Thursday, July 14, 2016

“The Pension Clause withdraws from the General Assembly the legal power to pass any statute authorizing municipal bankruptcy as a means to unilaterally discharge public pension obligations” —Eric M. Madiar






“[According to Eric Madiar, the municipal bankruptcy] proposal is untenable because the General Assembly simply lacks the legal power to statutorily authorize its municipalities to file for bankruptcy where the result is the unilateral discharge of their pension obligations. This conclusion stems from the fact that before an Illinois municipality is eligible to file a petition under Chapter 9 of the Bankruptcy Code, the General Assembly must first enact a state law providing specific authorization.[288]

“The state law authorization requirement derives from the U.S. Supreme Court’s decision in United States v. Bekins, which upheld Congress’ power to enact municipal bankruptcy legislation.[289] The requirement balances the constitutional difficulties of allowing municipalities to shed their debt obligations through a bankruptcy court­approved plan without running afoul of U.S. Constitution’s Contract Clause,[290] while also preserving the State’s sovereign control over its fiscal affairs and its municipalities without federal interference under the Tenth Amendment.[291] The Bekins decision upheld the municipal bankruptcy statute, in part, by emphasizing that the statute did not affect ‘any restriction on the powers of States or their arms of government in the exercise of their sovereign rights and duties.’[292]

“Importantly, federal courts construing the state authorization requirement have found that the state law purporting to provide authorization must in fact be valid under state law.[293] Indeed, as one federal bankruptcy court observed, while ‘Congress has made bankruptcy available to municipalities, states retain their concomitant rights to limit access by their political subdivisions to bankruptcy relief.’[294]

“Under our system of government, State rights and powers derive from the people who, in turn, can delegate it to representative instruments they create or reserve it to themselves.[295] The powers they have reserved are shown in the prohibitions set forth in State constitutions.[296] And as the Illinois Supreme Court recently noted, ‘which reserved powers a state government may exercise is a question for the people of that state, not the federal courts.’[297]

“This conclusion is reinforced by the Bekins decision. In that decision, the court observed that States, like sovereign governments entering into treaties, are at liberty to make agreements ‘with Congress if the essence of their statehood is maintained without impairment.’[298] Indeed, the very legal authority[299] the Bekins court relied upon stated that sovereign governments were unable to enter into treaties that violate their own constitutions.[300] The U.S. Supreme Court, of course, agrees.[301]

“Given that framework, it is important to note that the Ninth Circuit Court of Appeals held long ago that California’s state law authorizing its municipalities to file for bankruptcy did not violate the Contracts Clause of the California Constitution because that Clause was construed in lock­step with the Contracts Clause of the U.S. Constitution, and because the Bekins decision had found that the state law did not violate the federal Contracts Clause.[302]

“The same logic was employed in the Detroit bankruptcy case. In that case, the court rejected the argument that the Michigan statute authorizing municipal bankruptcy violated the Michigan Constitution’s Pension Protection Clause because there was nothing in that Clause’s drafting history or jurisprudence to suggest that it was intended, as an independent matter of state law, to provide greater protection to pension benefits rights than that afforded under the U.S. Constitution’s Contracts Clause.[303] This is simply not the law in Illinois.

“The recent Pension Clause decisions… make clear that ‘when it came to retirement benefits for public employees,’ the people of the Illinois, through the limits found in the Illinois Constitution, determined that ‘the legislature could not be trusted.’[304] To that end, the people of Illinois withdrew from the General Assembly the legal authority to take any action that unilaterally diminishes or impairs the pension benefit rights of members of the pension systems.[305]

“As the Illinois Supreme Court put it, there was ‘no possible basis for interpreting the Pension Clause to mean its protections can be overridden if the General Assembly deems it appropriate.’[306] Indeed, according to the court, the Pension Clause ‘removed the option of unilaterally diminishing benefits as a means of attaining pension stability.’[307]

“As a result, the Pension Clause withdraws from the General Assembly the legal power to pass any statute authorizing municipal bankruptcy as a means to unilaterally discharge public pension obligations. To allow the General Assembly to enact such a state law would simply be an end run around the Pension Clause and be inconsistent with its purpose.[308] ‘Municipal governments,’ after all, ‘are creatures of the Illinois Constitution. They have no other powers.’[309]

“This conclusion is made all the more necessary given the holdings of two recent municipal bankruptcy court decisions.[310] In both cases, the bankruptcy court judges found that once a state legally authorizes a municipality to file for Chapter 9 bankruptcy, the municipality is free to discharge its pension obligations through a bankruptcy court­approved plan regardless of any state law obstacles to the contrary.[311] Whether these decisions would equally apply to an Illinois municipality in light of the Pension Clause is beyond the scope of this Article, but it appears highly uncertain in this author’s view based on the Bekins decision and Chapter 9’s plain language and legislative history...”[312]


[288] 11 U.S.C. § 109(c)(2) (requiring a municipality to be “specifically authorized to be a debtor under such chapter by State law, or by a governmental officer or organization empowered by State law to [so] authorize.”) (emphasis added).
[289] 304 U.S. 27 (1937).See Franklin California Tax­Free Trust v. Puerto Rico, 805 F.3d 322, 327­28 (1st. Cir. 2015) (describing the origins of the state law authorization requirement as necessary to avoid “a Tenth Amendment problem”); In re City ofBridgeport, 128 B.R. 688, 692 (Bankr. D.Conn. 1991) (stating that it “is beyond peradventure that municipalities are political subdivisions of states from which they derive all of their rights and powers. Chapter 9 does not disturb that arrangement, that is, it does not give a city rights and powers independent of the state. Thus, chapter 9 does not give a city the power to file a bankruptcy petition. Rather, it is the state which must decide whether to empower its cities to file.”); In re City ofHarrisburg, PA, 465 B.R. 744, 753­54 (Bankr. M.D.Pa., 2011) (same).
[290] Id. at 53­54 (discussing that the purpose of the municipal bankruptcy statute was simply to remove the obstacle posed by the U.S. Constitution’s Contract Clause to state legislation impairing existing contracts because only Congress had the power to remove the obstacle via its bankruptcy power); Hanover Nat’l Bank v. Moyses, 186 U.S. 181, 188 (1902) (“The grant to Congress [regarding bankruptcies] involves the power to impair the obligation of contracts, and this the states were forbidden to do.”).
[291] 304 U.S. at 51­53 (explaining how the statute preserved state control over its fiscal affairs and its because the municipality had to have state law authority to carry out the plan approved by the bankruptcy court, and because the states, like sovereign governments entering into treaties, were at liberty to make agreements “with Congress if the essence of their statehood is maintained without impairment.”).
[292] Id. at 49­53 (quoting H.R.Rep. No. 75­517, at 2 (1937); S.Rep. No. 75911, at 2 (1937)) (emphasis added). Seven years after its Bekins decision, the U.S. Supreme Court emphasized that it upheld the municipal bankruptcy statute “only because Congress had been ‘especially solicitous to afford no ground’ for the ‘objection’ that an exercise of federal bankruptcy over political subdivisions of the State ‘might materially restrict (its) control over its fiscal affairs’ whereby states would no longer be ‘free to manage their own affairs’. The statute was ‘carefully drawn so as not to impinge on the sovereignty of the State. The State retains control of its fiscal affairs. The bankruptcy power is exercised * * * only in a case where the action of the taxing agency in carrying out a plan of composition approved by the bankruptcy court is authorized by state law.’” Faitoute Iron & Steel Co. v. City ofAsbury Park, 312 U.S. 502, 508 (1942) (quoting Bekins, 304 U.S. at 50­51).
[293] See In re Suffolk Regional Off­Track Betting Corp., 462 B.R. 397, 417­421 (Bankr. E.D.N.Y. 2011) (finding that a public benefit corporation established under New York law was ineligible to file a Chapter 9 bankruptcy petition because the New York county that authorized the filing through a county resolution lacked the state constitutional authority to enact such a resolution, and noting that court could not turn “a blind eye to New York law governing the scope of a county’s authority”); In re New York City Off­Track Betting Corp., 427 B.R. 256, 268­71 (Bankr. S.D. N.Y 2010) (stating that “courts must look tostatelaw” when determining whether valid authorization is given to a municipality to file a Chapter 9 provision and looking to relevant provisions of the state constitution); In re Sullivan County Reg’l Refuse Disposal Dist., 165 B.R. 60, 73 and n. 41 (Bankr. D.N.H.1994) (same, and stating a “municipality has only those powers granted by the state. Unless state law has authorized the municipality to seek protection under federal law, use of the Bankruptcy Code would implicate the Tenth Amendment to the U.S. Constitution.”); In re Summer Lake Irr. Dist., 33 F. Supp. 504, 506 (D. Or. 1940) (“The question of the technical validity of state consent is a question of state law for the determination of state courts.”). See also, Brieffor the U.S. as Intervenor­Appellee, In re: City ofDetroit,2014 WL 2555744 at *39­*40 (6th Cir. 2014) (stating that a “state law that purports to authorize commencement of bankruptcy proceedings but that is invalid under the State’s own constitution would not satisfy this statutory requirement” and that “the question of whether the Michigan Pension Clause does in fact render invalid the state law authorizing commencement of these proceedings turns solely on issues of state law.”); Vincent S.J. Buccola, Who Does Bankruptcy? Mapping Pension Impairment in Chapter 9, 33 Rev. Banking & Fin. L. 585, 606­07 (observing that “if within the meaning of a state’s constitution the act of [a municipality] petitioning [under Chapter 9]—or perhaps the act of petitioning plus proposing to adjust debts—were understood to constitute ‘impairment,’ then statutory authorization to petition would be void as ultra vires.”). McConnell & Picker, When Cities Go Broke: A Conceptual Introduction to Municipal Bankruptcy, 60 U. Chi. L. Rev. 425, 457 & n. 143 (1993) (“Looming in the background of this issue [i.e., the state law authorization requirement], but not resolved in litigation, is whether general state constitutional provisions requiring municipalities to make adequate provision for the payment of debts should be interpreted as barring bankruptcy filings.”) (cited favorably in Puerto Rico v. Franklin Cal. Tax­Free Trust, Nos. 15­233, 15­255, — S.Ct. —, 2016 WL 3221517, at *8 (U.S., June 13, 2016)).

[294] In re City of Harrisburg, Pa., 465 B.R. 744, 753 (Bankr.M.D.Pa. 2011). Moreover, it is beyond doubt that “municipalities are political subdivisions of states from which they derive all of their rights and powers. Chapter 9 does not disturb that arrangement, that is, it does not give a city rights and powers independent of the state.” In re City ofBridgeport, 128 B.R. 688, 692 (1991). Under Illinois law, “[m]unicipal governments, whether home rule or nonhome­rule, are creatures of the Illinois Constitution.” AT&T v. Village ofArlington Heights, 156 Ill.2d 399, 414, 620 N.E.2d 1040, 1047 (1993).
[295] City of Eastlake v. Forest City Enterprises, Inc., 426 U.S. 668, 672, (1976); McPherson v. Blacker, 146 U.S. 1, 25 (1892) (“legislative power is the supreme authority, except as limited by the constitution of the state, and the sovereignty of the people is exercised through their representatives in the legislature, unless by the fundamental law power is elsewhere reposed.... What is forbidden or required to be done by a state is forbidden or required of the legislative power under state constitutions as they exist”).
[296] Munn v. Illinois, 94 U.S. 113, 124 (1876).
[297] In re Pension Reform Litigation, 2015 IL 118585, at n. 14, 32 N.E.3d 1, n. 14. Accord Gregory v. Ashcroft, 501 U.S. 452, 460 (1991) (“Through the structure of its government, and the character of those who exercise government authority, a State defines itself as a sovereign.”); Highland Farms Dairy v. Agnew, 300 U.S. 608, 612 (1937) (“How power shall be distributed by a state among its governmental organs is commonly, if not always, a question for the state itself.”); Schuettee v. Coalition to Defend Affirmative Action, 134 S.Ct. 1623, 1646­47 (2014) (Scalia, J. concurring) (“So it would seem to go without saying that a State may give certain powers to cities, later assign the same powers to counties, and even reclaim them for itself.”).
[298] Bekins, 304 U.S. at 53.
[299] Id. at 52 (citing 1 OPPENHEIM, INTERNATIONAL LAW §§ 493, 494 (4th ed.; 2 HYDE, INTERNATIONAL LAW § 489).
[300] See 1 OPPENHEIM, INTERNATIONAL LAW § 497 (4th ed.) (“Such treaties concluded by heads of States, or representatives authorised [sic] by these heads, as violate constitutional restrictions are not real treaties, and do not bind the State concerned, because the representatives have exceeded their powers in concluding the treaties.”); 2 HYDE, INTERNATIONAL LAW § 494 (“An independent State is deemed to possess the broadest right to enter into international agreements. Its constitution may, however, in various ways limit and regulate the exercise of the right, restricting the conclusion of treaties designed to effect certain objects, or prescribing the method by which the State shall give its consent to certain classes of engagements. An unconstitutional treaty must be regarded as void.”).
[301] See Reid v. Covert, 354 U.S. 1, 16­19 (1957) (finding that Congress cannot legally bind itself to a treaty with another nation that violates the Bill of Rights).
[302] In re Merced Irr. Dist., 114 F.2d 654, 665 (9th Cir. 1940). See United Firefighters ofLos Angeles v. City ofLos Angeles, 259 Cal.Rptr. 65, 68­75 (Cal. App.1989) (noting that public pension benefits are protected under both the State and Federal Contracts Clauses); Birkhofer v. Krumm, 81 P.2d 609, 620­21 (Cal. App. 1938) (construing the California Contract Clause in lockstep with the federal Contract Clause). As a question of federal law, the U.S. Supreme Court is the ultimate expositor of whether a state law violates the U.S. Constitution. Dodge v. Bd. of Educ. of City of Chicago., 302 U.S. 74, 78­79 (1937). When it comes to whether a state law violates the Illinois Constitution, however, the Illinois Supreme Court, not a federal court has the last word. Hope Clinic for Women, Ltd. v. Flores, 2013 IL 112673, at ¶79, 991 N.E.2d 745, 765.
[303] In re City of Detroit, Mich., 504 B.R. 191, 244­48 (Bankr. E.D.Mich. 2013).
[304] In re Pension Reform Litigation, 2015 IL 118585, at ¶82, 32 N.E.3d at 26­27.
[305] Id. at ¶¶82­87, 32 N.E.3d at 26­28. See McPherson v. Blacker, 146 U.S. 1, 25 (1892) (observing that the “legislative power is the supreme authority, except as limited by the constitution of the state, and the sovereignty of the people is exercised through their representatives in the legislature, unless by the fundamental law power is elsewhere reposed. * * * What is forbidden or required to be done by a state is forbidden or required of the legislative power under state constitutions as they exist.”). Cf. IBM v. Evans, 99 S.E.2d 220, 222­23 (Ga. 1957) (holding that the Georgia legislature could not exempt property from state taxation in violation of the state constitution when providing consent to exclusive federal jurisdiction over that property under Article I, Section 8, Clause 17 of the U.S. Constitution).
[306] Jones, 2016 IL 119618, at ¶32 (quoting In re Pension Reform Litigation, 2015 IL 118585, at ¶75).
[307] Id. at ¶47.
[308] Id.

[309] AT&T v. Village ofArlington Heights, 156 Ill.2d 399, 414, 620 N.E.2d 1040, 1047 (1993).
[310] In re City of Stockton, Cal., 526 B.R. 35, 56 (Bankr. C.D. Cal. 2015); In re City of Detroit, Mich., 504 B.R. 191, 254­55 (Bankr. E.D. Mich. 2013); In re City of Stockton, Cal., 475 B.R. 720, 727­29 (Bankr. C.D. Cal. 2012)
[311] In re City of Stockton, Cal., 526 B.R. 35, 56 (Bankr. C.D. Cal. 2015); In re City of Detroit, Mich., 504 B.R. 191, 254­55 (Bankr. E.D. Mich. 2013); In re City of Stockton, Cal., 475 B.R. 720, 727­29 (Bankr. C.D. Cal. 2012).
[312] See Hon. Thomas B. Bennett, Consent: Its Scope, Blips, Blemishes, and a Bekins Extrapolation Too Far, 37 CAMPBELL L. REV. 3, 17­18, 22­23 (2015) (for a well­reasoned criticism of the current view taken by some bankruptcy court judges that once a state authorizes its municipalities to file a Chapter 9 bankruptcy case neither the state, the municipality, nor anyone else may reject the use of any parts of Chapter 9 along the road to readjustment of municipal debts).


from Eric M. Madiar, Illinois Public Pensions: Where To From Here?, 33 Ill. Pub. Employee Labor Report (Winter/Spring 2016). 



3 comments:

  1. From Rauner’s Turnaround Agenda: Municipal Bankruptcy

    Background:
    Under federal law, before a municipality can seek relief under Chapter 9 of the Bankruptcy Code, it must be "specifically authorized" under state law to file bankruptcy — 24 states currently provide this authorization. Illinois lacks that authorization, providing no ability to help turn around struggling communities.

    Proposal:
    This legislation explicitly authorizes municipal bankruptcy. There are no requirements, pre-conditions or other limitations to a municipality's access to Chapter 9 in the proposed legislation. The decision whether to file is left entirely up to a municipality.

    ReplyDelete
    Replies
    1. Apparently, Rauner has not talked to Eric Madiar.

      Delete
  2. ...And even though the State’s liabilities continue to increase and the State of Illinois has a cash-flow problem (and we know the reasons why), bankruptcy is not an option. Why? Because bankruptcy would destroy the State of Illinois’ credit rating completely and its ability to borrow at affordable interest rates; the State’s budgets would be slashed; bond sales would plunge, and the bond market would destabilize. Most importantly, the U.S. Constitution prohibits any state from declaring bankruptcy or “impairing the obligation of contracts” (Article 1, Sec. 10).

    As stated by the Center on Budget and Policy Priorities: “Various pundits [who suggest] enacting federal legislation that would allow states to declare bankruptcy, potentially enabling them to default on their bonds, pay their vendors less than they owed, and abrogate or modify union contracts [are idiots]. Such a provision could do considerable damage, and the necessity for it has not been proven.

    “States suffer from ‘structural deficits’ or the failure of revenues to grow as quickly as the cost of services… Structural deficits stem largely from out-of-date tax systems, coupled with costs that rise faster than the economy in areas such as health care. Fixing these structural problems would help states and localities balance their operating budgets without resorting to [desperate measures]… It is far more constructive to focus on fixing these basics of state and local finance than to proclaim a crisis based on exaggerations of imminent threats.

    “It is unwise to encourage states to abrogate their responsibilities by enacting a bankruptcy statute. States have adequate tools and means to meet their obligations... Confusion between short-term cyclical deficits and debt, pensions and retiree insurance – and the overstatement of the magnitude of the latter set of problems – draw attention away from the need to modernize state and local budget and revenue systems and address structural problems that have built up over time in these systems.”

    ReplyDelete