The state of Illinois is $203 billion in debt. The situation in the ‘Prairie State’ is so bad that government officials are looking at filing for emergency bankruptcy as a viable option. How could taking such a step affect the rest of us, though? If the state lawmakers do go down that path, who’s going to approve it?
Pensions are the single largest driver of the state’s debt burden. Illinois closed the 2015 fiscal year with nearly . Per taxpayer, that’s $45,500 in debt, and growing.
With the debt creeping higher and higher every year for the past decade or so, there doesn’t seem to be much of a choice in the matter. 10 years ago, Democrats introduced a 78-page bill that would “reform” the growing debt that the state had already accrued. One sponsor called it the first “meaningful” reform in 40 years, a reversal of “decades of neglect and bad decisions.” Another predicted that it could save the state up to $35 billion.
But in addition to reform, the bill later signed by then-Governor Rod Blagojevich allowed the state to skip half its pension payments for two years and to stretch out some expenses approved under the previous governor, Republican George Ryan. No one mentioned those could cost $6.8 billion. No one bothered to add it all up.
Democrats were so eager to pass legislation in time for their summer recess that they were just focused on pushing it through. Blagojevich signed the bill into law before anyone could stop him. Let’s remember Blagojevich, as he was the Democrat who was impeached and removed from office for corruption after he solicited bribes for political appointments, including Obama’s vacant U.S. Senate seat after he was elected president in 2008. He’s probably not the guy you want controlling your pensions and retirement funds.
Another reason Illinois faces such an unholy mess may be the inability of state leaders to fathom how even slight alterations to state employee retirement plans could carry billion-dollar costs or lead to bond-rating downgrades.
The bill, known as Senate Bill 27, was never a good idea. It shortened pension payments to buy immediate budgetary relief. The nonpartisan Commission on Government Forecasting and Accountability, the fiscal research arm of the General Assembly, concluded in 2013 that the largest cause of the unfunded pension liabilities was inadequate contributions from the state. Underpayments between 1985 and 2012 totaled $41.2 billion, the agency calculated. It also enhanced pension benefits.
Former Republican Gov. James Thompson agreed in 1989 to establish a compounding, three percent cost-of-living increase for retirees. Another round of benefit enhancements followed in the late 1990s. In May 2014, the state Supreme Court ruled that those changes can’t ever be revoked for tens of thousands of current and retired government workers.
After passing, SB27 almost immediately kicked off the downward spiral of Illinois’ debt problem we are all currently witnessing. The issue is with both state and local pensions and retirement funds, and it keeps getting worse.
So what can lawmakers do now to clean up the mess they made? Bankruptcy looks like a great choice because of the benefits that come along with publicly admitting failure. In bankruptcy, debt that cannot be repaid gets cancelled, as if it never existed. This includes unfunded pension liabilities for governments because there’s no realistic hope of paying them. For the state of Illinois specifically, that means part of its $153 billion state pension debt alone could be erased without any real issue. Unsecured bonds and other debts could also be cut. In reality, Illinois will never have a truly balanced budget or be restored to competitiveness unless those cuts are made.
Contracts and leases can also be cancelled in bankruptcy, which includes employment contracts and collective bargaining agreements. That means that not only could the state forego all of the money it owes current retirees, but it could also cancel the contracts it has with people who are counting on a retirement pension in the future.
One good thing about bankruptcy is that it provides an organized process to sort everything out. Without some sort of organization, a free-for-all eventually sets in for any entity that can’t meet its obligations. We all know by now that Illinois lawmakers can’t exactly be trusted to do things on their own, so keeping it orderly is necessary.
As it currently stands, Chapter 9 bankruptcy, which is a Federal legislation, is only available to cities, towns, and municipalities. There is no law that expands the process to states, but Congress could easily make that happen. If it did, Illinois would be the first example of this kind of massive cleanup effort.
One other way Illinois could consider cutting the large amount of debt is by amending the state’s constitution. Although on paper this might seem like an easy feat, it’s not that simple. While the Illinois Constitution would give the state express liberty to cut the debt, the United States Constitution could have objections within itself that would block the process. Furthermore, as we know people can be greedy, there’s also the possibility of lawmakers pushing for more cuts. What would start out as cutting the $203 billion in pension debts could expand into more areas and result in more cuts. While in theory this sounds just fine, it could eventually cause the entire state’s economy to collapse. At that point, it’s not just a debt issue; it’s a recession crisis.
The state has reached a point beyond any possibility of simple tax reform curing its debt plague. Perhaps having someone from the outside – who isn’t set on destroying the lives of hardworking citizens – take over the state’s fiscal issue isn’t such a bad idea either. As for the residents in Illinois, it may also be time to reconsider voting blue in the next state election. It hasn’t worked in your favor in over four decades.