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Monday, January 18, 2010 3:36 PM


Illinois Careens Towards Bankruptcy; Governmental Collapse Coming


Although there is no provision for states to file bankruptcy, Illinois is clearly insolvent, unable to pay its bills. Please consider the NBC News article Illinois Careens Toward Bankruptcy.

The latest count puts Illinois’ unpaid bills at around $5 billion – a contentious fact among the state’s gubernatorial hopefuls. The question is: what can Illinois do about its near-bankrupt status? Answer: not much.

Federal bankruptcy protection doesn’t apply to states, so there's no way for Illinois to hide from its creditors. And none of Illinois politicians are willing to make the tough choices needed to close the budget gap, like raising taxes or cutting spending, Crain’s notes.

Indeed, Illinois is not taking in cash, its liquid assets have dipped below $1 million at times, Comptroller Dan Hynes said, and the state is supposed to pay $5.4 billion into its pension fund next year and $10 billion the year after that. And that's just the beginning.

"The crisis will come when you see state institutions shutting down because they can't pay their employees," David Merriman, head of the economics department at the University of Illinois at Chicago told the publication.
Fiscal Paralysis in the Midst of Insolvency

Inquiring minds are reading the Crain's Chicago Business report Illinois enters a state of insolvency.
"I would describe bankruptcy as the inability to pay one's bills," says Jim Nowlan, senior fellow at the University of Illinois' Institute of Government and Public Affairs. "We're close to de facto bankruptcy, if not de jure bankruptcy."

Despite a budget shortfall estimated to be as high as $5.7 billion, state officials haven't shown the political will to either raise taxes or cut spending sufficiently to close the gap.

"The crisis will come when you see state institutions shutting down because they can't pay their employees," says David Merriman, head of the economics department at the University of Illinois at Chicago.

A record $5.1 billion in state bills was past due at yearend, almost doubling to 92 days from 48 days a year earlier the average amount of time it takes the state to pay vendors such as doctors, hospitals, non-profit service providers and other contractors.

The $5.1-billion backlog of unpaid bills doesn't include $1.4 billion in Medicaid and group health bills that haven't been processed, plus $2.25 billion in short-term borrowing that must be repaid soon.

Cash on hand varies from day to day, sometimes dipping below $1 million, says a spokeswoman for Illinois Comptroller Dan Hynes.

While California has an even bigger budget hole to fill, Illinois ranks dead last among the states in terms of negative net worth compared with total expenditures. The state's liabilities, including future pension payments, exceed its unrestricted assets by $39 billion, more than 72% of its total expenditures as of mid-2008, according to Richard Ciccarone, managing director and chief research officer at McDonnell Investment Management LLC, an Oak Brook money manager that invests in bonds. "It's probably higher now," he adds.

Unfunded liabilities and pension debt are projected to reach $95 billion by June 30. The state must contribute $5.4 billion to the pension funds next year, and more than $10 billion a year in the future. Required contributions will soon start increasing dramatically because the state has repeatedly pushed back a payment schedule enacted in 1995 to set aside enough to cover 90% of its pension obligations by 2045, up from 43% today, one of the worst unfunded liabilities in the nation.

The sharp rise in pension payments is the biggest factor pushing Illinois toward what a legislative task force last November called "a 'tipping point' beyond which it will be impossible to reverse the fiscal slide into bankruptcy." The little-noticed report on the state's pension problems warned that "the radical cost-cutting and huge tax increases necessary to pay all the deferred costs from the past would become so large that many businesses and individuals would be driven out of Illinois, thereby magnifying the vicious cycle of contracting state services, increasing taxes, and loss of the state's tax base."

While the Illinois Constitution protects vested pension benefits, that promise, like all the state's obligations, is only as good as its ability to pay. The Civic Federation warned lawmakers last fall that "there is mounting evidence that a judge could find the state is already insolvent.

If the state is found to be insolvent under the classical cash-flow definition of insolvency, which is 'the inability to pay debts as they come due,' it is not only the pension rights of non-vested employees that will be in jeopardy. All the obligations of the state, whether vested or not, will be competing for funding with the other essential responsibilities of state government. Even vested pension rights are jeopardized when a government is insolvent."
Fiscal Irresponsibility

Since I live in Illinois, I am bombarded with political ads. Not one of them, by any candidate, from either party mentions the pension crisis, let alone what to do with it. Instead we bombarded with finger pointing ads about the silliest of issues like who said what 10 years ago.

In addition, the candidates are also hopping on the "green brigade" and biofuels as if that is going to do something meaningful about a $95 billion budget hole.

I hope whoever wins has enough courage to say "we are broke", stop paying all but emergency ongoing bills and toss those unfunded pension liabilities into court where they belong. Unions and politicians helped bankrupt Illinois thus unions and politicians should be the one taking the biggest hit.

Unfortunately, whoever wins is likely to raise taxes and drive out businesses. Illinois is already a business unfriendly state. We do not need more taxes or higher fees. We need a budget that makes sense, and the only way a budget can possibly make sense is to address the pension crisis.

Dan Proft on the Pension Crisis

Amazingly, after writing the above I did find one candidate willing to say something about pensions. His name is Dan Proft, a radio commentator I had not heard of.

From Proft's Un-Fix Illinois Website.
State Sen. Kirk Dillard as well as every Republican in this state should flatly reject support from the teachers’ unions.

It is not only because the IEA supports a permanent income tax hike; which they do support.

It is not only because the IEA refuses to constructively engage in a conversation about structural pension reform to deal with pension obligations that are threatening to bankrupt Illinois; a conversation they refuse to have. ....

Rather, it is because the IEA runs school systems that annually relegate hundreds of thousands of children to second-class citizen status, preventing them from ever even having the opportunity to access an education where they can attain the reading, writing, and critical thinking skills they need to be successful, independent adults.

The reason your property taxes go up even while your property values decrease is to fund teacher pensions, not the education of young people.
Please consider this review of Proft's announcement for governor:
Conservative radio commentator Dan Proft of Wheaton announced his intent to run for governor Wednesday at the Williamson County Regional Airport.

Proft's message centered around Illinois' woes falling on nine Chicago democrats including Governor Pat Quinn and Attorney General Lisa Madigan and members of both parties who concentrate more on politics than doing what is right for the state.

"To un-fix Illinois, we must take the fight to the Chicago Nine who control this state," Proft said. "We must make them defend systems whose performance is indefensible."

He cited problems that politicians are unwilling to change in public schools, Medicaid and the Illinois Toll Highway Authority as holding the state back. He said his policies will promote conservative principles that consist of promoting competition, protecting private property, investing in families, keeping promises, decreasing tax and regulatory burdens, promoting a transparent and responsive government and respecting life.
Democratic Ticket

On the Democratic side, Quinn's idea to save Illinois is to raise the state income tax a whopping 50%. See the Huffington Post article Fighting Illinois Tax Increases for some details.

Also consider the January 17, 2010 article Quinn, Hynes eye tax hikes.
Tackling the state's growing, multibillion- dollar deficit has both Democratic candidates for governor pitching tax plans to stop the bleeding.

Democratic voters in the Feb. 2 primary election will pick between Gov. Pat Quinn - who as lieutenant governor assumed the state's top job in January 2009 when former Gov. Rod Blagojevich was ousted from office - and Comptroller Dan Hynes, the state's top fiscal officer.

Both Quinn and Hynes have devised plans to raise money to bring the state's budget back into balance. Hynes touts himself as "the lone voice of fiscal responsibility," and plans a tax overhaul to create revenue, while Quinn plans to increase state's 3 percent income tax rate to keep the state open for business.

"I am the only person who is telling the people what they need to hear. We have to raise taxes to pay our bills," Quinn told the SouthtownStar editorial board. "We cannot cut our way out of this crisis."

Hynes, comptroller since 1999 and a native of Chicago's Beverly community, proposes eliminating the state's flat-rate income tax structure and adopting a progressive tax rate that would see richer residents pay a larger portion of their income.
Teachers Union Backs Democrat Hynes, Republican Dillard

The Chicago Tribune reports Teachers union backs Democrat Hynes, Republican Dillard in governor's race.
One of the state's leading teachers unions is backing Democratic Dan Hynes and Republican Kirk Dillard in their respective governor primaries.

It marks the first time the political arm of the Illinois Education Association has issued separate endorsements in the governor's race.
That is all you need to know to dislike both of them. Yet in the Democratic primary, the only other choice is Quinn. Both are losers. Rather, you are a loser if you vote for either of them.

Republican Primary

In a recent candidate's debate Taxes Top List.
All six candidates repeated their vows to cut spending and to oppose an income tax increase.

  • "I will not raise taxes," said Bob Schillerstrom, (R) Candidate for Governor.
  • "I'm the only candidate in this race who has a proven tax record of not raising your taxes," said Sen. Bill Brady, (R) Candidate for Governor.
  • "I'll do three things as your next governor: I will cut spending, cut spending, and cut spending," said Adam Andrjeweski, (R) Candidate for Governor.
  • One went a step further- and promised to cut taxes. "Now the only time that structural tax cuts and statutory spending caps work--everytime they're tried," said Dan Proft, (R) Candidate for Governor.
  • "Raising taxes would be the poison pill for Illinois especially in the worst recession since the Great Depression," said Jim Ryan, (R) Candidate for Governor.
  • "I have no designs to raise taxes. In fact I have said I would reduce many taxes in the state of Illinois," said Sen. Kirk Dillard, (R) Candidate for Governor.

The only candidate not to participate was former republican chairman Andy McKenna, whose latest ad takes shots at candidates Jim Ryan and Kirk Dillard, who McKenna chides for not signing a no tax increase pledge.
McKenna is suspect for failing to show up at the debate. Dillard is out for the simple reason the teachers' union endorsed him along with Democratic candidate Hynes.

Proft is certainly a long-shot but he is the only candidate willing to address pension and to take a courageous stand against the teachers' unions.

Enough Is Enough!

If you want your taxes hiked, vote Democratic. If you think "Enough Is Enough!", then vote in the Republican primary and in the general election for a candidate you believe won't.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
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