Jim Dey | Best route for state may be bankruptcy

Jim Dey | Best route for state may be bankruptcy

Illinois finances are now — and have been for years — in desperate shape.

How desperate?

Here's what William M. Isaac, the former chairman of the Federal Deposit Insurance Corp., wrote about the debt-laden plight the state has found itself in.

"The city (of Chicago) and the state should act now to restructure their liabilities and put the fiscal mess behind them. This can be accomplished by utilizing Chapter 9 and other tools Congress just gave Puerto Rico. The process would entail about two years of unpleasant headlines, but the city and the state will rebound far sooner and less painfully than if they stay on their current paths," he said in an article published for The Bond Buyer.

Isaac's commentary was published in September 2016, and the state's financial circumstances are far worse now than they were then.

Here's what economics professors John Merrifield (Texas-San Antonio) and Barry Poulson (Colorado) say about Illinois' situation now.

"Unfortunately, the best hope for a failed state such as Illinois is to let the state go bankrupt. With bankruptcy and a no-bailout rule in place, elected officials would again have an incentive to enact effective fiscal rules and pursue sustainable fiscal policy," they wrote in a commentary published earlier this month.

Even if Congress were to change the law allowing states to follow the Puerto Rico example, Illinois is not going to file bankruptcy in the foreseeable future. Too many politicians have too much riding on maintaining the sick status quo for as long as they can do so.

But eventually all the chickens will come home to roost. What then?

Given that the state's elected officials — collectively — have shown no signs of doing much different in the future than what they've done in the past, Merrifield and Poulson contend the situation cannot be fixed.

They noted that shortly before the Legislature adjourned for the summer, state legislators including Democratic state Sen. Tom Cullerton of Villa Park, proposed a constitutional amendment that would cap state spending. That proposal was met by a collective yawn from their colleagues.

"It has taken Illinois' state and local governments half a century to accumulate unsustainable levels of debt and unfunded liabilities. Today, it is virtually inconceivable the elected officials in Illinois will be able to meet these financial obligations. Illinois cannot reverse 50 years of deterioration in dynamic credence capital by simply proposing a spending cap that will never be enacted, let alone be enforced," the economists said.

They make a strong statement about the proposed spending cap "never" being enacted, "let alone enforced."

Why such skepticism about the Legislature ignoring constitutional mandates? Because that's what members of the House and Senate do.

The Illinois Constitution mandates a balanced budget, a fiscal safeguard designed to avoid the problems the state now faces. So how does Illinois find itself behind the financial eight ball?

Because the Legislature has for years ignored the balanced budget mandate, evading it with gimmicks that made budgets wildly unbalanced in reality look balanced on paper.

"The state of Illinois incurred deficits reaching nearly $15 billion in 2017, and those deficits are scheduled to double to $30 billion in 2018. Illinois also has accumulated hundreds of billions in unfunded liabilities in public sector and health-care plans. ... The courts have exacerbated this problem by ruling the Illinois Constitution mandates state bailouts for public sector pension and health plans," Merrifield and Poulson write.

Puerto Rico, a victim of years of irresponsible spending, sets a potential example for recovery. When it finally hit the point of no return, Congress passed legislation that stayed bondholders from suing upon a default on bond payments, allowing that government to negotiate a debt restructuring with its bondholders.

If that failed, the new law allowed Puerto Rico to choose bankruptcy. That's an option Isaac speculated that "Congress would be willing to give" to Illinois and Chicago.

Gov. Bruce Rauner has urged legislators to pass a law allowing municipalities to file for bankruptcy. They can't do so now, a stricture that has forced Harvey to lay off firefighters and police officers to keep its door open. Other municipalities facing desperate pension-related foes face a similar future.

Isaac cited the example of Detroit, a once-great city that filed for bankruptcy when it finally was on the brink of collapse.

"When Detroit finally resorted to Chapter 9, the case lasted only 17 months," Isaac wrote.

Under a federal Chapter 9 bankruptcy proceeding, financially distressed municipalities receive protection from creditors by creating a plan between the municipality and its creditors to resolve the outstanding debt.

Assuming they were legal options, there's no question it would be embarrassing for a state like Illinois or a city like Chicago to file for bankruptcy. What more persuasive admission could there be of massively inept financial management by the bankrupt entity's elected leaders?

So far, the political leaders of Illinois either don't recognize the caliber of disaster they face or choose to ignore it.

Isaac said they have two options — "the state can deal with their problems the long-drawn-out way or the swift and decisive way."

"The drawn-out way entails years of over-taxation, suppressed economic activity, stopgap budget measures, shortchanged services and infrastructure and incremental reforms — delaying but unlikely avoiding a financial restructuring. The decisive way is to confront the fiscal crisis now and fix this mess once and for all through an orderly transition," he said.

For now and for the immediate future, Illinois has chosen the former course.

Deep in their financial hole, the state's leaders have ignored calls to quit digging, doubling down on the status quo by calling for more excavating equipment.

Jim Dey, a member of The News-Gazette staff, can be reached by email at jdey@news-gazette.com or by phone at 217-351-3569.

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