 Illinois Democrats have started talking tough about financiers, proposing a new
“privilege tax” on investment income that would drive much of the financial
sector out of the state. But the same Democrats who are publicly cheering for a
tax on investors are quietly working to pass legislation that would bail out
bankers and cash-strapped local governments.
Democrats are moving at least five bills in the General Assembly that would
encourage more borrowing by local governments and would make sure banks and
bondholders get paid first – ahead of social service agencies, pensioners and
anyone else owed money – if those governments go broke.
Banks and local governments should bear the cost of their own mistakes. But the
proposed legislation would bail them out if things turn south.
The bailout bills
Senate Bill 10, if enacted, would create a mechanism for a backdoor bailout of
bondholders and broke governments. SB 10 would allow home rule municipalities,
such as Chicago, to issue new debt that gives lenders special protection in case
the municipality fails to pay them back. The protection would be a first lien on
state distribution dollars that go to that local government. The language of SB
10 is clearly written to address issues of insolvency.
Bankruptcy attorney and former adjunct law professor Mark Glennon described SB
10 thus:
When I practiced law I taught secured lending and bankruptcy as an adjunct at
the University of Texas Law School. I can imagine giving an assignment like
this: “Draft a bill to make bondholders supreme by stiffing the public and
taxpayers.” If somebody handed in Senate Bill 10, they’d get an A+.
SB 10 was included as part of the Illinois Senate’s proposed “grand bargain.” SB
10 is clear evidence that the grand bargain was never about ordinary
Illinoisans. It was always about special interests – in this case, banks and
broke local governments.
Senate President John Cullerton sponsored SB 10, which passed out of the Senate
with all Democratic votes.
House Bill 278 complements SB 10 because it increases state distribution dollars
to local governments by $300 million per year by boosting the Local Government
Distributive Fund. HB 278, sponsored by state Rep. Anthony DeLuca, D-Chicago
Heights, increases the very type of state distributions to local governments
against which banks could make the first claim if SB 10 passes, making the two
pieces of legislation a creative way to give a backdoor bailout to local
governments and their bondholders. HB 278 had 33 cosponsors, all Democrats, and
passed the Illinois House with the overwhelming majority of votes in favor
coming from Democrats.
House Bill 2584, also sponsored by DeLuca, is yet another bill that gives banks
and bondholders the first spot in line if a local government gets in trouble. HB
2584 is perhaps the worst of all the bailout proposals, because it puts a
blanket mortgage on all of a local government’s future tax revenue in order to
pay bondholders ahead of taxpayers and government services.
This is a huge giveaway to bondholders – it even gives the bondholders a
statutory first lien on future tax dollars for bonds that were issued in the
past under different terms. If HB 2584 becomes law, it will be a handout to
bondholders likely worth millions or perhaps billions of dollars, courtesy of
the Illinois General Assembly. HB 2584 passed out of the House Cities and
Villages Committee on a unanimous vote.
House Bill 3004, sponsored by state Rep. Al Riley, D-Hazel Crest,
extends a state treasury bailout mechanism to the Chicago Transit
Authority, or CTA, and the Regional Transportation Authority, or
RTA. The bill would also allow RTA to borrow more money for a longer
period of time. Furthermore, HB 3004 creates a way for the Illinois
treasury office to buy the CTA’s and RTA’s bad debts to bail out the
CTA, RTA and their investors.
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 The bill says that if the state treasury invests money in CTA’s
interim financing notes and CTA is unable to pay back those debts,
the treasury can skim the state dollars that are distributed to CTA.
The language of HB 3004 is clearly written to address issues of debt
default.
HB 3004 also extends an increase in the amount of short-term
borrowing RTA can undertake above and beyond its $800 million debt
cap. Current law allows RTA to issue working cash notes that are
$100 million beyond its debt limit, but the law says RTA can take on
as much as $300 million in debt beyond its limit if it enters into
those agreements before July 1, 2018.
HB 3004 amends current law to allow RTA to issue working cash notes
and establish lines of credit of up to $300 million beyond its debt
limit so long as those agreements are entered into before July 1,
2020, rather than July 1, 2018.
Another of Riley’s bills, House Bill 3005, expands a mechanism by
which the state treasurer can purchase the bonds of broke local
governments in order to bail out those governments and the financial
institutions that hold the governments’ bonds.
This would allow the treasurer’s office to pick winners and losers
in the municipal bond market. Like SB 10 and HB 3004, this bill
creates a mechanism by which state distribution dollars would go
directly to the treasury for debt service instead of to the local
government. That means money will go to bondholders or the treasury
before it will go to local government services, pension payments and
taxpayer relief.
While Illinois law seemingly restricts potential treasury
investments to high-rated bonds, the language of HB 3005 is clearly
written to address issues of debt default. When a local government
gets in trouble, it will take a simple amendment of law to allow the
treasury to use its expanded powers to buy the bad debt.
Interestingly, HB 3005’s Amendment 2 specifically includes bailout
provisions for the debt of the CTA and the RTA. The transit
authorities have significant debt and pension problems.
Why are Illinois politicians preparing to bail out bondholders and
broke governments?
As the state teeters toward bankruptcy and local finances fall
apart, politicians shouldn’t be focused on moving legislation to
bail out the banks and broke local governments that made mistakes –
they should prioritize taxpayers and people who need government
services.
These bailout bills are the exact opposite of how state and local
governments should approach impending debt defaults. The reason
governments default on debts is because they have out-of-control
spending and owe too much money. They need to restructure their
finances so they can lower spending, cut debts and give their people
a fresh financial start instead of endlessly throwing good money
after bad. That’s the purpose of bankruptcy. It’s not pretty, but
it’s sometimes necessary.
These bailout bills would turn Illinois’ immense debt problems into
guaranteed profits for banks and bondholders and a lower standard of
living for other Illinoisans.
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