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Illinois Bankrupt?

Is the state of Illinois bankrupt?  Well, if Illinois is not totally broke already it is certainly well on its way.  The state government has now quit paying even the most essential bills.  It spends three dollars for every two dollars that it takes in.  The state of Illinois now ranks eighth in the world in possible bond-holder default.  That is actually one spot ahead of the state of California.  As much of a mess as California is (as we have previously detailed at length), Illinois is in even worse shape.  Every major rating agency has downgraded Illinois debt, and Illinois now pays millions of dollars more to insure its debt than any other state in the nation.  So yes, the state of Illinois is a complete and total basket case.  For a long time, many analysts had expected California to be the first state to go “belly up” financially, but now Illinois seems to be the favorite.  Not that Illinois is alone.  Thousands of state, city and local governments across the United States are facing massive debt problems.  All of the borrowing that was done to push communities towards achieving the American Dream is now coming back to haunt localities with a vengeance.  Debt is a very seductive and yet very cruel master, and the government of Illinois is rapidly finding out just how painful it can be to drown in a sea of debt. 

So just how bad are things in Illinois at this point? 

Well, an excellent article recently published in the New York Times did a great job of describing the fiscal panic that has gripped the state….

Even by the standards of this deficit-ridden state, Illinois’s comptroller, Daniel W. Hynes, faces an ugly balance sheet. Precisely how ugly becomes clear when he beckons you into his office to examine his daily briefing memo.

He picks the papers off his desk and points to a figure in red: $5.01 billion.

“This is what the state owes right now to schools, rehabilitation centers, child care, the state university — and it’s getting worse every single day,” he says in his downtown office.

Mr. Hynes shakes his head. “This is not some esoteric budget issue; we are not paying bills for absolutely essential services,” he says. “That is obscene.”

Have you ever heard of a state not paying its bills for essential services for an extended period of time? 

This isn’t just a financial crisis in Illinois – it is a financial nightmare.

But it just isn’t the ongoing expenses that are causing a massive financial headache for the state government of Illinois.  The state’s massively underfunded pension system has become a financial black hole which seemingly has no solution.  The state has just kept borrowing billions upon billions of dollars to make scheduled payments, but that just keeps making the state’s financial situation even worse.

“Their pension is the most underfunded in the nation,” Karen S. Krop, a senior director at Fitch Ratings told the New York Times recently. “They have not made significant cuts or raised revenues. There’s no state out there like this. They can’t grow their way out of this.”

And that is the truth – Illinois is now such a financial mess that no amount of economic growth can reverse the situation.  The state is literally drowning in debt without any real hope of turning the situation around.

The state government has already made deep cuts to public health and social service programs, they have already slashed many government agencies to the bone and they have already fired thousands of teachers.

And yet the red ink keeps marching on at an accelerating pace.

In the New York Times article referenced above, there was a stunning description of the financial chaos that government agencies in Illinois are now experiencing….

The Community Counseling Centers of Chicago is another of those workaday groups that are like the stitches on a baseball, holding together poor and working-class neighborhoods. With an annual budget of $16 million, the agency tends to families torn by crime and violence as well as people who are psychologically stressed and abusing drugs.

On any given Monday morning, the agency’s chief administrative officer, John J. Troy, 61, has no idea how he is going to keep its doors open until Friday. He said the state had not come through with an expected $2.2 million, which is about six months of arrears. He has laid off and recalled employees three times in the last two years.

“Two weeks ago, I had days to meet my $420,000 payroll and all I was looking at was a $200,000 line of credit from a bank,” recalled Mr. Troy. “I drove down to Springfield and said, ‘Hey, you owe us $3 million.’ They said: ‘Oh, that’s nothing. We owe another agency $10 million.’ ”

How in the world can a government even function under such circumstances?

Well, the truth is that it can’t.

And unfortunately things are going to get even worse.  Already, the U.S. economy as a whole is teetering on the brink of a depression, and there is every indication that we are headed for incredibly difficult economic times ahead.

If we do fall into a depression or a very deep recession, that would likely be enough to totally collapse the finances of the Illinois state government.

So could Illinois actually go bankrupt?

Well, not in the way that a corporation would go bankrupt, but Illinois could experience something similar.

An article in Slate recently described how it would work….

Say the state can’t make its debt payments, and no one will lend it any more money. In that case, the federal government can step in and put the state into receivership. This would involve the assignment of an accountant to manage the state’s debt, overseen by a judge. It would be a lot like bankruptcy, except instead of following a structured set of steps—informing creditors, appointing creditors’ committees, a 120-day window to file a plan, etc.—a receiver has the authority to force creditors to renegotiate loans in a speedy fashion. However, the accountant in charge would not have the power to make decisions about the state’s budget, such as which programs needed to be cut and which taxes had to be raised. (No state has ever gone into receivership.)

Actually, some have suggested that if the state government of Illinois “fails”, something even more dramatic could happen.  Steve Janke of the National Post suggested in a recent article that Illinois could actually once again turn back into a “U.S. territory”….

I’m just musing here, but if Illinois was constructed out of a territory in 1818 (becoming the 21st state) on the promise of upholding a state constitution, could that statehood be dissolved and the territory returned to federal control if it fails to meet the obligations of said constitution?

A state can’t go bankrupt, but it could still be a “failed state”.  When Afghanistan was deemed a failed state, the larger international community moved in.  The legal basis for that might be shaky, but in the case of Illinois, a US territory becomes a US state becomes a US territory.  No citizens lose their citizenship or their right to vote.  They just lose a state government that had already failed to meet the obligations that defined its statehood.

I’m sure there are a dozen reasons why this can’t be done, but I can’t think of a single one.

Now that seems extremely unlikely to happen, but it is an indication of just how desperate things have become in Illinois that such things are even being discussed.

The truth is that Illinois state finances are in such a wreck in large part because the state is currently experiencing an economic nightmare.  Back in 2006, the unemployment rate in Illinois was only about five percent.  Today the unemployment rate in the state is at about 11 percent.  Large corporations have moved tens of thousands of jobs out of the state and Illinois ranks in the top ten nationally in home foreclosures.

But other states are having a very hard time of it as well.  What truly sets Illinois apart is the rampant corruption and mismanagement that have characterized state government for decades.

Actually, it seems like almost every place where a liberal political machine has been entrenched for decades (Illinois, California, Detroit, etc. etc.), the local governments are now facing financial nightmares of unprecedented magnitude.

Of course this is happening on the national level as well, where the liberal “borrow and spend” economic policies of George W. Bush have given way to the ultra-liberal “tax, borrow and spend” economic policies of Barack Obama.

The truth is that massive amounts of government borrowing and spending is never the solution to anything.  It only sets up tremendous economic pain down the road.  But America has not learned, and now we are going to learn some very hard lessons in economic reality.

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  • Gary

    I live in South Eastern Wisconsin about 25-30 miles from the Illinois border so I can speak with creditability. Illinois needs to tax the rich, this will solve all their deficit issues. I see the rich Illinois come to their second home on the lake in Lake Geneva Wisconsin. Tax Them-End the deficit in Illinois. Tax the rich tax corporations end poverty! Spread the wealth!

  • Gnome

    Gary, don’t be dense. Illinois’s solution lies is ousting the established political machine and returning to honest hard work.
    Taxes will never fix a problem of corruption and greed.

  • Greg

    Gary, you haven’t had credibility since you started begging for your mommy to give you a government that would steal from others and give to you. Your ignorance continues to amaze me. More government is not your answer. Here is what you are going to actually experience – there will be a tremendous increase in taxation but the rich people that you hate are going to move their money out of the US so that it won’t all get confiscated. That is going to leave even less potential revenue so guess who will make up that difference. You will!

  • http://www.chelseacleaners.co.uk Chelsea cleaners

    yes but taxes can be the better solution. I mean – politicians are problem everywhere. In a world ruled by politicians the truth will be always hidden

  • Mr Carpenter

    I would find it the height of irony to have the present day Federal Government, which is TRILLIONS in debt and has untold TRILLIONS of unfunded liabililties, and which totally IGNORES the foundational law of the land (i.e. the United States Constitution), walk in and declare a bankrupt state a “US Territory” nominally for NOT being able to keep to their state Constitution and keeping straight financial and budgetary control!

    Of course if that happens, I can see how the Feds would at least have New York State, Massachusetts, Illinois and California (as well as the District of Columbia, Puerto Rico and US territories) if the other 46 states nullified and seced from the Union. (I know this didn’t work out so well for the south 150 years ago, but if 46 of 50 states did it, what could the feds do?)

    Naturally, it could get even messier than that; whole counties could secede from seceded states (and please, Washington DC, DO keep the Detroit metro area – the rest of Michigan doesn’t want it!)

  • Elise

    I’m afraid that is just the beginning of the domino effect; one state defaults, and then surely one by one, municipalities and states will start to fail as well. This is going to hurt everyone in a big way; our system can no longer work this way. There are PLENTY of reasons why this is happening, but one of them I believe in my very own personal opinion is all those huge pension plans weighing on the system. Large companies like GM have such gigantic plans that they just can no longer support all those who retired or are about to. The baby boomers that helped propel our society after the war are now going to take it down with them. Governments should allow people to deal with their RSPs the 0way they see fit, and not lay a hand in it. They tried to cover everyone’s a$$es for this long, the balance no longer work: there’s too many retirees compared to workers. Maybe I’m selfish, but I already have my own retirement to plan (and perhaps even my parents’s), I shouldn’t have to deal with the ones from the rest of the country who weren’t careful enough.

    In a way, all of this was to be expected. When we look back at history, how many different systems have we gone through? None are perfect, and some are more adapted then others. Capitalism has been pushed to its boundaries and beyond; where it helped shape our world in an healthy manner is now slowly destroying us. It may sound ominous, but I think the world in just 20 years will be nothing like the one we have right now. But changes are coming our way, and you can blame Obama, Bush, or any other scapegoat, but the system has been rotten at its core for a while, and no president is powerful enough to keep an entire house of rotten wood from coming down.

  • Greg

    Elise:
    America was destined to come down before we were built up and no president can keep it from coming down because our presidents are directed to make it come down. We bloggers are not the only ones smart enough to understand basic economic realities like spending $5 billion more per day than taxes bring in will cause debt collapse, generating regulatory compliance burdens that cost thousands to millions per year will drive businesses under, removing reasonable trade barriers so $1 per day wages compete against American wages will devastate our industry, etc.

    So why do we continue to talk about the demise of this nation as though there will actually be a solution? Does anyone really think that the people powerful enough to intentionally cause the destruction of our nation are now going to learn from us brilliant bloggers and make things wonderfully different? I don’t.

  • Mr Carpenter

    Well, Elise, while I’m a baby boomer, it took until I was nearly 40 before I could really start saving on my own for retirement due to the fact that greedy employers refused to pay me a living wage sufficient to raise a family on AND save for my own retirement – so I was STUCK with “Social (in)Security”. My parents weren’t wealthy, I allowed myself to be a slave for 4 years in the military in order to get a degree which helped me some… but recession after recession plus the natural desire to have children (two, not six or eight) impinged on my abilities to save. I’ve made up for that sufficiently over the past decade and a half, miraculously (and with good planning) but now Obama and company could simpy take my 401k (AND yours) away, just as happened in Argentina….. think on that. I do have savings put up in physical gold and silver – do you? But then again, Roosevelt illegally and unconstitutionally demanded Americans hand in their gold in 1933…. I guess my true reliance on Jesus Christ is pretty well all I’ve got since the people younger than me certainly have no intention of continuing to allow the Social Security and retirement promises kept to me and my generation, eh?

    On the other hand, the people in control right now (my generation, the one older than mine and the one younger) are busy spending not only our children’s money, but our grandchildren’s money and great-grandchildren’s money.

    Perhaps we should simply wipe the slate clean, go back to real gold as real money and start from scratch – nobody owes anything to anybody, everything wiped clean. Might this be the only way out? Of course those minute number of people such as myself who’ve saved physical metals – real money – will be the new wealthy.

    That’d make a change. The responsible and non-greedy few being the wealthy, wealthy because of NOT p*ssing away their money, but putting it up into gold & silver as savings…. Gee that almost sounds like what the Founding Fathers advocated….

    And what would the new wealthy do with their money? They’d put Americans to work with it, of course. Because Gold Bugs are generally NOT the grasping, ultra greedy types you see in government, in corporate HQs and in banks.

  • Elise

    Mr Carpenter:
    Saving money is always easier on paper than in reality. My own parents have very little left on the side, simply because they had to take their savings out once too often. Public workers and large company workers make less, but these guys once retired are technically getting a large piece of pie. Two of my relatives who are teachers, retired at 60 after 35 years of work and now basically rake in 80% of what they used to make just in pensions. Not that they don’t deserve it, but how is the system gonna pay them both their almost full salaries for nothing in return for the next 30 years? People die well into their 80-90’s these days when they’re healthy, so how does that make any sense? Maybe the situation is a bit different in different areas, but this is just ridiculous.

  • John

    Well, you can always pass a CCW law allowing to carry in the Great state of ILLinois…Charge 100.00 for a 2 year permit and start to generate some revenew.But the Great state of Illinois wont let that happen, there will be too many shootings..LOL….Yeh, will just let the state go BK…

  • Mr Carpenter

    Elise, it’s not easy to save gold & silver, and very few people do it. Just make a budget, and put it in as a line item (then take the cash out of your credit union or bank every payday and go down to a coin store). At this poitn in time, it’ll probably be silver that is bought.

    But if you buy a little every payday – and put it in a safe bolted down in your home (and speak not of it to anyone you wouldn’t trust with your life) then you should be okay eventually.

    There is well under 1% of the population who’ve been willing to do this in America – but guess which nations’ citizens do this regularly?

    The two nations most likely to do well in the next century – India and China.

    Gold and silver are real money; paper money is bound to go to its intrinsic value – zero. Eventually.

  • Captain Obvious

    Unfortunately, I live in Illinois, and am employed by the state. I have watched helplessly while all the morons and racicsts in Chicago have been electing the criminals that run the entire state and cater to their own selfish personal whims.

    We are overrun by third and fourth generation welfare cheats, unwed mothers with multiple children with their hands out for food stamps and wic cards, massive amounts of illegal immigrants from every country bogging down the system.

    Not to mention ALL the greedy self serving politicians who treat their positions like a neverending slush fund account to live lavishly off of OUR backs and hard work!

    In the last forty years, I have seen two Governors sent to prison, and am soon awaiting the third, and possibly the fourth! This is ridiculous! If we could get rid of ALL the Chicago politicians and their death grip on this state, we might have a slim chance of survival, but I doubt it.

  • Khy

    As someone who lives in Illinois, I can tell you that all our problems lie in the greater chicago area. Downstate, we try very hard to get by and work but watch as everything gets poured into Chicago. We know that the views of the majority of the state (landmass wise, IE: South of I-80) are going to be marginalized by the desires of the Chicagoland area. We know the taxes we are painfully paying each check are going there and that our leaders come for there… our votes ultimately can not counter the desires of what is a very tiny portion of the state. This state is going to die because of one city’s desires. It really is like going to a whole different state or country to be honest. Too bad too because I really do enjoy living here.

  • Thomas C

    Nothing in Illinois will change until the leadership is changed. Instead of taking baby steps for many years to fix the states problems, Madigan and Cullerton have buried the state with handouts instead of jobs. Two laws instituted through voter referendum could change this problem and lead us onto a path of recovery. The first being term limits( working for the government was never intended to be a career!!) The second being that whatever the politicians vote for should apply to them as well, no exceptions, period. Good luck though with getting any referendum on the ballot when it has to go through Madigan!! Sets taxes for Illinois and is partner in a large law firm that appeals taxes all while saying there is no conflict of interest! Wake up voters and vote this inept moron out of office. 37 plus years in state govt. is way too much time for an out of touch politician! New blood = a better chance of change. It will only get worse when Lisa is our next Governor.

  • Thomas C

    It is no surprise that states that are doing the worse are run by democratic governors Look it up!