Shifting the Burden of Government Borrowing

Illinois’ problems with government pension funds started with negotiated promises for excessive benefits.  Some Illinois pensions run at $100,000 or more per year and half of employees retire with benefits before age 60.  Those problems were inflamed by the state making smaller contributions than needed to support the benefit payouts.  Instances of early retirements and high pension payouts have weakened public sympathy for retirees, but employee unions demand fulfillment of exorbitant pensions they negotiated and the Illinois Supreme Court ruled unanimously that the government may not force retirees to accept less.  The state and workers are looking outside Illinois for a resolution while no one inside Illinois takes responsibility for this pension racket.

Time is no ones’ friend.  Seven years of weak economy and pitiful yields from bonds and equities failed to grow Illinois’ pension fund assets fast enough to keep pace with current and expected future payouts.   State revenues did not keep pace with all the commitments that the legislature and governor have promised and there is neither a budget surplus nor a compromise to fill the gap in pension funds.

An inescapable pension contribution of $6 billion in 2015 and $7 billion in 2016 depletes funds needed for the state’s essentials.  Illinois income, sales, excise and other taxes were $37 billion in 2015. Yet the state’s major pension funds have an unfunded liability of at least $111 billion. From Illinois’ perspective the easiest solution would be a federal bailout; but from the national perspective, an Illinois bailout would set an unacceptable precedent.  Many states and municipalities have shown discipline – they avoid spending more than they take in.  A bailout of Illinois would set a precedent that encourages other profligate states to demand equal bailout treatment.

Another smoldering powder keg of debt is Puerto Rico.  The island territory owes $72 billion that it borrowed over decades.  Puerto Rico has the highest ratio of municipal debt per capita grown from a vicious circle where it borrowed to balance the budget, raised the debt and had an even bigger budget deficit the next year.  The island has a 45% poverty rate and because of chronic and severe unemployment, many Puerto Rican residents left the island to seek jobs on the mainland.  The diminishing taxpayer base magnified budget deficits, which in turn enlarged the unpayable debt.

The island had begun taking desperate measures such as diverting money that was lawfully dedicated to repay other debts.  Ambac, one of the bond insurers, sued Puerto Rico seeking a court order to prevent and reverse the diversion of funds.  Of the $72 billion in debt only about $13 billion in bonds are insured.

A report commissioned by Puerto Rico recommended debt restructuring, tax hikes and spending cuts which would entail dire measures such as “fewer teachers, higher property taxes and suspension of the minimum wage.” The debt restructuring would be a form of Chapter 9 bankruptcy, although Puerto Rico is not currently eligible to file for bankruptcy.  If Congress made that an option, it would be seen as undermining those who bought Puerto Rico bonds on the understanding that the bonds could not be devalued by a bankruptcy court.  So far, there has been no mention of a Puerto Rico bailout done General Motors-style.  By comparison with Illinois, Puerto Rico seems rational if not repentant.  Perhaps it just has a better PR team.

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