Winds of Insolvency Blowing Around Chicago

A year ago I posted here about the fiscal crisis looming over the City of Chicago.

Quoting my quote from an article in Data Analytics Illinois,

As the state’s economic engine, Chicago’s pension problems demand a fix beyond short term strategies that compound the longer-term problem. After decades of corruption and mismanagement, officials cannot tax or borrow their way out of the fiscal crisis.

If matters were so bad then, you may be wondering, why hasn't the shoe of Chapter 9 municipal bankruptcy fallen? The answer to that question is two-fold: super-low interest rates and political inertia. Neither of those phenomena is likely to go away in the near future so, one might think, there's no problem, right?

Wrong. 

You can go here to read the Wall Street Journal opinion piece "Chapter 9 Is the Best Bad Option for Chicago's Pensions." Some tidbits:

In 2016, the contribution [for employee pensions] for 2022 was projected to reach nearly $2 billion, 4.3 times what it was for 2014. Despite this gargantuan contribution, the pension plans’ funded ratio was projected to plummet—from a poor 31% in 2015 to an alarmingly low 26% in 2021. (Emphasis added.)

And it's gotten worse:

It’s no longer credible to claim Chicago can work its way out of the huge hole it has dug for its pension plans over the past 20 years. From 2000-19, their funded ratio dropped from 83% to 24%. Even before the pandemic, Chicago lacked the resources to make $2.3 billion in annual pension contributions. Never mind making such payments year after year for decades to come.

So what's to be done? 

Fortunately, there is a viable alternative. Chicago has the wherewithal to fund its pensions and provide public services. But it can’t do those things and also service its debt. Chapter 9 of the U.S. bankruptcy code provides a means to cancel a great deal of that debt.

In other words, give the bondholders a haircut. That's easier said than done but it is possible, as Detroit showed (here but also here). The opinion piece has three premises, which might be true; I'm not sure. First, that Chicago's pension obligations have priority over its general obligation (GO) bonds. Second, that revenue bonds have priority over pension obligations. And third, that Chicago could confirm a plan of adjustment whacking GO bonds even though the Bankruptcy Code prohibits "unfair discrimination." The Bankruptcy Court in San Bernadino's Chapter 9 reluctantly bought this argument even though California law seemed relatively clear. I'm not as sanguine about Illinois law. The Bankruptcy Court in Detroit's Chapter 9 put enough pressure on the GO bondholders in Detroit to get almost all of them to settle (here and here) but we can expect the battle to be much harder in Chicago's case.

None of my concerns means that Chicago should not file Chapter 9. It is almost certainly the case that waiting will only make matters worse. But everyone should also understand that adjusting Chicago's debt at the expense of its GO bondholders will not solve the underlying demographic and political problems that are endemic to late-modern political and economic liberalism.