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By: Mark Glennon*

A far deeper crisis for Illinois is inevitable, we’ve long said, but it’s now more imminent because that certainty is becoming so obvious.

The exodus from the state will accelerate, unpaid vendors will start refusing to work, cuts by both the state and local governments will become more severe, schools and small universities will run out of cash, already impossible pension burdens will worsen and borrowing costs will continue to rise.

When?

Let’s start with what many see as the optimistic scenario, which is that Springfield agrees on a budget soon. That agreement would probably be roughly similar to what the Illinois Senate passed today — $5.5 billion in new taxes and $3 billion in spending cuts.

Many would breathe an initial sigh of relief if that deal passed. Credit downgrades would probably be avoided for now and many recipients of state money, now cut off, would have funding at least partially restored. Schools and universities would stay open for now.

But the reality of what that compromise wouldn’t accomplish would soon become apparent:

•   Nobody is even discussing the lion in the room — the $180 billion of unfunded pension and healthcare liabilities for services already rendered by state workers. Pension contributions already consume a quarter of the state budget, and it would take billions more each year just to keep the unfunded liabilities from growing. When the current budget debate ends — no matter how it ends — Illinois will realize that the largest source of its crisis wasn’t addressed.

Yes, there is a pension “reform” bill on the table, but it’s based on the “consideration” model which is constitutionally suspect and would be litigated all the way to the Illinois Supreme Court. Even if it’s upheld, savings from it are extremely dubious and have never been documented.

•   Most Illinoisans would focus only on the tax increase. Sixty-two percent say the budget does not affect them or anybody in their family. That’s foolish and selfish, but that’s the way it is. The business community, too, would see little to like — only gimmick reforms that soon will be exposed as cosmetic, and the corporate income tax would increase under the Senate bills passed today. In short, more people and employers would see more reason to leave.

•   The full effect of the $3 billion in “cuts” is a mixed bag and unclear for now. Those cuts are off of a theoretical baseline, not against what’s been disbursed over the past year. So, some recipients of state money would have funding restored at least in part, but some would still face severe austerity.

•   Nothing in the legislation would address the $14 billion in unpaid bills at the state level.

•   There’s no relief being offered to struggling municipalities, though the Senate legislation apparently would have state taxpayers pick up the “normal cost” of the Chicago teachers’ pension. Illinois’ crisis has to considered on a consolidated basis with all its overlapping jurisdictions, especially in and around Chicago. It’s the consolidated picture that’s so overwhelming. Chicago will go bankrupt because of its pensions, which are rapidly bleeding down towards zero assets.

•   Finally, Governor Rauner appears to have made a tax freeze a must-have for any budget deal by saying today that “real property tax reform” is essential for him to sign off on any compromise. He probably won’t get a permanent freeze from Democrats, though he apparently would now be content with a four-year freeze, i.e., a huge hike in year five.

Most galling is hearing sponsors of today’s legislation call it a “balanced budget.” Truly balancing the budget would take billions more in revenue or cuts.

That benign case is probably academic because a compromise solution probably won’t become law. Its future in the House is dark, where a vote for the tax increase would mean the end of many lawmakers’ careers, and House Speaker Madigan is content to let the state go without a budget so he can blame Governor Rauner.

Let’s go back to property taxes where the deal may fall apart. That’s where Illinois’ crisis is burning white hot. A freeze would be nice for many taxpayers, but it won’t help towns and cities already in crisis. Property taxes now often over 3%, 4% and even 5% in many municipalities are fueling a death spiral. Nobody has offered a solution.

Downgrades to “junk” status are likely to come if a full budget isn’t passed, which will increase borrowing costs not just for the state but for municipalities, which suffer from secondary effects. However, Fitch, the ratings agency, said today that the May 31 deadline isn’t so important. After that, a 3/5 majority is needed to pass a budget. Fitch says it would give the state until June 30.

About Illinois’ creditworthiness, however, Mr. Market is already talking. As Bloomberg reported last week, investors are now demanding their biggest premium ever for holding Illinois bonds, 2.5% over the benchmark rate.

There is no positive solution to be had. This is about disaster mitigation. Though politics and personalities indeed are an obstacle in themselves, conflicting views about how to mitigate the disaster are deep, genuine and irreconcilable. Most importantly, the problems are insurmountable absent a bankruptcy court’s power to reduce debt.

That’s why a compromise budget probably won’t become law, in which case our fiscal crisis will escalate very rapidly.

That’s why, when the dust settles on any compromise that is reached, Illinois will quickly see that little was accomplished.

That’s why ultimate resolution will end up in the United States Congress when it is asked to amend the Bankruptcy Code to allow states to file for reorganization.

*Mark Glennon is founder of Wirepoints. Opinions expressed are his own.

 

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S and P 500

For a good laugh read the financial report of Chicago. Debts exceed assets by $25 billion. Well actually it’s not funny but it must have taken a lot of immature adults to dig that deep of a hole. Adults who don’t know how to read a balance sheet or an income statement.

https://www.cityofchicago.org/content/dam/city/depts/fin/supp_info/CAFR/2015CAFR/2015CityCAFR.pdf

Paul

Right on Mark. The collapse is here!!!

That’s why ultimate resolution will end up in the United States Congress when it is asked to amend the Bankruptcy Code to allow states to file for reorganization. As I have stated many times previously, states are sovereign and can repudiate (not pay) any debt they want to, they do not need BK court. Bottom line, the pension money is NOT there and never will be there. I will not lose one nanosecond of sleep if over paid, under worked gov employees who retire 10-15 years earlier, at a rate 2-20 times higher, and who have made MORE than their private sector counter parts in cash salary,… Read more »
Tough Loive
The FIRST step …. just to stop digging the financial hole Ill is in now ……. is to hard freeze DB pensions for the future service of all CURRENT workers. For future service, replace it with a MODEST 401K “match” equal to what Private Sector companies typically provide their employees (3% of pay) and Social Security. AndZERO taxpayer-subsidized employer-sponsored retiree healthcare. With such being just about GONE in the Private Sector, it should also be GONE in the Public Sector. Private Sector Taxpayers should NOT be told to pay for benefit for Public Sector workers that they RARELY get from their own employers. If a Constitutional Amendment… Read more »
Doug

The only real option is income tax freeze, property tax freeze, change Illinois constitution to change new pension benefits to 401ks, and dramatically scale back spending. Oh, and pass right to work law.

This won’t happen so BK is the only option, the sooner, the better, it will only get worse.

nixit

SB 1905 attempts to outlaw RTW at the local level: http://www.ilga.gov/legislation/billstatus.asp?DocNum=1905&GAID=14&GA=100&DocTypeID=SB&LegID=105221&SessionID=91

Why can’t RTW be attempted at the local level? If it doesn’t work, then the local district can go back. That seems to make more sense than trying it state-wide. Not surprising our politicians are not familiar with iterative development.

John Cleary

Debt that can’t be paid does not get paid.bye

Bross

It’s all come down to a blame game with the politicians. Running a State government with a bunch of lawyers…what did we expect? Democrats pass this tax hike and Rauner signs. Might see a complete flip of parties. Could we end up with a republican assembly and a dem governor?

erik

The assembly won’t flip. The Democrat Chicago machine is too strong, and there are too many people on the dole in this state. The coming crisis is inevitable.

Thank you Mark for your efforts to alert the public to the magnitude of the problem. You’re a true patriot. I hope you continue to gain traction with your information campaign. I’m continuously shocked and horrified how few of the Illinois residents I encounter understand these issues. Most have some inkling that the state is in financial trouble, but seem content to just ignore it.

bob oriole park

A lot of the problem is people are unaware of the mind numbing magnitude of the problem. The media is guilty of enabling the situation by merely parroting press releases, instead of researching to find out: 1-Are the figures correct and 2-Are the figures complete? As someone who lives in the city, I’m appalled when I look at the CPS CAFR and the CPS TRS CAFR. My goodness, CPS has a net position of -10.9 billion dollars, and TRS has an unfunded pension liability of -11.01 billion dollars, yet the media really doesn’t seem to know. Shame on them.