Thursday, October 15, 2015

The Most Important Story No One Is Talking About - Puerto Rican Debt

Dan and I go back and forth on the relatively arcane topic of municipal debt. As we all know, the state of Illinois is awash in debt. The situation is so bad that:

1. The State of Illinois is operating without a budget
2. The city of Chicago is proposing a massive property tax increase
3. Cook County just raised our sales tax (one of the highest rates in the country, already) and is proposing additional fees
4. Chicago Public Schools face a major deficit and without some sort of massive state tax relief is likely going to face significant layoffs and a likely teachers strike
5. Note that we are one of the few states and cities to be in such dire straits that we issue TAXABLE debt instead of MUNICIPAL debt which is generally exempt from Federal taxes and some state taxes. This is due to the fact that you generally cannot issue muni bonds to pay off operating expenses (like payroll and legal settlements)

The long term most indebted players have been Detroit, Puerto Rico, and the State of Illinois / City of Chicago. We saw how the Detroit bankruptcy occurred, with bondholders generally taking it on the chin and unsecured pension holders in fact emerging in a relatively better situation.

Now Puerto Rico is up to bat. They have massive, unpayable debts of many varieties (some secured by full faith and credit, some secured with revenues, some bank loans, etc...) and their governor basically said so out loud. All of this is inevitable as their island's best talent has fled to the mainland USA and the remaining population is more and more reliant on government aid to survive. They also have failed to modernize their power infrastructure and / or build new industries outside of tourism which erodes their ability to compete against the mainland USA who in turn has much higher productivity.

The real issue - long term - is whether or not the Federal government will back up the states. This is essentially the "long game" of the State of Illinois and the city of Chicago - waiting to see whether or not the Federal government is really going to stand by and let us go bankrupt or not. If the government is ultimately going to pick up our debts, it is "business as usual", and the corruption, back-scratching, and non-competitive behavior can just continue indefinitely, with taxpayers across the nation picking up the debris rather than forcing the citizens of Illinois to clean up our act.

Today Puerto Rico and the treasury announced that they are working to backstop the Puerto Rican debt with some sort of Federal umbrella per this article.
Puerto Rico and U.S. officials are discussing the issuance of a “superbond” administered by the U.S. Treasury Department that would help restructure the commonwealth’s $72 billion of debt, people familiar with the plan said.
And what a great name! A "superbond" means that all the US citizens will pick up the "super" obligations of our corrupt, crony-laden, inefficient city and state. That's super!

This is the path out for Illinois and the city of Chicago. Play brinksmanship with Federal government and receive a backstop. Puerto Rico leads the way!

Cross posted at Chicago Boyz

2 comments:

Gerry from Valpo said...

"This is essentially the "long game" of the State of Illinois and the city of Chicago"...

Grab your ankles loyal subjects of Illinois.

Carl from Chicago said...

Ha ha the cronies in Illinois are passing their debts onto US taxpayers across the nation. That's the plan.