States like Illinois sure could use a similar deal.
Puerto Rico’s leadership moved on Wednesday to place the island’s debt crisis into federal bankruptcy court, making it the largest United States government entity to seek court refuge from its creditors in American history.
The move sends Puerto Rico into uncharted territory. America’s recent spate of municipal bankruptcies has involved various state and federal laws, but Puerto Rico is not a state, so none of that hard-won precedent will apply. The outcome of its case could help determine where and how the deep financial troubles of certain states, such as Illinois, are resolved.
Puerto Rico has roughly $120 billion of bond debt and unfunded pension obligations to restructure, which dwarfs the second-largest similar episode. When Detroit went bankrupt in 2013, it set the previous record, with about $18 billion of bond debt and retirement obligations.
Under the Promesa law, the next step will be for the Chief Justice of the Supreme Court, John G. Roberts Jr., to designate a bankruptcy judge to handle the case.
The governor’s fiscal plan also calls for shifting all current government workers from pensions into 401(k)-style retirement plans. Current retirees will continue to receive their traditional monthly pensions, but the amounts are to be reduced by about 10 percent on average, with the smallest pensions getting the smallest cuts.
Exactly What Illinois Needs
The Chicago public school system is bankrupt in all but name. So are Illinois pension plans in general, and so are numerous cities that cannot repair their books because Illinois is a state that does not allow municipal bankruptcies.
Instead, public unions and public pensions demand higher and higher taxes which does nothing but drive businesses and individuals who are able to move out of the state.
Still No Budget
Illinois is the only state in the union to have gone more than a year without a full operating budget.
In July, Illinois will hit two full years.That’s how long this game of chicken between House Speaker Michael Madigan and Governor Bruce Rauner has gone on.
GARS Only 13.52% Funded
Illinois has accrued a combined net pension liability of roughly $130 billion on which it assumes a 7% return. Effectively, that is an interest liability of $9.1 billion a year even though that liability technically does not bear interest.
State Pension Crisis
“First off, the biggest problem we got with the budget right now is the interest they are paying on the debt. If I were the governor, … I’d say we are never going to be able to pay the full debt back, so let’s eliminate half the debt right now and write it off.
“If that’s not constitutional, it might be worth changing the constitution. That would dramatically reduce the amount of interest that they’re paying. The bond ratings would go up and the interest would go down.”
Madigan Sponsored Problem
The problem is all on Speaker Madigan’s side. He insists on tax hikes first and reforms second.
Governor Rauner has held out and I support that policy. Once the governor agrees to tax hikes no reforms will ever take place.
Five Desperately Needed Reforms
- Municipal bankruptcy legislation
- Pension reform
- Right-to-Work legislation
- End of prevailing wage laws
- Workers’ compensation reform
Number one on my list of Illinois reforms is bankruptcy legislation. It is the only hope for numerous Illinois cities whose hands are also tied by union-sponsored prevailing wage laws.
Despite massive gains in the stock market since 2009, Illinois pension plans have gotten deeper and deeper into the hole.
Even a modest pullback in the stock market will sink numerous Illinois pension plans. I expect much worse than a modest pullback.
Tax hikes are not the answer. Reform is the answer, and bankruptcy reform is at the top of the list.
Required Pension Contributions to Double or Triple
The same fate or worse faces Illinois.
Mike “Mish” Shedlock