Monday, January 19, 2015

Illinois Government, Broadly Defined, Will Have A Major Crisis by 2017

The fact that the State of Illinois has dire fiscal problems is well documented. If you just type in headlines like "Illinois is broke" into your web browser and you can spend hours reading. One of the best is Illinois Policy.org which brings together articles from various news sources into a coherent theme. We have a new governor, Bruce Rauner, who is wealthy and thus unlikely to be entangled in corruption, who is pledging to take on this giant mess which is a cause for optimism.

The issues, however, are much larger. It isn't just the state of Illinois which is in deep crisis - we have an interconnected set of entities which each are on the verge of facing fiscal woes, who in turn can tip other entities off the fiscal cliff. The city of Chicago also has very significant financial problems, mostly from pensions as well, which it has been papering over for many years with debt and by allowing its unfunded pension issue to get ever larger. Cook County, too, which is one of the largest governmental counties and entities of its nature in the USA, is also facing dire challenges.

Once you get beyond the state, the city of Chicago, and Cook County, you encounter myriad minefields from our plethora of governmental units. Illinois has more governmental entities than any other state, 8400, as you can see from this article. Most of them have various taxing powers, debt they've raised, and liabilities like pensions and health care for workers that are not funded. Look near O'Hare, where the (tiny) city of Rosemont has funded huge shopping malls, convention centers, and even a casino by floating debt. In the end this debt is substantially backed by the state whether that guarantee is implicit or explicit; a city of a few thousand residents can't normally fund this sort of largess.

But the challenges are much deeper than this. These entities, much of which are overseen on a local level, invite vast opportunities for institutional corruption. We saw this on Metra, where the scandals caused the prior president to commit suicide (by standing in the way of a train, no less) and cast a light on the squalid pay for play decision making process of a typical entity in our state.

The situation has become so bad that even in a time of record low interest rates, when there are many buyers of debt with any sort of return, that Illinois and the city of Chicago often cannot take advantage of municipally funded debt (which carries a lower interest rate because individuals are not subject to Federal taxes on the interest) because this debt has to be used for capital purposes and can't just be used to pay day-to-day bills. Thus they are forced to issue "taxable" debt, and pay a higher interest rate. Many of the issues are essentially "scoop and toss" where we just take the entire principal and interest of expiring debt, refinance the whole thing, and just throw it out into the future, growing ever more indebted.

The state has been surviving not only by the fact that interest rates have plummeted but by our penchant for not paying our bills. Even with the recent tax increase, the state is far behind in paying off billions of dollars in bills to third parties (note, as employees, they always pay themselves on time).

Atop all these woes are the poor performance that we generally receive from the governmental entities. While there have been improvements (I have friends who send their kids to local city of Chicago schools), the schools in many government units are poor and the public hospitals are targets of frequent criticism. We also have "Chiraq" which is the name given by gang bangers to the City of Chicago which has had more murders than our ongoing wars in Iraq. Our universities are severely underfunded and many of them have turned to foreign students (especially from China) to fill in for the state funding that no longer can pay the bills. The key take-away is that not only are we in a major fiscal hole, but our performance from these governmental units is generally viewed as lacking and subject to extensive corruption.

If there is some sort of shock in one of these entities, say a major municipal strike, a huge corruption investigation, or a big lawsuit that fails, or just a lack of buyers for our ever growing pile of debt, any one of these units is teetering on a cliff. The difficulty is that these entities have many inter-connections. You can't just "let" the city of Chicago go broke, or Cook County. These entities are tied to our web of obligations and debt and will draw in the State once the problems are too large. Note how Michigan helped to corral the bankruptcy of Detroit, for instance, even though they mostly were staying out of the way of supporting their debt.

A significant percentage of these Illinois entities are insolvent right now, meaning that they don't have cash to pay day-to-day bills much less their share of debt obligations (formal) much less their informal or off the books debt (like pension or health care benefits in the future for existing employees). The fact that they need to borrow all the time just to keep functioning makes "triggers" for a mega-event lying all around the 8400 governmental entities listed above, much less the known major ones you see in the paper every day.

There is no way of knowing how long we will be able to keep playing this mega-shell game in the state of constantly piling on debt, unfunded obligations, and commitments to residents and third parties that can never be met. We have been bailed out by record low interest rates which allow us to keep issuing debt at low costs (it is high relative to the other states, but low relative to historical baseline rates) and a lot of liquidity in the market which means we can find buyers for our debt. The state also has been able to do things like let their pension funds fall to the lowest level in the nation and not pay bills for months or years at a time and it appears that this cannot continue in perpetuity.

Another element working against us is "relative" performance. Illinois is adjacent to other states that are emphatically reforming. Michigan, the cradle of our union movement, instituted a "right to work" law just like the deep south and is allowing Detroit to go bankrupt. Indiana long ago reformed most of their institutions and made their state business-friendly. Wisconsin under Walker have worked to tame their unions (although they have not yet implemented "right to work") and are obviously tackling their problems. Only deep blue Illinois (with Rauner a "speck" of red, about to get rolled by our veto-proof legislature) and historically liberal Minnesota are clinging to the old ways of tax, spend and bet on the government and unions to keep the party going. The difficulty is that if you are in the midwest already these other states compete for business and on the margins Illinois, although it has advantages, will start to lose business to these states and it is a self fulfilling prophecy.

The kindling is everywhere. All the governmental units have stretched their kit bag of "tricks" to the maximum. We have allowed our unfunded obligations to deteriorate worse than any other states, and are not paying bills. There are huge implicit links between these entities in which shocks in one will be difficult to contain in the others. There is also little confidence in our institutions due to chronic corruption which is well publicized and is in fact a national punch line. We also cannot put up a wall to keep our citizens here, and by relative performance the adjacent states are moving forward while we continue to slide backwards.

Based on all of this we are looking at some sort of "spark" to set the flames alight across these entities and then we will see what happens next.

Cross posted at Chicago Boyz

1 comment:

Gerry from Valpo said...

What a pickle. Few in Illinois seem to care when liberal politicians toss out all that free shit to buy voters.That new governor will be unable to stop the bleeding with Madigan and his union backers in control of all legislation. And that street punk mayor will be no help.

Maybe you could bug out while there's still time : )