There is no provision for state bankruptcies under Chapter 9 law.
Instead, the governor of Puerto Rico, Ricardo Rosselló, petitioned for relief under Title III of a new federal law for insolvent territorial governments, called Promesa.
States like Illinois sure could use a similar deal.
DealBook reports Puerto Rico Declares a Form of Bankruptcy.
Puerto Rico’s leadership moved on Wednesday to place the island’s debt crisis into federal bankruptcy court, making it the largest United States government entity to seek court refuge from its creditors in American history.
The move sends Puerto Rico into uncharted territory. America’s recent spate of municipal bankruptcies has involved various state and federal laws, but Puerto Rico is not a state, so none of that hard-won precedent will apply. The outcome of its case could help determine where and how the deep financial troubles of certain states, such as Illinois, are resolved.
Puerto Rico has roughly $120 billion of bond debt and unfunded pension obligations to restructure, which dwarfs the second-largest similar episode. When Detroit went bankrupt in 2013, it set the previous record, with about $18 billion of bond debt and retirement obligations.
Under the Promesa law, the next step will be for the Chief Justice of the Supreme Court, John G. Roberts Jr., to designate a bankruptcy judge to handle the case.
The governor’s fiscal plan also calls for shifting all current government workers from pensions into 401(k)-style retirement plans. Current retirees will continue to receive their traditional monthly pensions, but the amounts are to be reduced by about 10 percent on average, with the smallest pensions getting the smallest cuts.
Exactly What Illinois Needs
The Chicago public school system is bankrupt in all but name. So are Illinois pension plans in general, and so are numerous cities that cannot repair their books because Illinois is a state that does not allow municipal bankruptcies.
Instead, public unions and public pensions demand higher and higher taxes which does nothing but drive businesses and individuals who are able to move out of the state.
Still No Budget
Illinois is the only state in the union to have gone more than a year without a full operating budget.
In July, Illinois will hit two full years.That’s how long this game of chicken between House Speaker Michael Madigan and Governor Bruce Rauner has gone on.
GARS Only 13.52% Funded
In March, I reported Illinois General Assembly Retirement System Only 13.52% Funded
Illinois has accrued a combined net pension liability of roughly $130 billion on which it assumes a 7% return. Effectively, that is an interest liability of $9.1 billion a year even though that liability technically does not bear interest.
State Pension Crisis
Illinois politicians have known for years about the state’s pension crisis, even if they have not taken serious steps to address the problem. Gov. Bruce Rauner recently spoke out on the cost of interest on the pension debt. Former Gov. George Ryan weighed in as well, saying:
“First off, the biggest problem we got with the budget right now is the interest they are paying on the debt. If I were the governor, … I’d say we are never going to be able to pay the full debt back, so let’s eliminate half the debt right now and write it off.
“If that’s not constitutional, it might be worth changing the constitution. That would dramatically reduce the amount of interest that they’re paying. The bond ratings would go up and the interest would go down.”
Madigan Sponsored Problem
The problem is all on Speaker Madigan’s side. He insists on tax hikes first and reforms second.
Governor Rauner has held out and I support that policy. Once the governor agrees to tax hikes no reforms will ever take place.
Five Desperately Needed Reforms
- Municipal bankruptcy legislation
- Pension reform
- Right-to-Work legislation
- End of prevailing wage laws
- Workers’ compensation reform
Number one on my list of Illinois reforms is bankruptcy legislation. It is the only hope for numerous Illinois cities whose hands are also tied by union-sponsored prevailing wage laws.
Despite massive gains in the stock market since 2009, Illinois pension plans have gotten deeper and deeper into the hole.
Even a modest pullback in the stock market will sink numerous Illinois pension plans. I expect much worse than a modest pullback.
Tax hikes are not the answer. Reform is the answer, and bankruptcy reform is at the top of the list.
Required Pension Contributions to Double or Triple
Inquiring minds will also wish to consider Required Pension Contributions of California Cities Will Double in Five Years says Policy Institute: Quadruple is More Likely.
The same fate or worse faces Illinois.
Mike “Mish” Shedlock
I wonder what a 49-star US flag would look like.
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49 stars? You are too optimistic.
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It looks like this:
http://www.usflag.org/the.49.star.flag.html
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I like that. Nice 1950s ‘retro’ look to it.
Any chance we could resolve Puerto Rico’s insolvency by ‘selling’ Illinois to them in exchange for all their worthlessness bonds? I’d call that an even trade.
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An M&A, one of those Wall Street style reverse mergers where Puerto Rico acquires Illinois. Voila, Promesa for PR’s IL subsidiary state.
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My crystal ball shows retail deflation.
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Mish it won’t do any good until the corruption is gone. They will be back to the trough. The corruption won’t be gone unless Illinois goes through a lot of pain.
Needed: Term limits. Tax state pensioners.
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The public unions that caused this crisis take a measly 10% cut.
Why are they not banned? Forever?
Why is every pension not cut to zero?
You keep using the word bankruptcy but I don’t think you know the definition of the word.
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Why don’t we just cut them loose to become their own banana republic complete with worthless currency. That would fix the problem. I mean, what do they have as assets, economic production, reason for habitation? We could call the West Side Story of Liberation. Perfect, made of television movie. Oh, we don’t have “television” any more…..
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You have to wonder why every government continues to move forward with the same tax and spend mentality when individually any rational person would agree mathematically it can’t continue. Is this just group madness like the dot com and real estate bubbles? This will end in great pain just like it always does but we will deserve it because people are pretty dumb collectively.
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The Free Sh*t Army votes.
And there are political parties that have had power for decades based on the FSA VOTES.
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“pretty dumb collectively”
BINGO!!!
That’s what makes the world go round, herding mentality.
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That’s how those in government gets to extract the most resources from their captives.
Noone would pay for their idiocies if asked up front, since non of these idiots are ever any more than self promoting incompetents incapable of doing anything of value. So they borrow to do it instead.
Relying on the captives being unintelligent and indoctrinated enough, to fall for the quick head fake that things they never would have paid for if asked, they are somehow OK to pay for because “we” have to pay “our” debt…..
Instead of having the brains and insight to realize noone has any at all obligation to pay for, nor comply in any other way with, any contract on which his explicit signature is not on the document.
If Madigan feels “we” need to pay “our” debt, he can go ahead and pay it. Ditto for the rest of the imbeciles dumb enough to fall for his nonsense. Leaving those of us a smidgen higher up the evolutionary ladder, to go about our lives undisturbed by riffraff of his ilk.
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Hold on. Write off the debt to eliminate interest payments? That would cause bond ratings to go up? HUH? If he’s talking writing off (defaulting) on half the state’s debt let them try to float a bond in the future. THEN you’ll see reforms!
Kicking the can down the road again. Biggest reform is to bring down the cost of providing healthcare-not health insurance- healthcare. Forget about U.S.competitivenes until then.
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I think what he wants to do is take the meager income from elderly American pensioners and give it New York banksters. Just another step in making America great again.
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He’s probably thinking in Argentina terms. Write off existing debt, wait a few years, and start borrowing again. Since, as all victims of progressive indoctrination have been told, “theeeengz are diiiiiferent noooow.”
Writing off the debt is an important first step. Then, a law stating no administration is in any way, shape, nor form liable for debts incurred by earlier administrations. Otherwise all you end up with is Groundhog day. With the additional kick in the groin of the Fed using every default, as an excuse for ever more robbery by debasement.
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We could break up the republic but the NBA, NFL, and MLB would’t allow it. Wasn’t there a hedge fund that held a lot of PR’s debt that was fighting against this bankruptcy? Where are they now and what are they doing about the PR bankruptcy?
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we’ll find out who loaded up on high paying PR bonds
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time to check my bond portfolio
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like dominoes,once it starts rolling,no one wants to be the first know that rico starts the ball rollin many more will be forced to follow
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“Despite massive gains in the stock market since 2009, Illinois pension plans have gotten deeper and deeper into the hole.”
Not surprising, as more money is paid out (interest, administration, pensions) every year than is collected (taxes, employee contributions). A rising stock market is insufficient monetary input. Illinois legislators are no doubt hoping for a hyper-inflation to inflate away the pension debt. What other hope do they have? No doubt the legislators figure they will escape with their pensions and lead a grand life in Florida or some other low-tax state. So, what me worry? It will be someone else’s problem, and no doubt the law will exempt legislators from pension cuts. In their minds they can go back to sipping drinks on some tropical beach far from the maddening crowds and crises. Those making the laws have an inherent advantage, and if not above the law can make themselves exempt..
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When did this Promesa event take place that allows BK for a US Territory, seems like 6 months ago it wasn’t around and who voted it in ??
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https://en.wikipedia.org/wiki/PROMESA
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Illinois is worse off than California – and that’s saying something. When Illinois implodes California won’t be too far behind. The common denominator is liberalism. An insidious and pervasive disease that slowly decays and destroys societies by choking off and killing productive labor through redistribution and public union rights.
This may sound strange but I hope I live to see the day when both come crashing down. I want my generation to get a taste of the recipe that we prepared and put on the stove.
IOW’s I want to see justice served.
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You and me both Old Timer. I’ll be munching on my popcorn enjoying the show. I love it when people get what they got comin’.
Mish, have any state or local governments done the sensible thing and gotten rid of pensions altogether and gone to 401K style plans like private businesses do?
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“The problem is all on Speaker Madigan’s side. He insists on tax hikes first and reforms second.”
In other words, he insists on no reforms.
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To each their own.
I do not want to pay ANYTHING for Puerto Rico nor Illinois nor ANY other state. THEY did it – let THEM pay for it – or suffer the consequences…..
Yes, it’ll affect all of us – but not as much as the precedence of having OUR fed $$ bail them out with ‘gifts’….’cause sure as hell, it will NEVER get repaid……
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Noone should pay anything for anyone involuntarily. That’s just freedom 101.
The specific Puerto Ricans whose signatures are on the loan documents may have some “obligation” to pay something. Noone else does. Ditto for Illinois and anywhere else.
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We need to reinstate suffrage so that only land owners can vote.
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the landed gentry, to you, sir. Have no worry, I will provide you with work. Put your back into it!
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Just as Bernanke said when asked if taxpayers bailed out the GFC banks. the money came from thin air, just by marking up the numbers in the faulty banks’ reserve accounts in the Fed.
Pension schemes are on a hiding to nothing. There is no way the earlier models will work as the economy was strongly growing until the end of the 1960’s so there was enough spare to put aside for pensions. Those days will never return, but the ageing population can still expect the pension. The government will just have to bite the bullet and do what Bernanke did. They actually do it already for the aged pension. just some people have ideological blinkers blinding them.
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Mish always talking good common sense on how to solve things. But the real answer to all this is to let what’s coming to happen naturally, let the dems go on down that path, leading to empty EBT cards. Hopefully, that’ll kill off half of ’em.
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The solution is expand social security, roll all current pensions into it and eliminate the max amount paid into fica so the wealthy pay their fair share of workers retirements. Raise capital gains tax to increase GDP,, easy right.
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“Raise capital gains tax to increase GDP.”
Huh?
And all this time I thought increasing GDP required inputs like labor, capital, energy.
Silly me. Just raise taxes. Yipee!!
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Seems that Illinois is a red state with a blue state capital. A politically brokered solution has to take the situation into account.
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