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.