CHICAGO — Illinois Gov. Bruce Rauner's promotion of Chapter 9 as an option for some local governments may hinder efforts to help resolve fiscal struggles in a way that protects bondholders, Fitch Ratings warned in a special report.
"Recent developments in Illinois and New Jersey are lessening the chances of state intervention that could result in better outcomes for bondholders than allowing distress to lead to bankruptcy," Fitch wrote in the April 20 report.
"We believe efforts to resolve looming budget deficits and ensure the affordability of long-term obligations would be more productive than focusing on easing laws or practices to allow bankruptcy," Fitch wrote.
Illinois' rookie Republican governor included a proposal to add a Chapter 9 provision to state statutes as part of his turnaround agenda. A hearing was recently held on a Republican-sponsored municipal bankruptcy bill but it's failed to gain much traction in the Democrat-controlled General Assembly. Unions charge the governor is using the threat of bankruptcy to give local government units more leverage in negotiations on pensions, benefits, and wages.
Fitch noted Rauner's recent comments that bankruptcy might be an option for Chicago Public Schools "further fueling concerns about the credit quality" of the district, which has been stung by a steep credit rating slide as it grapples with a $1.1 billion deficit and $9.5 billion of unfunded pension obligations.
Chicago and other local governments are struggling with public safety pension payments that will skyrocket next year under a state mandate to stabilize those funds. They are hoping for state help on pension reforms.
Fitch said fiscal intervention mechanisms vary by state with most focused on helping local governments recover from distress, rather than preventing it. Restrictions on their ability to impact some union collective bargaining agreements including pension obligations "limits their ability to remediate financial distress," wrote the report's authors Amy Laskey, a managing director, and Rob Rowan, a senior director.
The Chicago Civic Federation is pressing lawmakers to consider a measure developed by municipal restructuring expert James Spiotto to create an authority designed to intervene before a government's fiscal strains reach crisis stage.