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Introducing “Bankruptcy Lite”!

Thursday October 12th, 2017   •   Posted by Craig Eyermann at 6:25am PDT   •  

Not quite bankruptcy lite, but as close as could be found in the stock image database! Earlier this week, we mentioned that if a fiscally strapped local government cannot tax or cut its way out of its debt burden, and won’t take action to directly reduce its most costly liabilities, then bankruptcy is a viable third option to preserve the interests of those who reside within the government’s jurisdiction.

But there may be another action that local government politicians and bureaucrats might take before it comes to that! A fiscally strapped local government can trade away its control over its revenue without filing for bankruptcy, as was proposed just last week by the nation’s most heavily debt-burdened city–Chicago:

Under a plan announced on Wednesday by the mayor’s office, Chicago would create a new entity to issue bonds backed by city’s share of Illinois sales tax collections in an effort to reduce its borrowing costs….

Illinois’ fiscal 2018 Illinois budget, which was enacted last month, included a provision allowing home-rule local governments like Chicago to assign their state revenue to an entity for the purpose of issuing debt.

Carole Brown, Chicago’s chief financial officer, said the state sales tax dollars would flow first through the new entity to meet debt service and other requirements before any of the revenue is released to the city’s general fund.

Chicago’s city government is effectively recognizing that allowing its politicians and bureaucrats to have full control over its revenue is harming its credit, where their proposed solution involves taking a significant portion of that control away from themselves. Not to the same extent as would happen if the city were to officially declare bankruptcy and have its fiscal management taken over by a court-appointed receiver, but certainly a step forward in that direction.

Think of it as “Bankruptcy Lite” for Chicago politicians! The question now, however, is whether Chicagoans would benefit more from a real bankruptcy process, which fully restructures and reduces its liabilities to affordable levels, or from the “lite” version being promoted by city officials – including the mayor – who benefit by getting to keep some of their power over the money they receive from taxes imposed on Chicago’s residents.

If the choice for Chicago residents is now between bankruptcy and “bankruptcy lite”, why settle for anything less than grabbing all the gusto they can from a full bankruptcy?

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October 2017