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Illinois Governor J.B. Pritzker (D) yesterday called on state lawmakers to pass legislation this fall to consolidate nearly 650 police and firefighter retirement systems that are causing funding headaches for many local governments, Reuters reported. Pritzker said that the current system of governments maintaining their own pension funds “is failing,” noting that the formation of two new statewide funds would generate as much as $2.5 billion in additional investment returns over the next five years. “If adopted by the General Assembly, it would be a monumental achievement in the history of our state,” Pritzker told reporters. Ballooning pension liabilities for some cities have led to budget cuts and credit rating downgrades. The city of Alton, Ill., sold its regional wastewater system earlier this year to raise money for its pensions. The aggregate funded ratio for firefighter and police retirement systems outside of Chicago fell to 55.47 percent in 2017 from 57.58 percent in the prior year, according to a July report from the Illinois Legislature’s Commission on Government Forecasting and Accountability. Unfunded liabilities rose by $1 billion to $11 billion.

As Congress had to create a new law to allow Puerto Rico to declare bankruptcy, some academics and analysts say that the territory's debt plan — if ultimately approved — could be a pathway for states to declare bankruptcy (not allowed under U.S. law), according to a San Diego Union-Tribune commentary. Eight out of 12 experts interviewed said that the Code should not be changed to allow states to declare bankruptcy. "Giving states the bankruptcy option would give them an easy way to renege on pension and other obligations, but it would exact large costs," said Prof. Lynn Reaser of Point Loma Nazarene University. "Financing would become more expensive as bond holders become more wary and fearful of losses." Experts who thought that states should be allowed to file for bankruptcy believed that the restructuring process would be undertaken cautiously. "States would not pursue bankruptcy lightly since future access to bond markets will be negatively impacted," said Prof. David Ely of San Diego State University.

The financial situation in the U.S. Virgin Islands is beginning to mirror what happened in Puerto Rico as the power agency is contending with a financial squeeze, Bloomberg News reported. The uncertainty led Moody’s Investors Service on Sept. 23 to downgrade the most senior Virgin Islands Water and Power Authority (WAPA) bonds to eight steps below investment grade, indicating a high likelihood of default. Subordinate debt due in 2031 last traded at an average of 92 cents on the dollar, above the 65 percent to 80 percent recovery that Moody’s rating suggests investors are likely to receive. The risk of default has increased due to WAPA’s “unsustainable capital structure with very tight liquidity, high debt load including a substantial unfunded pension liability, the increased frequency of power outages, reducing the reliability of the electric system, high electric rates, and chronic challenges facing the economy,” Moody’s said in a report. Governor Albert Bryan Jr. says the government is “steadfast” in making sure that the utility’s bills are paid. But the territory’s Congressional representative says its debt may need to be restructured, clouding the outlook for investors who own $227 million of the authority’s bonds.

Unless the Illinois Constitution is amended next year to permit modest pension adjustments, a restructuring in bankruptcy court is Chicago’s only practical path to prosperity, according to a Chicago Tribune commentary. While the city attempts to pass the burden of its debts to residents through taxes, residents can choose to stay and pay or leave — and thereby leave their share of the burden behind for others to bear. The city’s rapidly mounting debts — arising from bonds issued to Wall Street, tort judgments and woefully unfunded pension promises and other benefits offered to city workers — are now of such a scale that the numbers are numbing and lose meaning to many. One number, though, is a “tell” that Chicago and other parts of Illinois have passed a tipping point: Chicago’s population is shrinking. Under federal bankruptcy law, Illinois may authorize municipalities to reduce debt through a court proceeding, but Illinois has yet to seize this opportunity. Chicago is not alone. Hundreds of other Illinois municipalities are finding it impossible to pay for the twin obligations of providing current services and keeping the exorbitant pension promises made in connection with past services.

Illinois municipal bonds rallied Friday after a judge dismissed a petition that sought to restrain state borrowing and prohibit Illinois officials from making any more payments on $14 billion in debt, WSJ Pro Bankruptcy reported. After Sangamon County Circuit Court Judge Jack D. Davis II threw out the complaint challenging the validity of $14 billion in Illinois general obligation bonds, their prices rose modestly, according to Municipal Securities Rulemaking Board data. A $7.65 billion bond sold in 2003 to shore up the state’s pension funds fetched as much as 108.9 cents on the dollar on Friday, up from 107 cents on Thursday before the ruling. Those were among the securities that John Tillman, chief executive of the conservative Illinois Policy Institute think tank, had challenged in a lawsuit claiming the state had piled more debt on the state’s taxpayers than its constitution allowed. Tillman, joined by New York hedge-fund manager Warlander Asset Management LP, said that Illinois broke a state rule prohibiting deficit financing by selling debt in 2003 to close a pension gap and in 2017 to pay down government vendors. Tillman, a prominent foe of public sector unions in Illinois, had asked the county court for permission to move forward his arguments that the two issuances should be invalidated and further payments to bondholders stopped. But Judge Davis found no reasonable grounds for the complaint, saying on Thursday that it would “result in an unjustified interference with the application of public funds” and draw the courts into political questions that should be left to lawmakers.

Illinois bonds rallied yesterday after a judge denied a petition by the head of a conservative think tank that sought to invalidate more than $14 billion of debt issued by the state, Bloomberg News reported. Sangamon County Associate Judge Jack Davis yesterday rejected the petition filed by John Tillman, head of the Illinois Policy Institute, and backed by Warlander Asset Management, a New York-based hedge fund, that sought to “restrain and enjoin the disbursement of public funds,” according to court documents. Tillman had claimed that Illinois’s record pension bond sale in 2003 and debt issued in 2017 were deficit financing that violated the state constitution, which says bonds must be issued for “specific purposes.” “The court finds that to allow the filing of the Complaint would result in an unjustified interference with the application of public funds,” Davis wrote in an order yesterday. “The court finds reasonable grounds do not exist for filing the proposed Complaint.” Tillman said that he plans to appeal and “strongly” disagrees with the court’s decision, adding that it was “premature for the Court to decide the case on the merits at the petition stage.”