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 all of which 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 decisionmaking 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 that, as employees, they always pay themselves on time).
Atop all these woes is 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 is 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 its institutions and made the state business-friendly. Wisconsin under Walker has worked to tame its unions (although it has not yet implemented “right to work”) and is obviously tackling its 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 state and are not paying bills. There are huge implicit links between these entities in which shocks to 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 LITGM
California, no matter what Jerry Brown says, is Illinois with good weather. I heard this weekend that 60% of illegals are living in southern California.
Anyone want to buy a house with a barn on 6 acres near Minooka????????
The obvious black swan is an interest-rate shock. That would affect heavily-indebted govts at all levels nationwide.
I think the government knows that they can’t raise interest rates without collapsing everything. I think that we are in an era of low interest rates. Look at Japan and the ECB. There will be other negative effects from this policy but the idea that our government would bankrupt itself by raising interest rates in an era where we are continually borrowing money makes little sense.
“You can’t just “let” the city of Chicago go broke, or Cook County” — who is “you” here?
The taxpayers of the rest of Illinois? But they don’t have any money either.
The taxpayers of the rest of the country?
That may be a tough sell. It should be.
Why should others pay for the corruption and stupidity these governments?
Chicago and Cook County can both file for bankruptcy, as Detroit did.
The state of Illinois? That is a different question.
Nothing quite like a state failing outright to pay its obligations has happened for a long time.
I have some ideas, which I may write about here or elsewhere.
Oxymoron: “obvious black swan”?
Also, increased interest rates above what they are today is inevitable.
So it is when not if.
Still, it will be “unexpected” when it happens.
The govt has limited control over long rates. A govt-bond selloff could occur based on mkt dynamics outside of anyone’s control. At current low rates it wouldn’t take much of an increase in absolute terms to make new debt financing extremely difficult and significantly increase the cost of refinancing current debt. It may not happen but it could happen, and the possibility that it will is a Sword of Damocles hanging over the entire debt-financed big-govt enterprise.
All points valid. This is the spark and I put up a different post with solutions and the end state.
I realize that none of this will happen without calamity and there is a stretch between the fire and actually doing rational activities to fix problems.
It is interesting when you think when the Federal govt begins and the state and local government. We gave billions after hurricane Sandy to NYC and NJ which are supposedly rich regions of the USA. Defense contracting pours money into DC and adjacent areas. What is this but tax moves anyways?
In the end likely our state and local and Federal debt will become co mingled. There are so many bankruptcies coming up. The question will be a federal vs. a local or a state system.
We have a long strange road ahead of us. A lot of people look backwards into our history for lessons but I frankly don’t see a lot there. The lessons are forward and they are unwritten. We can watch the currency / debt / balance of payments / commodities situations play out in the Euro area with particular interest to Greece – also Japan and now Russian and soon to be most of South Africa and the middle east.
The fact that currencies and commodities are now bouncing around with debt makes this whole puzzle much more complex. If Russia did have debt outstanding (many of their companies do) and they need to settle up in USD it now is 2x as expensive. If you have euro debt and are tied to swiss assets or liabilities you have huge swings there.
Japan too is amazingly indebted with no growth and they have actual issues because they need to import fuel and food just to survive and face rising defense costs if they want to hold the line vs. china (maybe they shouldn’t).
All of these issues are going to be boiled in a big, big stew.
I meant South America not South Africa.
“A govt-bond selloff could occur based on mkt dynamics outside of anyone’s control.”
My understanding, which could be wrong as I am no expert, is that Treasury is creating money to buy debt which is not being sold on the bond market. This was 2012 and I don’t know the current situation.
Somebody is buying it and it probably isn’t Belgium.
While foreign investment in the U.S. has sharply declined since March, Belgium has quickly become the third largest buyer of Treasury bonds, just behind China and Japan, purchasing more than $200 billion in securities in the past five months, adding to a total stash of around $340 billion. This development is rather bewildering, primarily because Belgium’s GDP as of 2012 was a miniscule $483 billion, meaning, Belgium has spent nearly the entirety of its yearly GDP on our debt.
Clearly, this is impossible, and someone, somewhere, is using Belgium as a proxy in order to prop up the U.S. But who?
Recently, a company based in Belgium called Euroclear has come forward claiming to be the culprit behind the massive purchases of American debt. Euroclear, though, is not a direct buyer. Instead, the bank is a facilitator, using what it calls a “collateral highway” to allow central banks and international banks to move vast amounts of securities around the world faster than ever before.
Euroclear claims to be an administrator for more than $24 trillion in worldwide assets and transactions, but these transactions are not initiated by the company itself. Euroclear is a middleman used by our secret buyer to quickly move U.S. Treasuries into various accounts without ever being identified. So the question remains, who is the true buyer?
My investigation into Euroclear found some interesting facts. Euroclear has financial relationships with more than 90 percent of the world’s central banks and was once partly owned and run by 120 of the largest financial institutions back when it was called the “Euroclear System”. The organization was consolidated and operated by none other than JP Morgan Bank in 1972. In 2000, Euroclear was officially incorporated and became its own entity. However, one must remember, once a JP Morgan bank, always a JP Morgan bank.
Another interesting fact – Euroclear also has a strong relationship with the Russian government and is a primary broker for Russian debt to foreign investors. This once again proves my ongoing point that Russia is tied to the global banking cabal as much as the United States. The East vs. West paradigm is a sham of the highest order.
Interesting.
Over a secondcitycop, the story is circulating that the government of Chicago is meeting with the Jones-Day law firm; the people that set up the Detroit financial restructuring and bankruptcy arraignments:
http://secondcitycop.blogspot.com/search/label/money%20questions
From what I understand, it was run this way. The Treasury issues bonds, which the Federal Reserve buys. The bonds are an asset, and the Federal Reserve can issue something like 10 times the value of the assets as currency [fractional reserve banking]. That currency is used to buy bonds, ad infinitum. The Treasury sends the money to banks and brokerages, and the banks and brokerages put the money in the stock market which keeps the Dow Jones and S&P averages up. When the Federal Reserve buys the bonds, it means that the Federal government does not have to compete for bond buyers with interest rates, which gives the Federal government a functional near zero borrowing cost.
This lets the Federal government basically self-fund by functionally printing its own money. Which is why the debt ceiling [which limits bond sales] negotiations were always so critical, and why the Institutional Republicans would not fight, because they are getting their cut.
The third round of Quantative Easing [QE3], as the process is called was putting between $55-85 Billion a month into banks’ hands, which is what has kept the stock market up, there being no economics fundamentals justifying prices. In theory QE3 ended in October. However, anyone who believes Federal statements on economics is a sucker. Long before QE1, there existed the PPT [Plunge Protection Team], also called Maiden Lane after the side street near Wall Street where it was based. Its purpose was to use QE type maneuvers to try to stop stock market crashes, and its existence was secret.
If the current regime says they have stopped QE, the odds are that they are lying; because they lie about everything.