The situation in Illinois is getting worse by the minute, as the state is just ten days away from entering its 3rd year without a budget, not to mention Democratic Illinois Comptroller Susana Mendoza saying that the state can no longer function if the current situation is not remedied ASAP. The thing is, if Illinois fails to get its books in order, it will be most probably downgraded to junk status and, in the worst case scenario, it will default on its 15 billion debt in unpaid bills.
Illinois elected officials were issued a dire warning on Tuesday by Comptroller Susana Mendoza via a letter posted on her own website.
The letter reads:
“The state can no longer function without a responsible and complete budget without severely impacting our core obligations and decimating services to the state’s most in-need citizens.We must put our fiscal house in order. It is already too late. Action is needed now.“
Reading through the letter, one will discover the reasons for Illinois’ dismal financial situation. And, if you’re a fiscal conservative like yours truly, you’ll not be very surprised to find out that Illinois was living far beyond its means for a long time, with the predictable end result of soaring deficits, culminating in an obligatory requirement for constant debt funding.
The full fledged financial apocalypse of Illinois is so bad that not even the state lottery is safe anymore. The state’s republican Governor Bruce Rauner went so far that it warned the state is entering banana republic territory, end quote. With regard to the lottery itself, the state lotto needs a payment form the legislature on a yearly basis, with the current deadline expiring on June 30th. And if the state fails to pay (which is highly probable) by June 30th, the lotto will have no authority to pay prizes. There are already plans to halt Mega Millions and Powerball sales in anticipation of a budget failure.
To deal with Illinois, and a little later with California, and after that New York, we need to legislate an orderly way for States to go bankrupt (currently it’s not allowed under bankruptcy laws unless Congress gets involved). We already have systematic bankruptcy procedures for lower levels of government (counties, cities, etc.) and many of the specific provisions in those “chapters” can be applied to States as well. For example, bond holders take a “haircut,” all contracts (including labor agreements) are voided, and the State is sheltered from creditor lawsuits. Bondholder and creditor representatives form as committees to restructure the State’s debts under the Federal Bankruptcy Court supervision.