Recently in Chicago’s mayoral primary election, Mayor Rahm Emanuel was forced into a runoff with Cook County Commissioner Jesus “Chuy” Garcia. For many this was an unexpected result that now calls into question who is going to lead Chicago out of its financial wilderness. One has to wonder if the primary results are in response to Mayor Emanuel’s cost cutting in an effort to bring the City’s operating expenses under control. The message may be voter resistance to doing what needs to be done to address Chicago’s shrinking revenue base, outsized operating budget and staggering pension obligations.

While Garcia has not presented a comprehensive plan addressing how he would deal with Chicago’s fiscal problem, he said in response to questions about Chicago’s pensions crisis that:

“This is a problem we created together as a City, and it is a problem that will require everyone’s participation to resolve. That said I do not support cutting benefits for current retirees.  I believe in the right of collective bargaining and the important social policies that it reflects, and I would prefer to negotiate such changes with elected union leadership. I don’t support a property tax rise to fund pensions, because I know too many families – especially senior citizens – who are already struggling to pay their existing bills.”

Garcia has indicated that he wants to put more police on the street, but has not identified how he will pay for them, and a preference to negotiate with union leaders who are locked in a fierce battle with Illinois’ attorney general over pension reform.  This appears to be a recipe for financial disaster.

Where does that leave Chicago?

With a budget deficit estimated to grow to $1.6 billion by 2016, Chicago’s challenges may eclipse, in terms of amount and timing, any solution other than bankruptcy. It will not matter who the mayor is if Chicago runs out of cash. The State is in worse shape and does not have the money to bail Chicago out. Federal funds are highly unlikely if not wholly impossible.

Many have watched as Mayor Emanuel has reduced city services, including the number of teachers, police and firefighters. These reductions have barely made a dent in Chicago’s operating expenses.  Its operating expenses and pension liabilities are so high that Chicago cannot cost cut its way to solvency. Right now, there are few options for Chicago, other than to continue to suffer more rating downgrades with more serious repercussions.

Will Chapter 9 legislation pass before Chicago runs out of money?

Chugging along in the Illinois Assembly is Representatives Ron Sandack’s and Jeanne M. Ives’s bill, HB0298 (the “Bill”), seeking to provide Illinois municipalities with access to Chapter 9.  The Bill was assigned to the Judiciary Civil Committee, has had its first reading, added Representative Ives as a co-sponsor and is scheduled for hearing on March 18.

If the Bill becomes law, arguably some relief may be in store for Illinois’ cities, including Chicago and all of the other cities saddled with pension obligations that they cannot possibly meet. What remains to be seen is whether Illinois will take the opportunity to amend or supplement the Bill to include a circuit breaker to provide for the kind of negotiation with union leadership that Garcia wants. If the Bill becomes law without modification, at least in theory, cities would have the option of filing without any State input or supervision. Unsupervised filings are not ideal for the cities, their creditors, employees and retirees. One has only to look at San Bernardino for the lesson in what not to do.

All of that noted, Chicago and its sister cities are still a long way from have access to Chapter 9 as a tool. Given the State’s ongoing legal battle with the unions over pension reform, it is hard to imagine any union consenting to pension reductions of any kind — even if for the benefit of Chicago and the greater good. With Moody’s recent downgrade, Chicago is now rated only two steps above junk. Truth be told, it’s all junk now.

More downgrades and Chicago will have to deal with the hard and immediate financial costs that rating downgrades bring in terms of derivatives and swap cover and termination costs. Market access, if even possible, will be expensive.

It is hard not to conclude that even a process as flawed as Chapter 9 might be a more predictable process for Chicago to put its financial house in order. Cash and timing are everything.  Let’s hope there is a Chapter 9 filing available for Chicago when push comes to shove and the coffers are empty. At least until someone designs and implement a better widget.