the accumulated burden of a generation of imprudent administration.
Chicago’s bankruptcy will likely be especially hard on the politicians who run the town. They bilked their base — the good folks who work for the City of Chicago — by saving only cents for every dollar of their promiscuous promises.
Understandably, municipal workers will not be happy with politicians for whom they campaigned and to whom they contributed millions upon millions of dollars over decades, even if the pension adjustments are modest in an absolute sense.
So, while reorganizing the city to lower its debts and trim liabilities would benefit Chicago’s residents, it will embarrass our ruling party and undermine its coalition with the people who work for the government they ostensibly run. That makes bankruptcy an unspeakably dark place for machine politicians: Unless pushed, they will delay the inevitable (until they can retire and move to Arizona themselves).
Mayor Lightfoot isn’t a product of the machine and so has latitude for action that machine politicians don’t have. She won with a broad coalition seeking change. While she isn’t “going there” yet, civic leaders should urge her to seek out a fresh start for Chicago by lowering taxes, restructuring debts and revamping the city’s organization in court.
This is Lightfoot’s moment: She didn’t make this crisis, but if she seeks higher taxes and less services instead of reform, Chicago’s population and property values will continue to bleed out. A bankruptcy restructuring is in Chicago’s future; it’s immoral to wait until empty buildings fill the downtown instead of cranes, and property values for “remainers” fall further toward zero.
Unfortunately, Lightfoot can’t make this happen on her own. Under federal law, the state must first authorize bankruptcy filings by municipalities before the city can avail itself of this procedure to restructure its debts.
Instead of lobbying Springfield to ask residents of other towns to pay Chicago’s debts, she needs Gov. Pritzker and the legislature to grant permission for the city to pursue a prudent financial reorganization and debt reduction through a federal bankruptcy procedure.
Convincing longtime politicians in her own party to permit this restructuring, many of whom will (justly) experience political pain for facilitating the city’s financial failure, may seem a daunting mission, but it’s the right thing to do for the people she sought to serve as mayor.