Welcome To The Third World: Illinois Death Watch – John Rubino

June 19, 2017

It’s been a long time coming, but Illinois’ slow-mo financial disaster is now front page news. A few recent examples:

Roadwork Could Shut Down Across Illinois Due To Budget Impasse

(Chicagoist) – Roadwork across Illinois may grind to a halt at the end
of June due to the continued state budget impasse, a representative for
the Illinois Department of Transportation (IDOT) announced Wednesday.
IDOT will be unable to pay contractors on July 1, unless the state
passes a stopgap funding measure.
IDOT has told contractors that “all construction work is to shut down
on June 30,” according to a statement. “Contractors will be advised to
secure work zones to ensure their safety during any potential shutdown.”

Illinois has gone almost two full years without a state budget, which
has hit education funding throughout the state and generated more than
$14 billion in unpaid bills.14

Summer is both a high-volume construction season and a vaguely
ominous time to cease road repairs; just last week, IDOT released a
statement warning that the heat could lead to pavement “buckling or
blowing out.”

—————

Powerball, Mega Millions to Halt Illinois Lottery Due to State’s Inability to Pay Winners

(Mish) – Both Powerball and Mega Millions Lotteries Will Pull Out of Illinois on June 30 due to the budget impasse.
Without a budget in place, the state is not authorized to make payments to the association or Mega Millions.

Lottery proceeds are about 2% of state revenue. Speaking of revenue
corporate income tax collection is down 41.3%. Sales taxes are flat. How
is this supposed to work?

—————

Could Illinois be the first state to file for bankruptcy?

(CBS) – Illinois residents may feel some solidarity with the likes of Puerto Rico and Detroit.
A financial crunch is spiraling into a serious problem for Illinois
lawmakers, prompting some observers to wonder if the state might make
history by becoming the first to go bankrupt. At the moment, it’s
impossible for a state to file for bankruptcy protection, which is only
afforded to counties and municipalities like Detroit.

Chapter 9 bankruptcy protection could be extended to states if
Congress took up the issue, although Stanford Law School professor
Michael McConnell noted in an article last year that he believed the
precedents are iffy for extending the option to states. Nevertheless,
Illinois is in a serious financial pickle, which is why radical options
such as bankruptcy are being floated as potential solutions.

Ratings agency Moody’s Investor Service earlier this month downgraded
Illinois’ general obligation bonds to its lowest investment grade
rating, citing the state’s growing pile of unpaid bills and its mounting
pension deficit. Illinois, by the way, has the lowest credit rating of
any state. Lower ratings mean higher borrowing costs, since lenders view
such borrowers as riskier bets.

“Legislative gridlock has sidetracked efforts not only to address
pension needs but also to achieve fiscal balance, allowing a backlog of
bills to approach $15 billion, or about 40 percent of the state’s
operating budget,” the agency noted.

As noted by the Fiscal Times, Illinois is the only state that’s been
operating without a balanced and complete budget for almost two years.

“We’re like a banana republic. We can’t manage our money,” Gov. Bruce
Rauner said after the Illinois Legislature failed to produce a full
2017 budget earlier this month.

Two Big Questions
Based on the immensity of its pension obligations, the legal barriers to
simply cutting benefits, and falling tax revenues, Illinois is a lock
to default on some or all of its obligations in the next few years.
That’s a problem for pensioners, state contractors and pretty much
anyone who cares about local public services. In other words, life is
going to get a lot harder for people living in the state, and especially
for those living in double-bankrupt Chicago.

But the real impact will be felt farther afield, when everyone with
money at risk starts asking who’s next – and finding a long list of
likely suspects. If Illinois defaults, how far behind can New Jersey,
Kentucky, or Connecticut be? Not far, according to current trends. And
if those states follow Illinois, what are Italian bonds worth? Not much.

The second big question is: How will stronger governments respond to
the implosion of weaker ones? If the failed states are bailed out by the
still-solvent, what does that do to the latters’ balance sheets? In
some cases it decimates them.

The dilemma? Allowing failed states to default will rock the global
banking system, but bailing them out replaces a debt bust with a
currency crisis. In a priced-for-perfection world, either will lead to
global asset repricing — in other words an epic bear market.

Read the previous posts in this series here.


John Rubino runs the popular financial website DollarCollapse.com. He is co-author, with GoldMoney’s James Turk, of The Money Bubble (DollarCollapse Press, 2014) and The Collapse of the Dollar and How to Profit From It (Doubleday, 2007), and author of Clean Money: Picking Winners in the Green-Tech Boom (Wiley, 2008), How to Profit from the Coming Real Estate Bust (Rodale, 2003) and Main Street, Not Wall Street(Morrow, 1998). After earning a Finance MBA from New York University, he spent the 1980s on Wall Street, as a Eurodollar trader, equity analyst and junk bond analyst. During the 1990s he was a featured columnist with TheStreet.com and a frequent contributor to Individual Investor, Online Investor, and Consumers Digest, among many other publications. He currently writes for CFA Magazine.


The author is not affiliated with, endorsed or sponsored by Sprott Money Ltd. The views and opinions expressed in this material are those of the author or guest speaker, are subject to change and may not necessarily reflect the opinions of Sprott Money Ltd. Sprott Money does not guarantee the accuracy, completeness, timeliness and reliability of the information or any results from its use.

Source: Sprott Money