It’s been a long time coming, but Illinois’ slow-mo financial disaster is now front page news. A few recent examples:
IDOT has told contractors that “all construction work is to shut down on June 30,” according to a statement. “Contractors will be advised to secure work zones to ensure their safety during any potential shutdown.”
Illinois has gone almost two full years without a state budget, which has hit education funding throughout the state and generated more than $14 billion in unpaid bills.14
Summer is both a high-volume construction season and a vaguely ominous time to cease road repairs; just last week, IDOT released a statement warning that the heat could lead to pavement “buckling or blowing out.”
Without a budget in place, the state is not authorized to make payments to the association or Mega Millions.
Lottery proceeds are about 2% of state revenue. Speaking of revenue corporate income tax collection is down 41.3%. Sales taxes are flat. How is this supposed to work?
A financial crunch is spiraling into a serious problem for Illinois lawmakers, prompting some observers to wonder if the state might make history by becoming the first to go bankrupt. At the moment, it’s impossible for a state to file for bankruptcy protection, which is only afforded to counties and municipalities like Detroit.
Chapter 9 bankruptcy protection could be extended to states if Congress took up the issue, although Stanford Law School professor Michael McConnell noted in an article last year that he believed the precedents are iffy for extending the option to states. Nevertheless, Illinois is in a serious financial pickle, which is why radical options such as bankruptcy are being floated as potential solutions.
Ratings agency Moody’s Investor Service earlier this month downgraded Illinois’ general obligation bonds to its lowest investment grade rating, citing the state’s growing pile of unpaid bills and its mounting pension deficit. Illinois, by the way, has the lowest credit rating of any state. Lower ratings mean higher borrowing costs, since lenders view such borrowers as riskier bets.
“Legislative gridlock has sidetracked efforts not only to address pension needs but also to achieve fiscal balance, allowing a backlog of bills to approach $15 billion, or about 40 percent of the state’s operating budget,” the agency noted.
As noted by the Fiscal Times, Illinois is the only state that’s been operating without a balanced and complete budget for almost two years.
“We’re like a banana republic. We can’t manage our money,” Gov. Bruce Rauner said after the Illinois Legislature failed to produce a full 2017 budget earlier this month.
Two Big Questions
Based on the immensity of its pension obligations, the legal barriers to simply cutting benefits, and falling tax revenues, Illinois is a lock to default on some or all of its obligations in the next few years. That’s a problem for pensioners, state contractors and pretty much anyone who cares about local public services. In other words, life is going to get a lot harder for people living in the state, and especially for those living in double-bankrupt Chicago.
But the real impact will be felt farther afield, when everyone with money at risk starts asking who’s next – and finding a long list of likely suspects. If Illinois defaults, how far behind can New Jersey, Kentucky, or Connecticut be? Not far, according to current trends. And if those states follow Illinois, what are Italian bonds worth? Not much.
The second big question is: How will stronger governments respond to the implosion of weaker ones? If the failed states are bailed out by the still-solvent, what does that do to the latters’ balance sheets? In some cases it decimates them.
The dilemma? Allowing failed states to default will rock the global banking system, but bailing them out replaces a debt bust with a currency crisis. In a priced-for-perfection world, either will lead to global asset repricing — in other words an epic bear market.
Read the previous posts in this series here.