Chicago SHOULD declare bankruptcy

For some analysts, bankruptcy would be a disaster for Chicago. For others, it would be impossible because it isn't permitted (yet) by state law.

But here's a school of thought asserting that bankruptcy for Chicago (and Chicago Public Schools) is not only possible, but advisable.

Scott Stantis/Chicago Tribune

Scott Stantis/Chicago Tribune

It is proposed by Center for Pension Integrity (CPI) is a not-for-profit, non-partisan public policy institute determined to educate the public about Chicago's pension fund mess and to put forward a comprehensive settlement. It is headed by Ed Bacharach, retired chairman and CEO of Bachrach Clothing Inc., a Chicago-based national retailer of men’s fashions.

Acknowledging an Illinois Supreme Court ruling that the state constitution prohibits a diminution of public employees' pension benefits, Bacharach boldly states:

In order to arrive at a comprehensive settlement – and the only way to solve this immense problem without a massive property tax increase – is for U.S. bankruptcy law to trump the Illinois constitution by voiding contracts enforced by state laws.

He also acknowledges that Illinois law does not permit a municipal bankruptcy, he argues that a U.S. bankruptcy court has the power to override the state constitution by "voiding contracts enforced by state laws."

In effect, the threat or the reality of a bankruptcy would force all parties, including the city and the public employee unions to sit down and hammer out a comprehensive solution that will require everyone to sacrifice.

Not being a lawyer, I don't know if this is a valid, merely a novel or an obviously incorrect reading of the U.S. Constitution and case law. But his argument deserves a hearing. He outlines them in detail in a 42-page white paper:

The only law that can override the state constitution is the US bankruptcy code. Bankruptcy courts can break contracts that state courts have upheld. Currently, the State of Illinois does not allow a municipality or any or municipal body (like CPS) to file for bankruptcy protection. Nevertheless, the City of Chicago and CPS have been running budget deficits for the past few years and have increased borrowing every year.

A city, business, or person can be in fact bankrupt but may not have been found to be so by law. Being bankrupt in fact is called de facto bankruptcy. Being found bankrupt by a court is called de jure bankruptcy. Many experts reject the idea of de jure bankruptcy as being bad for Chicago. They are right. What they don’t acknowledge, though, is that the city is already bankrupt. This is not a choice between bad and good. It is a choice between bad and worse...

The City of Chicago and CPS are de facto bankrupt. Both entities cannot pay their bonded indebtedness. They borrow each year to extend the term of their loans and pay the interest. The indebtedness grows, the bond ratings fall, and the interest costs rise. And they still struggle to make their required pension payments – which, though required by current law, are still insufficient to keep the unfunded liability from growing.

Here's my earlier post on Chicago's possible bankruptcy.

John Kass weighs in on CPS bankruptcy.

Read why Americans need to learn about the nation's most ignored war. 

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  • Yes.

  • Moral bankruptcy was declared decades ago. It's time to follow on the fiscal side.

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