Let’s look at where the Illinois fiscal crisis now stands through the lens of how insolvencies are supposed to be handled. Some basic principles about how to give a broke operation a clean start are below – and giving the state a clean start is what we need. I put those principles in bold followed by how we are doing on them:
• List your liabilities honestly and accurately. Illinois does the opposite, vastly understating the scope of its problems. The primary problem – unfunded pension liability – is at least twice as large as the state says, but exactly how much worse they are is unknowable because defined benefit plans are too opaque. The state budget is largely incomprehensible and prepared in violation of the Budget Law, by the state’s own admission
• List your income sources honestly and accurately. Illinois is not yet trying. Springfield leaders say the decision whether to extend the 66% “temporary” income tax increase should be punted until the next election. That’s crazy – no rational reform plan can be formulated without knowing the status of so large a chunk of revenue. Many in Springfield also pin hopes on implementing a progressive income tax, but nothing is even drafted and no revenue estimates made. Finally, Illinois doesn’t bother to learn how many high earners are fleeing the state or changing residence, though they would be needed to pay the bulk of any new taxes.
• Stop the bleeding – terminate the sources of losses as rapidly as possible. I think the state has made progress on Medicaid costs and there’s little discretionary spending that can be cut much further. But it’s pensions, again, that are the problem. Earlier reforms were a joke — the state’s unfunded pension liability grew last year by $12 billion. Current reform proposals include guaranties that the state make annual future pension contributions, assuring continuation of the central culprit — the defined benefit plan which is a fundamentally poisoned concept.
• Level with all stakeholders about how bad things are – to get them on the same page for agreement on as much as possible. Illinois remains in denial. Illinois’ liabilities far exceed combined damage from hurricanes Sandy and Katrina, but Springfield won’t say that, unions won’t admit it to their members and most of the media are in La La Land. Most tragically, we let state workers continue to flush their own pension contributions down the drain. Teachers, for example, are putting over 9% of their paychecks into their pension, but that pension has only 18% of what it needs to fund its obligations and is toast.
• Do it big, do it fast and do it decisively – a reorganization or bankruptcy, that is, that realistically puts revenue and payments on liabilities in sync. The state cannot file for bankruptcy, but if Springfield had the courage it could force a comprehensive reorganization and reform plan on all parties. That would be complicated, unprecedented and painful but would give the state a clean start. My confidence that current leadership will do that is exactly zero. A few state senators have suggested reforms with some worthwhile elements, but they would solve maybe ten percent of the problem and key leadership has shown no support for them. Where’s our governor? Off to Germany. What’s the schedule for new legislation and what will it include? If Madigan and Cullerton have a plan for when they get veto proof power over the state on January 9, they sure have kept it a secret. Delay punishes all stakeholders, especially when credit downgrades have driven up borrowing costs, but Springfield shows no sense of urgency.
In short, we’re screwed. Only a catastrophic shock of some kind will jolt Illinois into acting as decisively as it must to get a clean start, though I am hard pressed to say what that shock might be. More on that in a later article.