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 that 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 LITGM
Puerto Rico’s labor costs are more than twice as much as the Dominican Republic just next door, and the DR’s tax structures and regulations make it much more business friendly. As a result, Puerto Rico has lost out on a lot of jobs and investment that went to it’s neighbor.
Now that there’s a rapprochement with Cuba, Puerto Rico’s tourism industry is going to go down the tubes as well to another neighbor. Instead of badly need reforms and restructuring, a Federal bailout will only prolong their decline.
It is worth noting that Mark Glennon is doing yeoman’s work at Wirepoints documenting the Chicago/Illinois crisis as well as calling out those who deserve it. Worth a daily read.
http://www.wirepoints.com
This is essentially the “long game” of the State of Illinois and the city of Chicago
I assume it’s also the tacit plan of the Obama administration. Why wouldn’t they want to force red-state taxpayers to bail out foundering Democratic machines?
“Why wouldn’t they want to force red-state taxpayers to bail out foundering Democratic machines?” – this. However, as Lex Green has pointed out, the theft is becoming more overt.
The problem is not that red state taxpayers will be forced to bail out blue states; that is only to be expected from the ruling class. The problem is that people in red states will put up with it. Secession is the word that must never be uttered in polite company.
Actually, when you look at who subsidized whom, the red states are themselves often on the gravy train.
“Actually, when you look at who subsidized whom, the red states are themselves often on the gravy train.” — PJ
Is that because of defense spending?
And poverty spending.
This “long game” will eventually run out of other people’s money. But what if, for whatever reason, the gov’t decides to get out of the game? In the long range, good stuff. But not in the short range. Theft always costs somebody.
When this morning I first read Carl’s post that decision question immediately stood out. It lead to an impossible-to-avoid follow up question. What if the present governors *intend* to hand the decision over to their philosophical/political opponents? Blame game.
Who will have the skills to explain the need to face disaster in the now rather than much bigger disaster(not very much) later?
Hay, look on the bright side.
Chicago still has hundreds of miles of well-groomed bike paths, unavoidable potholes, red light cameras, toney restaurants and bars, Irish Pubs on every corner, Wrigleyville drunks, lower Wacker homeless trolls, cheap *cough* parking, the 2015 Stash Cup Champions, a street murder rate greater than Damascus, a top notch school system, ketchup-free hot dogs, tomato soup in a bread bowl with cheese that passes for pizza and finally The Chicago Bears Drum Line. Ooops, almost forgot pro sports elite Superstars like Derek Rose and Jay Cutler to seduce you. Somebody stop me!! Wait. Did I mention that new George Lucas Museum being built on lakefront Park District property nearly free of charge?
A small price to pay : )
Cheers!
Puerto Rico? Tourism? I have never seen an ad for travel to Puerto Rico; never seen a reference to any resort in Puerto Rico; never heard of anyone vacationing there, even in fiction.
Cancun, Cozumel, Acapulco, Cabo San Lucas, Bahamas, Virgin Islands, Jamaica, Cayman Islands, Costa Rica, Aruba… even Cuba.
The Cubs are a source of revenue. Every 100 years they rake it in. All big cities are bankrupt. It is just a question of the faith people have in the dollar.
Rich – interesting comment re PR tourism. In my circle I have exactly one person that I know who has been there and was told that it sucked.
Dan,
Several years ago we did a Caribbean cruise. The next to last stop was in San Juan. The ONLY two things worth seeing were the big old Spanish fort and the Bacardi rum factory. The rest of the island was one big slum.
The cruise ship I was on stopped for a day in San Juan and it looked a bit like I imagine Cuba and Havana does. Old buildings with charming design allowed to run down but still nice. The fort is the major attraction. Crime is a serious problem. There was a case a few years ago of the girlfriend of the skipper of a large yacht in the harbor who decided to go jogging. She was kidnapped and called her boyfriend on her cellphone from the trunk of the car she was in. She was found dead.
I don’t know of any big resorts with security like other islands have.
They also have ‘bioluminescent’ waters that are supposed to be a good for nighttime kayaking. The water glows from specific species of plankton. However, I’ve heard it’s got lots of bugs. It’s actually named Mosquito Bay, which is a deal breaker for me. Bugs and I don’t get a long. I’ve found that I have an easier time on the drier, leeward sides of islands.