By: Mark Glennon*

The figure I deeply admire in The Big Short, Mark Baum (Steve Eisman was his real name), had a simple reaction when financial screens began to bleed red as the subprime mortgage market collapsed and the Great Recession began: “It’s happening.”

 

Illinois’ descent isn’t like that. No single day, month or even year will be marked on a chart to stick in the history books. But it is happening. Illinois is gradually bleeding out through ever deeper wounds inflicted by its own government. The most common question I get here is when it all blows up, but I doubt there will be any explosive event.

 

It’s not just happening, it’s worsening. The most recent news marks a death spiral in full swing. Population is shrinking, the tax base is eroding and the state’s revenue is declining, all while the underlying causes remain unaddressed and debt soars for the state and most of its municipalities.

 

One credit rating agency last week finally conceded that death spiral, at least tepidly. “A self-reinforcing cycle of population loss and economic stagnation could greatly complicate Illinois’ efforts to stabilize its finances,” Moody’s  wrote. That’s important because rating agencies have shamelessly focused on the short term, cheering tax increases that cover debt service for the moment but ignoring the long term effect of driving off taxpayers. Well, the long term has arrived.

 

The press remains complicit by missing the full scope of the crisis. Major stories are ignored. For example, a recent RealtyTrac study found a stunning 500,000 Illinois homes — nearly 20% of houses in the state — with seriously underwater mortgages. That is, the mortgage balance exceeds home value by at least 25%. I was asked about that yesterday by Dan Proft while taping for his Illinois Rising radio show that airs on Sunday. He’s about the only one to recognize how horrible that fact is in itself. He asked me afterwards to provide the source the numbers I discussed. (It’s linked here, and kudos to Proft for being conscientious about facts.)

 

Most political reporters have long mocked doom and gloom about our problems. They ridiculed the “Illinois is Broke” campaign of The Civic Federation and the comment by Ty Fahner of The Civic Committee that Illinois’ pensions may be “unfixable.” They ignore superb research long produced by the Illinois Policy Institute. One long-time member of “the sky isn’t falling” crowd came around recently — almost. That’s Rich Miller, the most influential political reporter in the state. He wrote last week that Illinois is in danger of becoming a “failed state.” But what’s his solution? “Throw [Gov. Rauner] a bone or two” on his reform agenda. No. The list of reforms Rauner initially wanted is down from some 44 items to just three or four. Illinois should be implementing the whole initial list, and more.

 

The Illinois General Assembly majority, the Chicago City Council and Mayor Emanuel are the obvious villains, but as for the ultimate culprits — voters who elect them — consider what Alexander the Great supposedly said about why Asians in his day were easily made slaves: “Because they never learned to say ‘no.'” Just saying ‘no’ to the incompetence, graft, lies and rank stupidity of their own government would end it all. But Illinoisans, especially Chicagoans, won’t say it, content to march blithely into indentured servitude.

 

There is no end in sight except for a small hope that the majority of the General Assembly turns over in two years and Rauner is re-elected. A budget compromise now will make little difference because the true deficit will remain massive. Our crisis will continue to worsen. Each day lost deepens the hardship to come.

 

We repeat our view that Illinois’ imperative should be having its Congressional delegation work for amendments to Chapter 9 of the U.S. Bankruptcy Code to make it a fast, efficient, predictable means to a fresh start, with the general public’s interest made paramount, and the option of bankruptcy should be extended to states as well.

 

It’s happening. Deal with it.

 

 

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

 

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bob oriole park
The city just sold 1.1 billion dollars in bonds to pay off legal judgements and refinancing other debt. Those of us in the city are getting hit with the largest property tax in modern history, and it’s nowhere near enough. That’s in addition to the flush tax, garbage fee, plastic bag tax and other assorted fines and fees. Chicago Public Schools sold 1.6 billion dollars worth of bonds in 2016, and they still manage to have over a billion dollar budget deficit. Meanwhile, the state is at least $12 billion behind in past due bills. We lost 16,700 jobs in December, so our leaders answer is to… Read more »

Excellent Column Mark
I touched on similar themes today as well
Explaining Dysfunctional Illinois in One Word, One Idea, One Person
https://mishtalk.com/2017/01/09/explaining-dysfunctional-illinois-in-one-word-one-idea-one-person/
Mish

pquilici
Sadly, the voters don’t get it or don’t care. My Village of Skokie grammar school district, East Prairie #73, passed a $47 million bond issue for a new building by a 65 to 35 margin. Most folks will see an $800 plus extra hit on their property taxes. They don’t understand that the salaries and pensions paid out by the school precluded the rational funding of plant replacement over time instead of hitting a community with many retirees on fixed incomes with a mega increase. And we know more is coming from other quarters, especially the state. The ability of the tax base to keep paying is… Read more »
Howba

I left Illinois for Virginia just a few years ago, and I smile every time I pay my taxes in Virginia, which are literally half what they were in Illinois. The Illinois property taxes were horrible in the Chicago western suburbs, there were too many taxing bodies (fire district, municipality, township, school district, library district, county, etc…) driving up costs, even with declining home values, they just upped their percentages. The Illinois solution is just to raise more revenue by raising taxes, but no brakes on spending. The crookery was rampant, and you don’t fully realize the extent until you’re out of the system.

Let’s consider the counter-factual. Whom should Chicago voters have selected in the last mayoral election? Or the one before that? Or the one before that? The reality is somewhat different that what you’ve painted. Although Democrats have committed malpractice in Chicago, Republicans have been complicit. The two parties have divvied up the state and agreed not to compete with one another. By far the greatest number of elective offices in Illinois go uncontested or at best not seriously contested. Speaker Madigan is elected by a very small number of voters and his fingerprints are all over Illinois’s problems. What do you suggest voters other than those in… Read more »

Put Madigan and Cullerton in prison, where their ill-gotten billions are worthless. Elect a Republican majority in both houses. Pass a state constitutional amendment allowing the state to renegotiate pensions. Pass a state constitutional amendment requiring pensions to use market (FASB instead of GASB) discount rates. Allow states to go bankrupt.

See michaelmadigan.com, he had competition in his district but he derailed it. As to your other point, the movie covers that too. Chicago, and the state of IL is gerrymandered ferociously in favor of the Democrats. Without real competitive elections, there is no way to escape the death spiral.

Andrew Szakmary
Sorry, but the actual annual population estimates are not particularly supportive of the hypothesis that the very recent shrinkage in Illinois’ population is due to high and increasing taxes. Here are the Census Bureau’s Illinois population estimates as of July 1 of each year: 2010 – 12,841,249; 2011 – 12,861,882; 2012 – 12,875,167; 2013 – 12,889,580; 2014 – 12,882,189; 2015 – 12,859,995; 2016 – 12,801,539. If you don’t want to take my word for it, verify them here: https://factfinder.census.gov/faces/tableservices/jsf/pages/productview.xhtml?src=bkmk. The increase in the income tax from 3% to 5% happened as of January 1, 2011. Granted, this was initially offset by a temporary 2% reduction in the… Read more »
Bruno Behrend

Look at long term trends of the adjusted gross income from millions of tax returns.

http://www.howmoneywalks.com/irs-tax-migration/

One need not be a libertarian / conservative ideologue to see the obvious. And yes, sooner or later they actually WILL run out of other people’s money.

nixit
Andrew, these statistics from the Census Bureau tell more about our population-related revenue woes than your conjectures about why people move: Persons 65 years and over, 2015 = 14.2% Persons 65 years and over, 2010 = 12.5% Assuming 65 is the age of retirement, that’s an additional 200,000+ residents that are no longer on Illinois’ tax rolls because their retirement income is not taxed. And that’s a conservative estimate as I’d bet there are more retired folks under 65 than folks over 65 that are still working. And the percentage increase I noted above is the largest increase among any age group in the state. In a… Read more »
Glad you wrote this. We all knew that the math was against them. Here is where the explosion will happen: The Fed starts aggressively moving Fed Funds rates higher in response to an overheating economy. Illinois doesn’t participate in that growth since so many businesses have left the state. Inflation comes to the US, but STAGflation comes to Illinois. In municipal bond markets, holders of Illinois bonds find no bidders at any price or at prices that seem preposterous. The Bond Vigilantes will have their way with Illinois. I own a muni bond in McHenry County (water bond). I can’t get any bid to sell it. No… Read more »
Evan Bour

I disagree on one thing mark. There could be one or two Explosive events.
Public schools across the state shut down due to no funding.
Or a major major tax hike atleast 2-3X the one in 2011.

Steve-O
Mark, what a tour-de-force you’ve written. Big-time Congrats !!! Democrats and their govt-ee unions have bankrupted the state and city with egregiously high pay and pension promises. Only a bankruptcy to tear up the union agmts will restore any sanity. Rahmbo’s 0.5B/year prop tax increases was a foolish and will be destructive response. It’s enough to continue killing property values and crushing homeowners, but not nearly enough to make a dent in the pension tsunami that will arrive. To review, because this can’t be stated often enough, the City has has 80,000 ‘ees (also 30,000 retirees) including public schools, with $5.5B/yr Payroll for the ‘ees. At a… Read more »
jake braekes
Lurking in the swamp of the 500,000 underwater mortgages, are those who lost equity but never went below the “water line”. Those people lost most of the equity in their homes when the values tanked, and many in these areas have not had the value come back to pre-crash levels. And it’s not likely to for various reasons, one of the main ones being that whilst the values tanked the property taxes increased, appeal or not. And in the years when the property taxes did not increase a lot (it always increased some, especially outside of Chicago proper), the multiplier increased. Lose, lose. And lose is what… Read more »

I sold my house in (Kane County) Geneva, IL in 2003 for XXX. The taxes were $14,000 per year. In 2015, the exact same house sold for XXX-$200,000. The taxes on it were $18,000. That explains it all in a nutshell.

Jbryd

Looks like you’re doing just fine points… not sure why you didn’t use real numbers to prove a point

nixit
Mark – Has anyone ever quantified the impact of a tax hike on other revenue streams? It sounds like Springfield is going to settle on 4.75%. Worse, it might be 4.9%, basically treating the tax rate like the price per gallon of gas and trying to trick us into thinking, “Well, at least it’s not 5% again!” My understanding is that every 0.25% hike in the tax rate brings in $1B in revenue. So if the state is pulling $4B from the taxpayers, isn’t that $4B that can’t be spend elsewhere? I would think sales tax revenue might stagnate. Maybe smaller deposits into 529 college savings plans?… Read more »
anonymous

This is all why Bruce should reject the budget deal being reported. You say it won’t accomplish much but in fact it will just hurt. More billions of tax dollars wasted, more people leave.

Matt

It already happened. And if Rauner doesn’t win; it’s over.

The billionaires on the other side are already lining up against him. Party trumps logic.

Apropos of little, one of the actors in the Big Short was one my college roomies: Rudy Eisenzopf

http://www.imdb.com/name/nm5647921/

His character was Lewis Ranieri

Back to your point – it’s like the Hemingway quote about going bankrupt: first slowly, then all at once

https://www.goodreads.com/quotes/102579-how-did-you-go-bankrupt-two-ways-gradually-then-suddenly

Michelle

Mark, you are just like Mark Baum!!! Keep up the good work.

Sharon

LOL. He looks like him too. And note the same slouchy posture!

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