Illinois is grappling with a full-fledged financial crisis and not even the lottery is safe – with Republican Gov. Bruce Rauner warning the state is entering "banana republic" territory.
Facing billions in unpaid bills and pension obligations, the state is hitting a cash crunch that is rare even by Illinois standards.
A top financial official just warned 100 percent of the state's monthly revenue will be eaten up by court-ordered payments. Rauner is calling a special session of the Democrat-led General Assembly in a bid to pass what he hopes will be the first full budget package in almost three years.
And Illinois will – literally – lose the lottery if the budget fails.
The state lotto requires a payment from the legislature each year. The current appropriation expires June 30, meaning no authority to pay prizes. In anticipation of a budget deadlock, the state already is planning to halt Powerball and Mega Millions sales.
“It is disappointing that the legislature’s inability to pass a budget has led to this development and will result in Illinois lottery players being denied the opportunity to play these popular games,” Illinois Lottery Acting Director Greg Smith told Fox News.
“We’re like a banana republic,” Rauner said earlier this month, after the General Assembly failed, yet again, to pass a budget package by the regular session deadline. “We can’t manage our money.”
The governor has called for a special session starting Wednesday. The state so far is operating on a series of stopgap spending packages.
But the problems are years in the making, caused in large in part by the state’s poorly funded pension system— which led Moody’s Investors Services to downgrade the credit rating to the lowest of any state. The state currently has $130 billion in unfunded pension obligations, and a backlog of unpaid bills worth $13 billion.
Reports have suggested the state could be the first to attempt to declare Chapter 9 bankruptcy -- but under the law, that’s impossible unless Congress gets involved.
“Nobody here in Illinois is considering bankruptcy—first of all, it’s not allowed,” said Steve Brown, press secretary for Illinois House Speaker Michael Madigan. “Second of all, it would damage the reputation of the state and it’s just not necessary.”
U.S. Sens. Dick Durbin and Tammy Duckworth, both Democrats from Illinois, declined to respond to Fox News’ request for comment on whether they would consider getting involved in introducing a measure allowing state bankruptcy.
“Illinois is the fiscal model of what not to do,” Rep. Peter Roskam, R-Ill., told Fox News, while not commenting on the bankruptcy question. “This avoidance in behavior toward dealing with our challenges is what leads to the devastating impacts we are seeing today.”
Just last week, the Illinois comptroller, who is responsible for paying the state’s bills, warned the office would be paying out 100 percent of Illinois’ monthly revenue, leaving negative funds for “discretionary spending. ”
But Rauner claims the Republicans have a new plan that could remedy the state’s crippling financial situation.
“Republicans in the General Assembly have laid out a compromise budget that I can sign,” Rauner said, calling it a “true compromise.”
The plan incorporates reforms like property tax relief, term limits, and spending caps, which have caused an “ongoing confrontation” between Madigan and the governor, one Republican leader told Fox News, adding that the two have been in a “stalemate” since Rauner took office two years ago.
“Gov. Rauner inherited this financial mess when he took office, and his proposals have been met by resentment from the speaker,” Deputy House Republican Leader Dan Brady said.
Brady added, “we are asking that the speaker allow for a date and a vote before June 30.”
But Brown told Fox News the governor isn’t making enough concessions.
“He’s not walking many back—the financial issues are serious enough, and he’s forcing things that have nothing to do with state government,” Brown said. “The biggest problem here is that the governor keeps associating a lot of things that do not have anything to do with the budget.”
Rauner has pushed for structural reforms, government consolidation and pension reform—some components that were able to pass on the Senate side.
“The people and businesses of Illinois deserve stability, not this ongoing chaos,” Senate President John J. Cullerton, a Democrat, told Fox News. The Illinois State Senate approved a balanced budget before the initial May 31 deadline that “matches” the governor’s spending proposal.
If the General Assembly fails to pass a budget package, they do have an option to pass another stopgap package, which lawmakers say is an option, but “not a good one.”
“We have a very real deadline looming,” Senate Republican Leader Christine Radogno told Fox News. “The alternative to not finding a compromise will be devastating to Illinois.”
Is this the financial trigger that starts a 2000 or 2008 sized bear market?
Chicago, IL, June 16, 2017 -- An article published today by The Fiscal Times raises the question: “Could Illinois be the first state to go bankrupt?” The suggestion is not far-fetched, says the nonpartisan financial watchdog Illinois Policy Institute.
Under current law, Illinois cannot file for bankruptcy. But Congress can and should amend federal bankruptcy law to give Illinois this option. To be honest, it would not matter if it did, politicians will simply throw the debts on the back of its citizens as they always have.
Here’s how dire Illinois’ situation is:
No budget: Illinois is the only state in the nation without a state budget. The last time Illinois had a full-year’s budget in place was 2013. Even when Illinois has had state budgets, they were not balanced; the last time Illinois had a balanced budget was in 2001.
Billions in unpaid bills: Illinois state government currently has $15.1 billion in unpaid bills. Vendors and service providers across the state are shutting their doors or reducing services on account of not getting paid by the state.
Skyrocketing pension debt: Illinois has more than $130 billion in unfunded pension liabilities. Local governments throughout the state, such as cities and counties, have racked up an additional $56.8 billion in unfunded pension liabilities.
Supersized pensions: The average career public school teacher in Illinois retires at age 59, has saved $153,900 for retirement account but will collect $2.2 million in pension benefits. The average career state worker retires at age 59, has saved $63,000 for their own retirement but will collect $1.6 million in pension benefits.
Government retiree health care-related debt: Beyond supersized pensions, Illinois is also on the hook for $56 billion in costs related to healthcare for government pensioners. It has no money set aside for this.
Budget deficit: Despite not having a state budget, most state spending is on auto-pilot. The state is poised to close the fiscal year on June 30, 2017 with a $6 billion budget deficit. The state will collect $32.4 billion in revenue but spend more than $38 billion this fiscal year.
Almost “junk”: On June 1 Moody’s downgraded Illinois’ credit rating to Baa3, just one notch above a noninvestment-grade, or “junk,” rating. Moody’s has also placed the state rating on “negative” watch, meaning the agency could downgrade Illinois again in the near future.
Is near-“junk” rating due to budget impasse? No. Illinois’s credit rating has been downgraded 21 times since March 2009. It had many downgrades during times when it had tax increases and budgets in place.
Illinois population is shrinking: Illinois lost more residents than any other state in the U.S. in 2016, according to the U.S. Census Bureau. That was the second year in a row that the state’s population declined.
No wonder taxpayers are leaving: Illinois has the second highest property taxes in the U.S. And this week, Republican state lawmakers and Republican Gov. Bruce Rauner – who campaigned on the premise of lowering taxes – proposed raising the state income tax by $5 billion a year, as well as implementing a variety of other tax increases or new taxes that would cost every Illinois household $1,125 a year in higher taxes.
Even the lottery is leaving: Thursday, PowerBall and Mega Millions announced they may drop Illinois due to its financial instability.
Refusal to reform: State politicians have a long-standing history of borrowing, taxing, and using other budgetary maneuvers to address budget deficits, rather than enacting structural and spending reforms.
Could this actually happen to us? Ask Cyprus, Greece, or Russia (1989)? Or, maybe we should ask the residents of these empires. Wait, where are they? Thats right, they drowned in debt and faded into history just as those before them!
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Socialism collapses rapidly when the public realizes that its government cannot pay its obligations AND taxes no longer cover those obligations. It is at this point the government will have lost the confidence of it own people. This is the catalyst that will bring everything down.
Nearly 600 State & Local governments are now in the hole and has reached nearly $1.2 trillion of unfunded pension liabilities in FY 2014. This reflects total pension liabilities of $4.798 trillion and total pension assets (or fiduciary net position) of $3.607 trillion. This staggering number is nearly 25% of the annual GDP and accounts for roughly 97% of all public pension funds in the United States. California is raising taxes to cover the short-fall for now, but this is going nowhere fast.
There are people on Capitol Hill who support confiscating all private 401 K plans in the country and replacing them with a monthly allotment. We know what will happen to that one, so you better have something else besides cash. The government cannot meet the promises for its own employees and they will turn to increasing taxes and confiscating private property. This will happen just as it has always happened in the past.
Government pensions are what destroyed the Roman Republic Empire and history is going to repeat sooner than later.
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Livio S. Nespoli has been a broker, registered investment advisor, and financial publisher since 1985.