CHICAGO – Chicago Mayor Rahm Emanuel and Chicago Public Schools may want to re-think their dismissive stance on Chapter 9 as an option in righting their financial ships, two well-known market players said.
"I'm never going to take bankruptcy off the table," said Kevyn Orr, a restructuring specialist and partner at Jones Day who was Detroit's emergency manager when the city made its historic Chapter 9 filing in July 2013.
He was answering a question posed Wednesday during a panel discussion at the Future of Chicago conference hosted by Crain's Chicago Business.
"It is a tool in the federal law that allowed the city of Detroit to correct a trajectory that was unsustainable," Orr said.
Illinois does not currently give local governments the option to pursue bankruptcy and city and Chicago Public Schools leaders have rejected Gov. Bruce Rauner's suggestion that adding such a statute could aid them.
Municipal finance veteran Richard Ravitch agreed with Orr that Chapter 9, or even the threat of a Chapter 9, aids in the brokering of agreements. The prospect of bankruptcy was helpful in steering New York City away from the brink of insolvency during its 1975 financial crisis, he said.
New York City would never have been able to reach the agreements it did with its unions and banks or secure federal government help If New York City had not the right to file under the bankruptcy law, said Ravitch, a Volcker Alliance board member and former New York lieutenant governor.
The city was two hours away from filing a bankruptcy petition when the teachers' pension fund agreed to lend the city $200 million, Ravitch recalled.
Orr's comments came in response to a question on whether a bankruptcy filing would provide an effective means for Chicago to deal with its fiscal ills
Orr made clear that Chicago is not currently in a comparable mess to Detroit -- which suffered from a weakened tax base and was unable to support a burdensome pension and bonded debt load -- but said its problems are clear.
"The math does not lie….the trajectory that you are on is not going to change," Orr said. "It's just math … the willingness of the elected officials and the counterparties both in the financial community and in the public sector side to sit down at a table and make rational and difficult decisions with the support of the state is the wild card."
Orr said the hope is that parties can come together to compromise outside of bankruptcy but in his public and private experience "bankruptcy actually accelerates that discussion because it becomes real, real quick…it's time to drop the gamesmanship and get at the bargaining table and get down to business."
Another panelist, Laurence Msall, president of the local government research organization the Civic Federation of Chicago, took a different tack.
"We don't believe that bankruptcy would be an effective way for either the Chicago Public Schools or the city of Chicago to deal with their financial challenges," he said, adding that Chicago has the assets and tax base to meet its obligations.
Bankruptcy doesn't add new money to the equation. The federation instead has pitched the establishment of quasi-governmental body to help steer local governments through fiscal strains and help with stakeholder negotiations.
Chicago has made strides in trimming its structural budget deficit in recent years but its roughly $20 billion unfunded pension tab has dragged its credit down to a low of junk from Moody's Investors Service. CPS is grappling with rising teachers' pension payments, a $1.1 billion deficit, and potential strike with its pleas for state help caught up in political gridlock that has stalled passage of budget for fiscal 2016 or fiscal 2017.
