Gov. Bruce Rauner issued an amendatory veto of House Bill 3004 on Aug. 28, a bill that could have provided a bailout to banks and bondholders at the expense of taxpayers.

House Bill 3004, sponsored by state Rep. Al Riley, D-Hazel Crest, would allow the cash-strapped Regional Transportation Authority, or RTA, to borrow more money for a longer period of time.

But it also included an unprecedented provision that ensured, in case the RTA or the Chicago Transit Authority, or CTA, were to file for bankruptcy, that money would go to bondholders or the treasury before it would go to local government services, pension payments and taxpayer relief in the event the CTA or RTA were unable to repay their debts.

Rauner stripped the bill of those bondholder bailout provisions.

Explaining the bondholder bailout

When a cash-strapped unit of local government, in this instance the CTA or the RTA, needs money for a project or to cover administrative costs, they are allowed to issue bonds or interim financing notes. These bonds and notes are essentially a loan to the unit of government with a promise the government, via taxpayer dollars, will pay it back with interest over a certain amount of time.

Those who buy up the bonds or notes are bondholders. Bondholders could be individuals, banks or even another public entity, such as the Illinois State Treasury. Bondholders make an investment risk when buying these bonds because there is no guarantee they will receive a return on their investment. For instance, an entity could file for bankruptcy and choose to dump the debt the bondholders invested in. And though public entities in Illinois do not currently have the ability to file bankruptcy, it is not out of reach. The General Assembly could pass a bill to allow it at any time.

House Bill 3004 was clearly written with an eye toward the possibility that the CTA or RTA could file for bankruptcy, because the bill includes provisions that would protect bondholders in case of default. Under the bill, if the state treasury invests any money in the CTA or the RTA and they are not able to repay those debts, then the treasury can skim state dollars that are supposed to be distributed to those entities.

Not only is this a bad provision as it relates to the CTA and RTA, but this language could be added to another bill and be extended to any public entity, such as a school district. Indeed, there were at least four similar bills introduced in the General Assembly this year that gave bondholders priority over taxpayers and those who rely on government services.

The importance of priorities

This bailout bill is the exact opposite of how state and local governments should approach financial problems. The reason governments default on debt is because they have out-of-control spending and owe too much money. Those governments need to restructure their finances so they can lower spending, cut debts and give taxpayers a fresh financial start. That’s the purpose of bankruptcy. It’s unfortunate, but sometimes necessary.

In theory, bondholders should be the first to take a hit in the bankruptcy process. That’s because bondholders know upfront that investing is risky – there is no guarantee of a return

But of course, bondholders want protections such as those offered in HB 3004. It means they are given a guarantee that they won’t lose out, even if it means putting everyone else last.

As municipalities across the state teeter toward bankruptcy, politicians shouldn’t be focused on moving legislation to bail out banks and bondholders – they should prioritize taxpayers and people who need government services.

Rauner was right to issue this amendatory veto and to strip out the bailout for bondholders. By doing this, he has provided a protection for taxpayers over special interests.

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