Illinois Governor Bruce Rauner has decided that allowing his state’s municipalities to declare bankruptcy is an important arrow in his quiver to break “the corrupt bargain that is crushing taxpayers”—namely union influence and membership rates in Illinois. ….
…. So the recent big city Chapter 9’s eliminated costly health care benefits and deeply discounted capital market creditors’ debts, but nonetheless preserved most of their pension payments. Why they struck that balance is critical for Illinois voters and politicians to understand. Rationales in each city varied, but two main themes emerged.
First, the plan authors in Detroit saw that cutting their retirees’ benefits would sink many retirees below the poverty line in the city and the region. This was a painful humanitarian reality, but so too was it an economic one: a municipal debtor has to be stable enough to pay its obligations under its bankruptcy plan. More concentrated local poverty does not help. A second main argument against cutting pension benefits showed up in Stockton. Officials determined that cutting benefits and thereby being excluded from the state pension system would make the city uncompetitive for public employees, especially police. That was a hard pill to swallow for a city with a spiking homicide rate and no cash to spare on competitive wages. Many other concerns surfaced in both cities as well, but they amounted to a bottom line determination that there were vanishingly few fat cat pensioners to be found, and the municipalities would be even worse off—as a debtor, as a city—if they cut into their retirees’ payments. (Because these big cases and others have effectively settled, the legal fairness of the decision not to cut pension payments has never been tested by a higher court, but there are compelling arguments that these decisions are consistent with Chapter 9.) …..