Illinois politicians should take note as Greek, Puerto Rican debts blow up: ‘This is not politics, this is math’
For Greece and Puerto Rico, avoiding sustainable solutions has lead to fiscal ruin. When will Illinois’ lawmakers stop whistling past the graveyard?
Illinois is not Puerto Rico, nor is it Greece. And the problems of Chicago are different from the problems of Detroit. Illinois’ state economy, though massively underperforming due to a vast array of public-policy disadvantages, is still diversified and integrated into the world’s greatest national economy. And the Chicagoland area is still one of the most talented regions in the world.
However, there comes a day when political leaders must realize that math is math, and that pyramiding debt and pension obligations can and will spin out of control, regardless of where in the world you are. That day is fast approaching for Illinois, and especially so for the city of Chicago.
On the heels of more financial chaos in Greece, Puerto Rico Gov. Alejandro García Padilla declared the island’s debts are not payable. In Padilla’s words, as quoted in the New York Times on June 28: “There is no other option. I would love to have an easier option. This is not politics, this is math.”
The Puerto Rican leader’s words are certain to rattle the increasingly fragile U.S. municipal bond market, where Puerto Rico is seen as one of the weakest credits. Puerto Rico’s problems could lead to increased costs to borrow for U.S. cities and states, especially for junk-rated municipalities like Chicago.
Puerto Rico is not yet eligible for bankruptcy, but Padilla’s administration is looking to change that. Administration officials are pushing for a bill in U.S. Congress that would allow Puerto Rico’s public corporations to go bankrupt, and perhaps allow the central government to file for bankruptcy as well. Steven W. Rhodes, the retired federal judge who oversaw Detroit’s bankruptcy and has since been hired by the Puerto Rican government, put it bluntly: “They need Chapter 9 [bankruptcy] for the whole commonwealth,” he said.
Meanwhile, in the cradle of democracy, the Greek government declared June 28 that banks will not open until July 6, and even then Greeks will be limited to 60 euros per day in bank withdrawals. The Greek stock market is also closed. Financial chaos continues to reign in the fountainhead of Western civilization, as decades of unsustainable spending, borrowing and pension promises, capped off with the blow of the Great Recession, have sunk the Greek isles. Debt default awaits the Greeks.
These harsh lessons should not be ignored in Illinois, where the lay of the land is different but the math is increasingly similar. In Chicago, the city owes the teacher pension fund a $634 million payment on June 30, which city officials say cannot be made without state assistance. With more people drawing money out of the Chicago Teachers’ Pension Fund than paying in, this problem will only get worse.
Basic math has already reared its head in places like Greece and Puerto Rico, along with U.S. cities like Stockton, California; Vallejo, California; and Detroit. The results are ugly. The same basic math is catching up to Illinois and Chicago.
There are three overriding lessons from these examples that should be taken to heart by Illinois politicians.
1. Kicking the can down the road is no longer a solution. It is the problem.
- Springfield and Chicago politicians have kicked the can down the road for decades. All they’ve done is put off the problem and make it bigger.
- Continuing to make pension promises that cannot be paid is an immoral and unjust way to treat both taxpayers and government workers. This process is perpetuating financial uncertainty for every worker, taxpayer and businessperson looking to invest in Illinois, and is nothing short of scandalous.
2. There is no solution to any of these problems without economic growth. In the words of Puerto Rico’s governor, “[w]e have to make the economy grow. If not, we will be in a death spiral.”
- Illinois has the nation’s worst recovery from the Great Recession, with 240,000 fewer people working today than before the recession began. This economic slack is a budget-busting loss for Illinois governments.
- Out-migration to other states is at an all-time high, as Illinois taxpayers take billions in annual income to other states every year. Illinois taxpayers are increasingly boosting public budgets in Indiana, Wisconsin, Texas and Tennessee.
- This is becoming ever more clear in Illinois, where most reasonable people realize state budgets are annually broken because the generator of tax revenue – Illinois’ state economy – is failing to function to potential.
3. Stop preparing to be unprepared. Illinois and Chicago politicians have done almost nothing to put policies in place that will prepare for the next recession or financial problem. Here are some suggestions:
- Acknowledge that there are recessions every five to 10 years in U.S. history. These recessions have been getting increasingly ugly, and the next one is likely not too far off. Illinois and Chicago are totally unprepared to deal with the finances of a shrinking economy.
- Do everything possible to encourage economic growth and lock in the gains of a larger state economy. Gov. Bruce Rauner’s Turnaround Agenda contains major pieces of economic reform that are necessary to make the most out of Illinois’ potential.
- Pass a state law that will allow municipalities to restructure through federal bankruptcy. Few things could be as ugly as insolvent Illinois cities that are prohibited from restructuring their debts and obligations.
- Put a constitutional amendment on the ballot to repeal the pension-protection clause and allow pension obligations to be changed on a going-forward basis. It is absurd that taxpayers are locked in to pay for pension benefits on work that has not been done yet, leaving the state with no way to control pension obligations that won’t even be earned until decades from now.
With every day that passes, Illinois lawmakers are whistling past the graveyard, allowing the future to happen to the state rather than forging a future for the state. Avoiding the harsh consequences occurring elsewhere requires taking a different tack. Leadership in Chicago and Springfield must admit the mistakes of the past, and put in place policies emblematic of a lesson learned.