At least in the case of municipal bankruptcy there is an established legal mechanism to follow – Chapter 9 Municipal Bankruptcy. However, it is not just municipalities that are teetering on the brink, it is also states, and there is no legal mechanism for state bankruptcy. A look at the state of Illinois suggests one is going to have to be developed in the not too distant future:
It’s not quite fair to say that Illinois officials are doing nothing to defuse the most threatening pension time bomb in America. Darn close to nothing, that’s fair, which explains why the ratings agencies Fitch and Moody’s have put the state on their negative watch lists. The Land of Lincoln is heading toward yet another downgrade of its battered bond ratings if this near-paralysis keeps up … .Illinois Gov. Pat Quinn took to the ether last year to explain why underfunding the state pension system (the deficit is deepening by more than half a million bucks per hour) is not a good idea. When the state has to pay promised pensions even though the coffers are empty, said the governor, other priorities get squeezed—like schools, roads, and law enforcement …
… Awareness of the pension mess is not really the problem in Illinois. Everyone has known for years that the state is a fiscal wreck, with Exhibit A being the smoking crater in the pension fund. Thanks in large part to the rapidly growing slice of state spending that goes to pensions, Illinois has gone ten years without a genuinely balanced budget, and the state was essentially broke even before the Great Recession hit. Now it is roughly 300 days behind in its payments to vendors—despite having tried every accounting trick in the book to hide the red ink. In fact, awareness of the problem inspired the state legislature to raise taxes and deposit some actual money in the pension fund last year, rather than toss in the usual IOUs …
… The problem is … well, there are several problems, the first of which is leadership. Illinois did not have much during the period when former Gov. Rod Blagojevich followed his predecessor, former Gov. George Ryan, out of office and into federal prison on corruption charges. As the Chicago Tribune has amply documented, Illinois labor leaders, lobbyists, legislators, aldermen—even longtime Chicago Mayor Richard M. Daley—have been more likely to pad pensions than to properly manage them, starting with their own comfy retirement cushions.
Lawmakers promised more and more benefits to retired teachers, police officers, firefighters, and other government workers over the past decade; meanwhile, the pool of money to pay these pledges was neglected. The estimated shortfall of nearly $100 billion between now and 2045 is, believe it or not, a rosy scenario, given that a) it assumes robust investment returns and b) doesn’t include local pension disasters, like the estimated $20 billion hole in the City of Chicago system …
… The Pew Center on the States, which tracks the pension funding problem nationwide, says Illinois now faces the worst mess in the country, with less than half of its pension obligations currently covered. But other states are suffering from symptoms of the same disease. According to Pew, 34 states were short in 2010 of the recommended 80-percent funding level considered safe for pension systems. (That is the most recent year for which data is available; defenders of public pensions argue that 2010 figures exaggerate the problem because they collected near the bottom of the bad economy.) In all, Pew estimates the total shortfall in state pensions to be $1.38 trillion.
Fixing problems of this scale, where the political price is immediate while the benefits are stretched out over decades, is never easy. The widely acclaimed reforms passed in Rhode Island last year are bogged down in litigation, as unions fight to preserve the deals they negotiated. But each day that passes without major reforms, the mathematics of the Illinois crisis grind on: ever more retirees, collecting steadily larger checks, as tumbling bond ratings make it more and more expensive to borrow money to mask the hole.
As with municipalities, a state verging on insolvency also has to make hard choices that have a tremendous impact on the lives and livelihoods of ordinary people:
Posted on Sunday, December 1st 2013