Detroit debacle a warning for Illinois

There is a lesson for Illinois in the financial fiasco that grips Detroit.

One of this country's most vibrant cities in post-World War II America, Detroit finally crashed and burned last week.

Filing for bankruptcy, Detroit has debts estimated at $18 billion to $20 billion that will claim many casualties as it is erased from the books — pensioners, bondholders, city employees. There's a lesson here, and people ought to pay attention.

Illinois is staggering under debt and deficits. So is the city of Chicago, whose bond rating was subjected to a triple-downgrade this week by Wall Street rating agencies. The state and city are a long way from Detroit's sorry condition, but Detroit once was a long way from where it is now.

"This is a difficult step, but the only viable option to address a problem that has been six years in the making," said Michigan Gov. Rick Snyder, who authorized the bankruptcy filing.

As Snyder indicated, Detroit has been on a downhill slide for a long time, and the warning signs were easy to see. Population dropped from 1.8 million in the 1950s to 700,000 now, vast sections of the city became vacant and disappeared from the property tax rolls, and city services collapsed to the point that 40 percent of city streets lights are inoperable and half the city's parks are closed.

Still, city officials kept spending more than they took in, borrowing to make up the difference. Unions representing city employees resisted reductions in their unaffordable salaries. Municipal corruption was common.

But if something can't go on forever, it won't; the result is the largest municipal bankruptcy in this country's history.

It's unclear exactly how Detroit's financial woes will be resolved. But bankruptcy judges have extraordinary power to decide who gets what. It's possible creditors will collect only pennies for every dollar they are owed.

Here's one key issue that could hit home in Illinois. Michigan, like Illinois, has a state constitutional provision that bars reductions in pension benefits. What happens when a state guarantee runs afoul of federal bankruptcy law, particularly when there is not enough money to go around?

What about the bondholders? The municipal bond market will take a big hit if governments are allowed to escape their debts by filing bankruptcy. Then again, why shouldn't those foolish enough to lend money to a fiscal wreck like Detroit be subject to the rules of caveat emptor?

The ultimate question, however, is this: why didn't the responsible officials take action when they could, decisions that would have caused pain and led to public outcry but avoided the ultimate agony of bankruptcy?

They were both ignorant and cowardly. They concluded they would be long gone before disaster struck. They feared they would be denied re-election if they did what had to be done.

Doesn't that sound a lot like Illinois, where our corruption, debt, deficits and pension woes have reduced the state to a national joke? Haven't our elected officials, like those in Detroit, repeatedly kicked the can down the road to avoid making decision that would cause short-term pain but avoid long-term agony?

Haven't Illinois' bond ratings been repeatedly downgraded, certainly not to the degraded status of Detroit's but low enough to cost taxpayers multiple millions extra to engage in routine borrowing?

Aren't Illinois' pensioners worried about the state keeping its promises to them, just as Detroit's pensioners are worried about whether they'll get a check next month and, if so, how much it will be reduced?

Detroit is in an agonizing situation, and there will be plenty of pain to spread around. Wiping out $18 billion to $20 billion in debt isn't easy, but it will be done.

As a state, Illinois can't file bankruptcy. But like Detroit, it can and has run up debts it can't pay, seemingly heedless of the long-term consequences of living for today and not thinking about tomorrow.

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Joe Melugins wrote on July 21, 2013 at 2:07 pm

Big difference between Illinois and Detroit. Moody's in its recent downgrade of Illinois bond rating even used such terms as: "Illinois still has a diverse and large economic base, with above-average wealth levels." and "Large, diverse, and wealthy economy"
- http://tinyurl.com/mbobo4g Does that sound like Detroit?

Illinois also has the 5th highest gross domestic product out of all 50 states.