Saturday’s New York Times has an article on Illinois’ finances that is must reading for anyone who thinks the U.S. has turned the corner. The crucial takeaways are 1) even though states can’t technically declare bankruptcy, they apparently can just stop paying their bills, 2) while salaries and pensions for current public sector workers are untouched, services that provide lifelines to the most vulnerable are being decimated, and 3) though Illinois is arguably the worst-run state, a whole bunch of others are close behind, so what happens there will soon be replicated across the country.
Illinois Stops Paying Its Bills, but Can’t Stop Digging Hole
CHICAGO — 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.”For the last few years, California stood more or less unchallenged as a symbol of the fiscal collapse of states during the recession. Now Illinois has shouldered to the fore, as its dysfunctional political class refuses to pay the state’s bills and refuses to take the painful steps — cuts and tax increases — to close a deficit of at least $12 billion, equal to nearly half the state’s budget.
Then there is the spectacularly mismanaged pension system, which is at least 50 percent underfunded and, analysts warn, could push Illinois into insolvency if the economy fails to pick up.States cannot go bankrupt, technically, but signs of fiscal crackup are easy to see. Legislators left the capital this month without deciding how to pay 26 percent of the state budget. The governor proposes to borrow $3.5 billion to cover a year’s worth of pension payments, a step that would cost about $1 billion in interest. And every major rating agency has downgraded the state; Illinois now pays millions of dollars more to insure its debt than any other state in the nation.
“Their pension is the most underfunded in the nation,” said Karen S. Krop, a senior director at Fitch Ratings. “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.”
As the recession has swept over states and cities, it has laid bare economic weakness and shoddy fiscal practices. Only an infusion of federal stimulus money allowed many states to avert deep layoffs last year.
Cuts in Work Forces
The federal dollars are nearly spent. Last month, local governments nationwide shed more than 20,000 jobs. Should the largest struggling states — like California, New York or Illinois — lay off tens of thousands more in coming months, or default on payments, the reverberations could badly damage a weakened economy and push housing prices down still further.
“You’re not seeing these states bounce back, and that could be a big drag on the national economy,” said Susan K. Urahn of the Pew Center on the States. “It could be a very tough decade.”
In Illinois, the fiscal pain is radiating downward. From suburban Elgin to Chicago to Rockford to Peoria, school districts have fired thousands of teachers, curtailed kindergarten and electives, drained pools and cut after-school clubs. Drug, family and mental health counseling centers have slashed their work forces and borrowed money to stave off insolvency.
In Beardstown, a small city deep in the western marshes, Ann Johnson plans to shut her century-old pharmacy. Because of late state payments, she could not afford to keep a 10-day supply of drugs. In Chicago, a funeral home owner wonders whether he can afford to bury the impoverished, as the state has fallen six months behind on its charity payments, $1,103 a funeral.
In Peoria — where the city faced a $14.5 million gap this year and could face an additional $10 million budget hole next year — Virginia Holwell, a trainer of child welfare caseworkers, lost her job when the state cut payments to her agency. She sits in her living room high above the Illinois River and calculates the months of savings left before the bank forecloses on her house.
“I’ve got enough to last until the end of August,” she says, matter-of-factly. “I’m 58 and I’m pretty good at what I do, and I got to tell you, I’m pretty devastated.”
Public colleges and universities occupy a fiscal sickbed all their own. This year they muddled through without $668 million expected from the state; the University of Illinois has yet to receive 45 percent of its state appropriation. Legislators made no pretense of promising to pay this bill soon. Instead they authorized colleges to borrow against the expected state payments.
“The big fear is that next year we’ll be down twice as much,” said Randy Kangas, an associate vice president of the university. “No one knows how to make the cash flow work.”
Illinois legislators tend to plead victim to economic circumstance, and the state’s maladies are considerable. In 2006, the Illinois unemployment rate stood below 5 percent; now it is near 11 percent, and the percentage of long-term unemployed exceeds the national average. Major manufacturers have eliminated thousands of jobs, and the state ranks in the top 10 nationally in foreclosures.
Five years ago, the Chicago suburb of Tinley Park issued about 650 home building permits; last year it processed one. The city of Rockford plans to close fire stations and lay off firefighters, and in Decatur, 180 impoverished seniors have lost their delivered meals. The lakeshore condo towers in Chicago bespeak affluence, but there are so many foreclosures on the bungalow blocks of southern and western Chicago that “for sale” signs sprout like sunflowers.
Few budget analysts are surprised to see Illinois, with a limping economy and broken political culture, edge close to the abyss. Two of the last six governors have served jail terms, and a third is on trial.
“We are a fiscal poster child for what not to do,” said Ralph Martire of the Center for Tax and Budget Accountability, a liberal-leaning policy group in Illinois. “We make California look as if it’s run by penurious accountants who sit in rooms trying to put together an honest budget all day.”
Stopgap Solutions
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.’ ”
“The fact of the matter is,” he added, “I don’t sleep much these days.”
Illinois’s fiscal practices are thoroughly fractured. Large agencies survive from one payday to the next. Small agencies seek high-interest loans from out-of-state finance companies.
The state pension system is a money sinkhole and the most immediate threat. The governor and legislature have shortchanged the pensions since the mid-1990s, taking payment “holidays” with alarming regularity.
The state’s last elected governor, Rod R. Blagojevich, is on trial for racketeering and extortion. But in 2003, he persuaded the legislature to let him float $10 billion in 30-year bonds and use the proceeds for two years of pension payments.
That gamble backfired and wound up costing the state many billions of dollars. Illinois reports that it has $62.4 billion in unfunded pension liabilities, although many experts place that liability tens of billions of dollars higher.
Legislators this year raised the retirement age and slashed benefits. Though changes apply only to future employees, the legislature claimed immediate savings.
“Savings upfront and reforms down the road,” said Mr. Hynes, the state comptroller. “It’s just bad habits and bad practices.”
More broadly, Illinois is caught between blue state convictions about social safety nets and a red state aversion to taxes. For years, the Democratic-controlled legislature has passed budgets that are, in effect, in deficit. Lawmakers routinely skip around the state’s balanced-budget law, with few consequences. (Republicans are near monolithic in voting against any tax increases and borrowings. When one broke ranks to try to keep the pension solvent, he was stripped of a committee position, reducing his pay and pension.)
“The pension move was Enron-esque,” said Mike Lawrence, a press secretary to the former Republican governor Jim Edgar, who was the last governor to sign an income tax increase. “Blagojevich was not a tax-and-spend governor; he was a spend-and-borrow governor.”
The state’s income tax burden is not terribly high — Illinois ranks in the bottom half of states — and its government is not terribly large. (The budgets in New York and California, per capita, are much larger). Even if the state cut out all family and human services spending, more than half of the budget deficit would remain.
As comptroller, Mr. Hynes has trained his attention on the public and nonprofit agencies that rely on state money; he tends to roll his eyes at the notion that slashing alone is a solution.
“Only the most delusional people think you can solve this without raising taxes,” he said.
The legislature has a different instinct: to borrow. In good times, that leads to unsightly imbalances. In bad times, it becomes catastrophic. This year, leaders gave the governor authority to move money around and left town to campaign.
“Each budget has gotten historically worse during this recession,” said Laurence Msall, president of the Civic Federation, a policy research organization. “We’ve borrowed more and pushed larger unpaid bills into the future.”
Illinois spends a minor fortune papering over its budget holes. Last year, the comptroller’s office paid $55.3 million just in interest on two short-term borrowings to pay the state’s bills.
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{ 18 comments… read them below or add one }
If we keep doing bailouts by printing money, that will work for awhile. Eventually we will be in trouble with that and may need a new trick like switching to Amero and some smoke and mirrors and all is well. Or at least no one will know what happened.
Or we make sweeping cuts but that will cause a loss of jobs and we will sink real fast. But we could have martial law, then layoff all the police. Then go back to volunteer fire departments, cut all the fire services. You could buy a bag of cement and fix pot holes in your street. Close Libraries, you have Wikipeadia. If your kids use the local parks take your mower and mow the grass while the kids play. Its late I better go to bed!
I wrote commentary about this NY Times article here: http://redpilltrip.blogspot.com/2010/07/greece-by-lake-michigan.html
The NYT article highlights exactly what has been so wrong in states like Illinois — inept politicians and self-deluded citizens who believe in their subsidized-by-taxpayers fake talents and skills.
John,
How do you see this thing playing out over the next few years? Do you see a large federal bailout or a quick and steady erosion of public services? What do you think would be the secondary effects of either choice on future government policy, interest rates, the dollar, and society at large? When checks start bouncing who do you think will get priority? (pensions, state workers, contractors)
John, I’ve studied this subject since February of 2008 when I first penned the piece on the prospects of a massive wave of Municipal bankruptcies and defaults due to the housing crisis and recession titled “Municide.” The sad truth is that there are categorically no Constitutional allowances for a sovereign state to declare bankruptcy in any way shape or form. However, the prospect that has been speculated on within the legal community, especially those with knowledge of both Constitutional Law and the legal options of the U.S. Treasury, is the prospect of the President of the United States declaring a state to be in violation of its fiduciary responsibilities, having this confirmed with a legal interpretation at the Appellate court level and Supreme Court if necessary, and thus a Conservatorship imposed on the state with direct control of all budgetary matters from Washington, D.C. up to and including Federal loans to maintain the state under the direction of the U.S. Treasury.
The dangerous aspect of this idea is obvious to most considering the methodology employed when Fannie and Freddie were placed into a conservatorship because the question of the rights of the debt holders would be determined in ofter times the same courts that gave the government the legal backing to impose a conservatorship.
Based on the track record of the prior and current administrations with Fannie, Freddie, GM, etc. it bodes poorly for the bondholders and opens up a new realization that the only solution is true debt monetization at almost every level to relieve the pressures and risks of serial defaults. This means if the Fed refuses to participate, the Treasury will be forced into action and drag Congress along for the ride as the government will have to back all the municipal issues, pension funds, 401Ks, and IRAs in the nation or risk a massive flight of capital out of our financial markets which would ultimately collapse the entire system.
Default is the only answer, all over the US, Europe and Asia. It’s a beautiful thing to watch all the welfare states slowly but surely collapse. A total financial and political reset is near.
What I cannot understand is the unreasonable demands of unions. We all must realize it is going to be a long hard road ahead if we are to leave anything to the generations that follow us. My guess is we have become so self absorbed with our own desires we cannot think of anyone but ourselves. I am in a union and cannot believe the selfishness. It is shamefull.
A couple quick points & counterpoints:
Was LOL that a credit rating agency is still offered as credible opinion.
Admittedly, I fail to understand all the right wing blame on wage earner pensions, unions and the social safety net.
When do you fellow patriots include bipartisan fiscal mismanagement, corporate welfare and our military spending in your Fox News induced repetitive rhetoric?
Geez Louise. I’d give ya lesser tax hikes for the rich, who you’ve elevated to god-like status btw, for a little fair & balanced rant.
All the best even in dissent,
Thrash
If the federal gov’t (i.e. executive branch) presides over a debt reorganization, woe be to all entities not deemed politically important. The government won’t even have to pretend to be following bankruptcy law. Unions will do well.
A sovereign state that reorganizes it’s debt would hopefully find a way to keep the federal government out of it.
My personal theory is that a prospective imperial presidency will want to wait until states are in such deep and irretrievable trouble that they have to give up all their sovereignty to the federal government, at which time the federal government will pounce.. I mean help.
At this point, none of the debt bombs – local, state, and federal – that make up the Grand Ponzi called the “U.S. economy” can be de-fused. I think the “Black Swan” trigger event will be the Iran War, c. spring-summer 2012, but it could be something sooner. In any event, our open-borders sweatshopped, free trade job-outsourced, globalized economy is approaching terminal velocity, as is our massively corrupt, group-entitlement, special interest-driven political system, and our rotten, self-indulgent Culture of Death. We need a systemic purge and we are going to get what we deserve. What must be, will be.
That’s a pretty good mix of religious based fear fear mongering with a touch of reality Compassionate Fascist.
Fact is we’ve come through worse. The Civil War, in terms of casualties and impact on the economy was far more devastating than what we face today.
All the best,
Thrash
I’m very interested in watching how the state budget deficits are dealt with.
My hunch is that the Obama administration will want to do whatever it believes will further centralize and strengthen federal powers. That probably means directing the purchases of new issuances of state and municipal bonds to cover the deficits, create dependency, strengthen union support, and secure political legislative favors from the respective states’ representatives. That would also meld nicely with the Fed’s desire to fight deflation by injecting more liquidity into the economy through asset purchases (i.e., state bonds). The confluence of a tanking stock market, imploding pension funds, increasing unemployment due to public sector layoffs, civil unrest, the threats of higher state taxes, the general loss of wealth due to the deflation of asset values, and efforts to bribe voters in the November elections, could create enough fear, desperation, and chaos to facilitate such a coup.
On the other hand, I may be underestimating Obama, et al and the states will not be rescued by the federal government. Personally, that’s what I hope happens. In that case I suspect we’ll see a plethora of state Constitutional crises as one mandate after another becomes impossible to fulfill, and the courts get to work it all out. Of course there will still be “blood in the streets” but that will happen any way. At least the unsustainable and bloated contractual agreements will be broken and new arrangements made that are compatible with the current realities facing the private sector.
If voters knew about the crazy agreements that the state and municipal governments have made over the years things would probably have never gotten this out of hand. Then again, state voters have for years now continued to reelect some pretty awful representatives, and with full knowledge of their voting records, political views, and pork. So, I take that back: ultimately every one is going to get what he deserves.
here is how i see it playing out….. The states are bailed out by the FED …Obama will have a Fanny kind of agentcy set up … all debt will go there… SAD but true we will by pass what we have to do now to pay 10 Times that later…. bet on it!!!
O by the way whats another 3 to 4 Trillion dollars to the Deficit!!! LOL
Surely the question of whether states can or cannot declare bankruptcy has become almost academic. Most already are, just not officially.
There is no doubt the Federal Government is in a position to bail out individual states (Start the printing press someone…), however the more pertinent question is ‘Can’ they?
One has to begin to wonder at the solutions available though (Let’s not mention License plate advertisments here!).
1) Cut spending – Tough medicine, but essential as a cure.
2) Reduce social obligations – It’s a Capitalist country not Socialist.
3) Raise Taxes – Obvious & Self explanitory.
4) Increase salaries and payed annual leave in the private sector workplace – Not as crazy as it sounds. Reward works just as well as penalty – More productive workforce, More Tax collected, More surplus income for wiping out personal debt or spending on services, More cash filters through the system.
5) Raise interest rates – It’s time to bite the bullet Ladies & Gentlemen! Those who fall…fall. Those who come through will be all the stronger.
For too long the US media/Government has tried to talk & spend it’s way out of this depression. What’s needed is a firm but fair doctor who’s not afraid to administer the correct distasteful medicine….
State and local government issued bonds are insured. I could see the federal government bailing out the insurance companies. That’s all the leverage needed to fully subjugate the formerly sovereign States.
We cease to be a federation, an association or union of independent or sovereign states. We become a confederation which is a union of dependent states.
Do we change our name to the United Failed States of America or the United Fubar’ed States of America?
No one has come to the conclusion, or the mention of government schools and what a drag that welfare system has been on the economy. Here in Washington state, it cost’s $60 a day per kid. What parent in their right mind would pay that for the babysitting that goes on, with a net loss in intelligence over just staying home and learning? It’s government teachers unions, as well as other public unions that are a big drag.
Gentleman:
A brother-in-law, just as “conservative” as most who post here and I were chatting about his dream. A business involving recycling. This isn’t the first time I have listened to his dream and he has never asked me to invest.
During our chat, I asked this “conservative” if he ever considered setting it up as a non-profit, schedule c corp? We discussed other industries. How well the non-profit form works in healthcare for example. Kaiser Permanente being the fair haired example.
He was intrigued but not quite convinced. I then took him through the idea that not all endeavors are best suited for the standard profit making model. Jails are the prime example. Private management of the penitentiary system has led to the early release of high maintenance violent offenders while the low maintenance non-violent serve more of their time.
I then went for the close. There are plenty of environmental grants available. All you need is one, State, County or Municipality to agree to serve as the test case. Grants usually take 2-3 attempts to secure.
My point gentlemen, is that we have a pressing need to restructure. As I listen to my liberal friends and conservative bloggers of one thing I am certain:
Toss out our preconceived notions and start from a clean page. Consider not only what is profitable but what is responsible.
Do any of you think that while BP was lobbying for reduced safety regulations, cutting costs and increasing risk that they would have proceeded as they had if they just once asked, “What if?” instead of merely, “How much can we make?”
All the best,
Thrash
What nobody seems to know is there is a special deep ground scanner that “sees” gold or the optimum conditions for it and bigger Gold Corps use it. It’s pricey and they use it from a plane.
If our President cared to save our country he could have it used to fill up the National Treasury in no time just from public lands. I’d be willing to say go for it!
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