Too Big to Fail Again

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Illinois is the latest financial crisis.  Speculation is that it will file for bankruptcy, even though it is not possible without congressional approval.  Congress granted Puerto Rico authority to file for bankruptcy.  Why not Illinois?  Why does it matter?

Illinois is much like Greece.  It has a bloated government with massive pension obligations.  Austerity measures are counter productive.  The day to day expenses exceed revenue.  The lottery, although profitable, will be suspended because the state can't pay for prizes.  It is in a downward spiral, and all the feedbacks are positive, which means that everything it does to increase revenue increase instability.

Illinois already has one of the highest tax rates.  The Democrats, as usual, want to raise taxes to kick the can down the road.  The Republican plan is Democrat-lite.  Neither Democrat nor Republicans are willing to make the hard choices.  They just hope to kick the can down the road long enough, so the crisis won't happen on their watch.  Increasing taxes on property will lead to people losing their land.  More people will flee the state.  Revenue will continue to decline.

Borrowed from RebootIllinois.


Illinois is not the only state in trouble.  It is not even in the top 5 in debt per capita.  My concern is the domino effect.  Once one state fails, a dozen others will follow.  Any bailout will cripple the entire nation.  Its effect won't be limited to the US.  The European countries like Greece will fail.  Once it fails, Italy and Spain will follow.  China?  Who knows?  Maybe there is still power in its magic wand.  But, there is a good reason why the Chinese have been investing in US real estate.  It is a lack of confidence in its state of affairs.

The bailout would have been a sure thing under a second Clinton administration with its close ties to Chicago.  I am less sure with a Trump administration.  Trump does have much experience with bankruptcies, so, he may be able to help.  Is Illinois too big to fail?  Already, we see JP Morgan Chase making loans to keep the school system afloat.  Does anyone think this is out of charity?  JP Morgan will be made whole; make no mistake about it.

At the beginning of the 2007-2008 economic crisis, I saw this as a major catastrophe looming.  But, I listened to all the experts.  They said it would blow over in 6 months and be limited to the US.  They were wrong, dead wrong.  The world is yet to recover.  This crisis is similar in scale.  Imodium can slow down diarrhea, but it can't stop it. Likewise, the government can delay the collapse, but there is little that can stop it.   All the state governments can do and have been doing is to kick the can down the road.  The day of reckoning is here.  The center can no longer hold.  I've taken my $1,000 retirement fund out of the market as a precaution.  I'm not listening to the experts this time.


Skip Stein Added Jun 21, 2017 - 11:45am
The last bail-out was a disaster and cost taxpayers billion$.  We paid enough in the bailout to pay off almost every mortgage in the USA (not the rich massive places, just ordinary folks).  CRAZY and insane and a mark of the globalist power structure that controls the corrupt political bureaucracy.
Let them go bankrupt/broke.  Let them fight for survival and sustenance just like US common folk.  Many of US got totally wiped out in that crash and bailout; no bailout for common man.
TO HELL with them.  Let them WORK and pay it off like the rest of us have had to do!  I'm sick of these assholes benefiting and US picking up the tab.
Much of the problem is the corrupt government bureaucracies, massive subsidies paid for with OUR tax dollars.  Let the Free Market rule and we can watch these companies crumble.  They cannot stand on their own merit but must be supported by rules, regulations and subsidies.  
Some of the WORST cased are ones run by those idiot socialist democrats/progressives that think that the world owes them a living.  Not so much assholes!
George N Romey Added Jun 21, 2017 - 12:12pm
Illinois won't be the last state to file for bankruptcy, others are right behind them.  The killer will be in the next five years as they see more people retiring and drawling on their grossly underfunded pensions. Its not going to be a pretty sight.
Leroy Added Jun 21, 2017 - 12:15pm
Amen, Skip.
Leroy Added Jun 21, 2017 - 12:16pm
I agree, George.  Once one fails, the others will fall like dominoes.  The only question is whether the federal government will try to stop it.  At least we have a president familiar with bankruptcies.
Jeff Jackson Added Jun 21, 2017 - 12:37pm
Leroy, someone has to be getting all the money. In Greece, I read that government employees worked for like 25 years and then collected their full salary as pension. I would have loved to retire will full pay under the age of fifty, but someone has to pay for it.Greece handed out huge amounts of money for people that did nothing. I respect the work they did, but huge pensions when someone is only in their fifties is a recipe for disaster.
As I understand it, the public workers in Illinois are looking at drastic pension cuts. Where I live, some police officers make over $125,000 per year, and they aren't high up in the organization.
Remember the city of Bell California, where a former city official made $442,000 a year? I suspect a lot of that is going on. When the government officials can vote on their own salaries, they're going to vote themselves a lot more money than they would make in the open job market. I feel sorry for the teachers and the other workers low on the totem pole. They should start cutting the pensions of those making over $70,000 first. Public service is becoming an overpaid and underworking cash cow. I predict it sill get uglier before it gets better.
Leroy Added Jun 21, 2017 - 12:53pm
Jeff, how would you like to be the one to tell workers that the pension they worked so hard for was going to be cut in half?  I am sympathetic but they enjoyed a free ride for a long time.  Who's going to be around to bail me out?  As ugly as it is going to get, I say let the market forces work it out.
One has to wonder if the Wall Street paid speeches to Clinton were a quid pro quo.  A lot of people were literally banking on her becoming president.
Jeff Jackson Added Jun 21, 2017 - 1:18pm
I'm with you Leroy, a lot of the people are overpaid, like cops in a suburban city making over $125,000 a year. Most police officers have maybe an associate's degree, some, in the rural areas, no higher education at all. I understand the risks, but they knew that when they signed up for the job, and I suspect many of them could never make what they make working for the government anywhere else.
HRC, whose experience in the private sector was brief, was certainly one of those who wanted to pay the "public servants" astronomical sums of money. I have to admit I get paid by local governments, but the pay is not enough even to live on, and I had to go to grad school, pass all kinds of tests, and then work under a license that I just renewed for no small amount of money, not to mention the ongoing educational expenses that I must pay to maintain my license. Many of the "public servants" have no idea what it would be like to work in the private sector, and if they did, they would surely stop telling people how difficult their job is.
Bill Caciene Added Jun 22, 2017 - 12:13am
One either has the money to pay their bills or doesn’t.  So how can it be that Congressional approval is needed to go bankrupt?  Do you have any idea what would or could happen if Illinois wasn’t allowed to file for bankruptcy and how that would be any different than if they receive congressional approval to file? 
Leroy Added Jun 22, 2017 - 8:05am
Bill, I suppose it can go bankrupt, but it can't file under Chapter 9 of the bankruptcy laws and get protection under the courts.  So far, the state is losing the lawsuits with the courts dictating which bills get paid.  The courts are unconcerned with its ability to pay them. That is a large part of the problem.  It might get some relief under the bankruptcy laws, if, like Puerto Rico, it was allowed.  That is the difference.
Steve Bergeron Added Jun 22, 2017 - 8:24am
Like most socialist organizations, looking to buy votes with freebies, sooner or later, you run out of other people's money.  Then, you have to pay the piper.  Maybe Illinois will learn a lesson.  That has yet to be seen.  Maybe other liberal, Marxist-led states will follow down the primrose path to bankruptcy, too.  What's interesting to me, is that none of these people have evidently studied history, with several very good examples of failure due to socialist agendas.  Just look at Venezuela, who bit the socialist agenda, hook, line, and sinker.
Leroy Added Jun 22, 2017 - 8:27am
I have to disagree, John.  Many of the investors have been State Owned Enterprises (SOEs).  For quite some time now and especial since last September, they have watched the value of the RMB decline.  They could either invest elsewhere or watch the value of their cash decline.  Although the SOEs are heavily in debt, the management is very wealthy. They have limited ways to invest in China other than other SOEs and property. The Chinese government recently limited their ability to invest money.  That is why you may have noticed the decline in news about China buying America.  At one time, Austraila was complaining about being taken over by the Chinese and dictating to the government there.  To solve the SOE debt problem, the government encouraged its citizens to invest in the stock market, especially the SOEs, knowing that it was a bad idea.  The Ponzi scheme fell apart in 2015.  That ended the debt for equity swap.  Many people lost money, including my driver.  He lost about $32,000 in the stock market and later another $16,000.  Considering he nominally made $500 a month and was scrappy enough to make another $500 or so, that was serious money.  The government lost this avenue for reducing SOE debt.  Shadow banking will be the undoing of the Chinese financial system. There is so much hidden debt that it will lead to collapse when the government is no longer able to manipulate the economy.
Leroy Added Jun 22, 2017 - 8:33am
John, I agree with you to an extent on Greece.  Because it was tied to the Euro, it could not devalue its currency.  On the other side, not allowing the free exchange of the Euro was criminal in my book.  They were allowed access to their money outside of Greece.  There's something wrong there.  Like Illinois, Greece needed to reform.  Austerity measures just made matters worse.  If Illinois is not allowed to file under the bankruptcy laws, the Federal government will step in and force it to reform.  Austerity measures will be implemented.  It will just make matters worse.
Dino Manalis Added Jun 22, 2017 - 8:51am
States and countries need a combination of pro-growth policies and save money, because creditors are only interested in loan repayments, not the general economy or the people.  Greece needs help, but the goal should be to become financially independent.  Priests, for example, have to be paid by their parishes, not the government, while most imported goods and services ought to be produced domestically to boost growth; jobs; and tax revenues.  Some foreign companies would be willing to make their products and services in Greece, it's crucial, if they really want to help Greece, they should!
Leroy Added Jun 22, 2017 - 9:10am
Dino, the best thing Greece could do is escape the crushing weight of the Euro and the EU.
Leroy Added Jun 22, 2017 - 9:58am
Here's the best idea yet.  Just dissolve Illinois into the surround states and a 40-acre plot called Rahmonia.
Glad they can keep their sense of humor in all this mess.
Even A Broken Clock Added Jun 22, 2017 - 10:20am
Leroy, I loved the Imodium analogy. That was worth the price of admission.
Leroy Added Jun 22, 2017 - 11:22am
It's an apt description, EABC.  Illinois needs to slow down the money it's flushing down the toilet long enough to figure out what to do next.
Thomas Sutrina Added Jun 22, 2017 - 12:07pm
And to top this off the liberal courts require payments of many things and also require filling the slush fun pension account.  Can not raise taxes enough Democrats since the principles of economics kick in.  Revenue will actually decrease because more businesses and people will vote with their feet to leave Illinois.
George N Romey Added Jun 22, 2017 - 12:20pm
Suddenly we are going to have millions of retirees, many very aged and infirmed finding their pensions dumped on the Pension Guarantee Corporation which will likely payout less than half and not take over health care benefits.  Its going to get real ugly in the states.  Just another pitfall waiting to shove the US (then Europe and Japan) into another but bigger financial meltdown.
Leroy Added Jun 22, 2017 - 12:36pm
That's exactly right, Thomas.  It's not like leaving your country.  It's relatively easy to pack up and move to another state.
The question remains, is Illinois too big to fail?
Katharine Otto Added Jun 22, 2017 - 12:43pm
I've read the post and all the comments, but no one has hit on the common denominator in all this, which is the central banking system.  This is a system that trades in debt and can create money out of thin air to pay government obligations, then add it to the national debt.  It's a totally upside down system, with debt being used like currency.  In the US the Federal Reserve doesn't want its loans repaid.  it merely exists to receive perpetual interest on the loans.  The income tax, passed the same year (1913), guarantees a steady income to the Fed.  The Federal Reserve Act, promulgated by JP Morgan and others, put Congress in the debt creation business, where it remains.  How this works is well documented in the book "The Creature from Jekyll Island," by G. Edward Griffin, but there are other books that also explain the Ponzi scheme central banks use.
Another common denominator is that the government debt is, in almost every case, to public service pension plans.  In the US, it is also to Social Security, I suspect, although I haven't seen this explicitly stated.  As older folks retire, they will rely more on Social Security, take more out of the stock market and bonds, and deplete the government's Siamese twin, Wall Street.  Since the younger generation has fewer numbers, and are in debt themselves, they are not replenishing the Wall Street money-pot they way the economists want them to.   
I applaud getting out of debt, off Wall Street, and minimizing expenses, focusing on cash flow rather than savings.  Learn to relax and enjoy the now.
Leroy Added Jun 22, 2017 - 12:44pm
You're right, George.  This whole fiasco has pensions front and center.  The only way to solve it or slow it down is to reduce pensions.  I applaud my company for moving towards a pension contribution plan.  I'm not sure I am calling it by the right name.  For better or worse, I stuck with the old pension plan because of it's cost of living adjustment and for the diversity from other savings.  I'll see if it was a mistake at the time of retirement.  I can see Illinois falling followed by other states along with the pensions.  Illinois is too big to fail. 
Thomas Sutrina Added Jun 22, 2017 - 1:02pm
As an Illinois resident, sorry error.  As a resident of the City State of Chicago.  (Clinton took 11 of the 102 counties.  All containing major cities.   Clinton won counties with  22,508 or more votes.  Trump won counties with 130,944 or less voters.    6.1% or the votes went to others candidates.) So I am hopping that the democrats get there tax increase and drive more employers out of the state so that the rate of depopulation increases in those 11 major city controlled counties.  Then the state bicameral legislatures will fall out of Democratic control. 
If COS reverses the 17th Amendment then Illinois has a chance of becoming the first state that employs federalism.  The government structure seen in the early days of the old testament, the Saxon approach to government that led to the Magna Carta, and the 6 nation New England Indian Confederation that Franklin brought to the Convention of Colonies that drafted the Constitution.  Thus the state senate would be elect one representative per county and the house by population.  This legislature would balance the budget and reduce cost significantly.  More functions of State government would be accomplished by the counties or the cities within the counties.  
George N Romey Added Jun 22, 2017 - 4:13pm
Leroy the pension world was originally based upon returns of 8% to 9%. Back in the late 80s and early 90s when a 5 year CD in the bank could give that kind of rate pension holders were able to promise such lofty returns.  Then after the dot com crash the Fed brought interest rates down to 1% for years and pensions never adjusted their expected rate of return.  Now nearly 9 years later long term interest rates are still under 2%.  Public pensions are mostly all ticking time bombs.
Leroy Added Jun 22, 2017 - 5:54pm
Am I right, George, that the lower the interest rate, the more it costs for governments and companies to provide pensions?
George N Romey Added Jun 22, 2017 - 6:07pm
I read today that GE is underfunded in its pension liabilities by $31 billion.  Its not just the public sector that won't be able to keep promises.
Leroy Added Jun 22, 2017 - 10:21pm
Katharine, it all comes down to whether or not the Federal government prints money to bail out Illinois or not.  Technically, it can't file for bankruptcy.  I take that to mean it has no protection from its creditors.  It must pay its debt, but it doesn't have the revenue to do so.  Much of the debt is to the Federal government itself.  The best the state government can do is prioritize the debt payments as best it can and choose which court orders to obey.  If Congress does allow for it to file for bankruptcy, I suppose the courts will allow it to restructure its debt.  Investors and pensioners would take a hair cut.
The American people will pay the price is Illinois is bailed out.  Perhaps Thomas has the right idea.
Katharine Otto Added Jun 22, 2017 - 10:58pm
John G, Have you read "The Creature from Jekyll Island?"  What about "Confessions of an Economic Hit Man?"  What about "Wealth of Nations?"  What about "Robber Barons?"  What about "Hamilton?"  What about "House of Morgan?" You have no idea what I've "been led to believe." Most of what I "have been led to believe" comes from following the news for years, reading lots of American history, economics, and in most cases synthesizing information from lots of different places and connecting the dots. "Creature" just happens to be the book that best puts the facts together.
The government passes authorization bills, the Fed writes a check to the government and sells treasuries, so technically, you can say the government borrows money from the bond purchasers, but the original Fed money came out of thin air.  The Fed then gets honest money in exchange for dishonest money.
George N Romey Added Jun 23, 2017 - 8:04am
Yes you are Leroy because the actuarial tables are passed upon the funds being able to return 7% plus but still maintain high quality investments (or what the rating agencies consider high quality).
Leroy Added Jun 23, 2017 - 8:27am
Thanks, George, for confirming.  So, if a company or government offers a lump sum in lieu of monthly payments, one will get a higher payout when interest rates are low.
George N Romey Added Jun 23, 2017 - 10:32am
Larry you just pointed out another problem. In situations in which a pensioner can take a lump sum they are doing so fearing the solvency of the fund. This puts even more pressure on pension liabilities.  CALPERS is underfunded by hundreds of billions, Illinois by nearly $1 trillion.  States like New Jersey and Texas aren't in better shape.  If  I was 60 or older and worked for the state I'd retire, take the lump sum if I could (even if I get a smaller benefit) and look for other work to supplement my income-even if a bu..t part time job.
Bill Kamps Added Jun 23, 2017 - 10:40am
It would be difficult for states to file bankruptcy in the traditional sense.  When a company files bankruptcy, but stays in business, the debtors are given equity in the new company in exchange for some or all of the debt they are owed.  One cannot be given equity in a state, so this is where the process would fall apart.
Debt can be renegotiated to different terms, different interest rates, have specific tax revenues assigned to some particular debt, there are endless ways of restructuring the debt.  In effect that is what happens when a city or state cant pay its bills.  It forces all parties to the table to do a work out, with a bankruptcy judge as a form of arbiter. 
What often happens is that entities are not given 100 cents on the dollar, but since they may not be collecting anything now, collecting something is better than nothing.  Of course there needs to be a reworking of future budgets or this is meaningless, and people will not do work for the state, or loan the state money if there is a high risk of a repeat scenario.
Leroy Added Jun 23, 2017 - 12:49pm
Bill, so far, the state is being taken to court and it is losing almost every time.  There is nothing there to arbitrate the debt.  That's why it needs authority to file bankruptcy.
You say that the state can't give equity.  Is that true?  We are in new territory.  Could another state loan money with Illinois putting up territory as collateral?  If it defaults, then this territory becomes part of another state.  Maybe China would loan them money with concessions if it defaults, like zero taxes until the debt is paid.  Maybe it is not possible, but there is room for creativity.
What country was it that just issued 100 year bonds, Venesula?  It gives the illusion of high interest rates.  It was 3.5x oversubscribed.  It will never be repaid, but investors flock to the high rates.  That might be one way out for Illinois.  There's a sucker born every minute.
Bill Kamps Added Jun 23, 2017 - 1:02pm
Leroy,  Im not up on the different forms of bankruptcy.  Detroit filed bankruptcy, and they appointed a judge to bring the parties together.
The state can lose all the cases, but if it cant pay this doesnt solve the problem.  Governments often play a game of chicken waiting for the Feds to step in, that  is what Detroit did.  However, it actually turned out pretty well for them once they got the parties to the table to reorganize the debt.  Once things got reorganized, the developers were willing to start projects again in Detroit, so that was the plus.  It is not a zero sum game.
Country governments can issue bonds, because they can print money to pay back the bonds.  On the one hand this is a guarantee of sorts, but of course if the money is worthless it is not much of a guarantee. With inflation running very high in Venezuela even the interest payments wont be worth much.  Illinois cant print the money to back its bonds.  This is one reason states have less flexibility than federal governments.  They are also less flexible than cities, because their problems are larger.
Detroit is much smaller than Illinois, and it is easier to fix.  However, it will get "fixed" at least in the short term.   The longer term problem is the political one, that promise are made that cant be kept.  Until that behavior  is stopped, the can is still just getting kicked down the road.
I dont know if the state can sell land to other states.  It could presumably sell a state park to private interests.  Im sure that  would not  sit  well with people, but then neither  does bankruptcy.
Dont forget though it is a game of chicken.  Everyone will claim nothing can be done, until something is done.  Just like Greece.
George N Romey Added Jun 23, 2017 - 1:42pm
Puerto Rico wasn't suppose to be allowed to declare bankruptcy but the Governor went ahead anyway.  Illinois could try to negotiate pension relief but I'd think they would run into massive resistance.  Of course, a Bankruptcy judge can alter pension obligations. 
I'm assuming all parties will take haircuts and the state could be forced to sell assets to private parties.  Either way it won't be an easy or pretty process.
Bill Kamps Added Jun 23, 2017 - 1:51pm
George, generally yes what will happen is a bit of pain on all sides.  While the numbers look grossly out  of balance, the  changes needed are often just a few percent, because the numbers are so big. 
A lot of brinkmanship, but when the checks stop going out the pension recipients may be inclined to make a deal as well.  They are getting too good of a deal by any rational measure.  A few percent less, wont kill them so long as the budget is put on sound footing, that is actually the more difficult challenge.  Without a rational budget people are just giving away their interests.  Illinois is not a place of rational politics  right now.
Detroit looked impossible, but when the public sector started to move, some private money came in.  That was much easier because Detroit is small and the private money  could  be targeted more easily than in a state like Illinois. 
George N Romey Added Jun 23, 2017 - 1:55pm
What we will see in Puerto Rico and then possibly Illinois is the extent to which bondholders, in many cases large New York banks take a haircut in relation to pensioners.  An 85 year old in a wheelchair dependent upon a monthly check and continued medical benefits will draw more sympathy than a Goldman Sachs tycoon.  Politicians will find themselves trying to serve the people they need votes from and the people they need money from.
In a way this could bring our economic issues to a boil. 
Bill Kamps Added Jun 23, 2017 - 2:15pm
George, sure they can wheel out the 85 year olds, but the numbers dont lie.  There are people able to draw a pension after 25 years of service, and being 50 years of age.  They get a pension equal to 85% of the near final pay, and this is then indexed to inflation for life.  So they could get a pension for 40 years after only having worked 25. 
I have a sister in law getting the 85% of her pay, and working as a substitute teacher.  She is making more now than when she was working full time, and she isnt even 55.
This is not justifiable in any way, and it will have to stop at some point. Probably like the private sector did, new employees wont get the same pension, the oldest will get what is promised, and those in their 50s will get their pension scaled back. 
However, the numbers are so big, they only really have to fudge a bit on the COLAs and things start to work a lot better.  The cuts dont  have to be drastic.
rudy u martinka Added Jun 23, 2017 - 5:20pm
Term Limits is the only hope to fix Illinois, in my opinion.
Regards and goodwill blogging.
Tamara Wilhite Added Jun 23, 2017 - 5:31pm
Illinois' problem is being hard Democrat and implementing Democrat policies regardless of the state's ability to pay. It is unfair to demand the responsible states bail them out. They promised more than they could afford, they have to figure out what to cut.
Leroy Added Jun 23, 2017 - 5:52pm
"Of course, a Bankruptcy judge can alter pension obligations."
George that is the crux of the problem.  If it cannot file for bankruptcy, then there is no bankruptcy judge.    Nobody's claim can be denied.
You can't squeeze blood out of a turnip.  I understand that.  But, the state will be forced to choose which court order to follow.  That's pretty much already been said.  Meanwhile, it all gets tied up in court.
At the end of the month, discretionary spending goes out the door.  They have already brought up the specter of defunding retirement homes.  Services will be cut to those who need it most.  For the rest, they will pay higher taxes.
Leroy Added Jun 23, 2017 - 5:59pm
Bill, I have two sisters in a similar situation.  One started teaching when she was 20.  She bought out one or two years of retirement so she could go on a special program.  Her boss did something similar, she got credit from the age of 16 as a bus driver for the schools.  It was a sweetheart deal.  Eventually, someone figured that out and the program was ended.  
George N Romey Added Jun 23, 2017 - 5:59pm
Leroy it can file for bankruptcy the question is will the case get thrown out?  So far Puerto Rico has not been thrown out.
Leroy Added Jun 23, 2017 - 6:02pm
Rudy, I think it will take more than term limits to fix this problem.  The liberal left has a stranglehold on the big cities.  They won't give up power without a fight.
It will be interesting to see how the politics play out.  The Republican governor doesn't seem to have a clue.  I don't see the GOP Congress being willing to help.
Leroy Added Jun 23, 2017 - 6:04pm
Tamara, I agree with you 100%.  Nevertheless, Congress will have no choice but to bail them out.  It won't call it a bailout.  It may even be a secret.  But a bailout will come.
Leroy Added Jun 24, 2017 - 12:47am
Enlighten us from the land down under.
Maureen Foster Added Jun 24, 2017 - 7:14am
I think you should change the title of this article.  Allowing Illinois to file for bankruptcy is an entirely different concept than the concept of “too big to fail.”  It was believed that some private companies were too big to fail so the government wrote checks to make sure it didn’t happen.  As much as I hate the idea of the government picking winners and losers, I think it was the smart thing to do.  After all, all of the money was eventually repaid with interest.
As it relates to Illinois, there is no chance of the money being repaid if the Federal government wrote a check to shore up Illinois’ fiscal situation. However, that option isn’t even the one being discussed.  The issue you wrote about is the mechanism for how Illinois files for bankruptcy.  Make no mistake, with a Republican Congress and President, there is no way the Federal government is going to bailout Illinois. 
John Minehan Added Jun 24, 2017 - 7:22am
As I understand it, there is no Chapter in the Bankruptcy Code for states (Puerto Rico is a Territory and Congress can pass legislation).
In the wake of the Financial Crisis, many intelligent people recommended that a Chapter for States be added to the Code and nothing was done.
Given the Federal nature of the US, possibly, the IMF could be involved.  Putting a "Washington Consensus" bailout plan in place as a condition for the bailout would be ironic . . . if appropriate.
As Lady Thatcher said, "The problem with socialism is that you eventually run out of other people's money." 
John Minehan Added Jun 24, 2017 - 7:24am
There are other states that are more indebted than Illinois, however, they are better managed and have more positive cash flows.  they have a problem, Illinois has a catastrophe.
John Minehan Added Jun 24, 2017 - 7:29am
"Tamara, I agree with you 100%.  Nevertheless, Congress will have no choice but to bail them out.  It won't call it a bailout.  It may even be a secret.  But a bailout will come."
Given what happened (or, rather, didn't happen)  with Detroit, I can't see this happening.
I tend to discount present talk of civil war.  However, one thing that could lead to civil war would be bailing out an utterly impecunious state like Illinois.  Places like Texas (and even California) will be rushing for the exits.   
Leroy Added Jun 24, 2017 - 9:28am
I'm Sorry, Maureen, but I don't get your point.  If the Federal government doesn't get involved, then there is the risk of a complete breakdown in Illinois.  It is probable that it will achieve the worst credit rating possible for a state, further raising its costs and chances of a complete breakdown.  If this were to happen, I would call that failure.  The question is whether the Federal government will step in to prevent a complete breakdown; i.e., will the government consider Illinois too big to fail?  Allowing it to file for bankruptcy would be one indication that it is too big to fail.  Maybe it writes a check if it reforms, like how we treat third world countries.
It's possible that a budget could be passed and a catastrophe can be delayed or avoided if the economy improves.
I hold out the possibility that the Republican Congress might help if it were to its political advantage.  I've known a few people from West Virginia who always vote Democrat for one reason--FDR saved them.  Could the Republicans flip Illinois?  I think they would gladly use the people's money to achieve this feat.
Leroy Added Jun 24, 2017 - 9:35am
"Leroy, you are unenlightenable."
John G., perhaps you just have nothing to offer.  You like to espouse your unconventional ideas but offer nothing to back it up.  I ask you once again to not only enlighten me but the rest of us as well.  At least some of us should be enlightenable.
Leroy Added Jun 24, 2017 - 9:56am
John M., I hope you are right.  Texas is another state with a serious debt problem.  It may well support the bailout of Illinois in its own self-interest.  There are other states not far behind.  They may fall like dominoes.
The idea of the IMF getting involved is interesting.  Wouldn't the US lose face, if that were the happen?
Maureen Foster Added Jun 24, 2017 - 10:41am
My point is this, a bailout entails the Federal government writing a check. Filing for bankruptcy protection, requires no check to be written. It's simply a mechanism for Illinois to resolve its spending problem.  Whether they're allowed to do so or not, the ramifications are going to be ugly for the pensioners (the largest creditors).
George N Romey Added Jun 24, 2017 - 1:24pm
Leroy and Maureen I just don't see the Federal government bailing out any state given the mood of the country.  I do see Illinois being allowed to file a controlled bankruptcy.  Now if other states start to fail then the situation becomes very problematic.
BTW, Leroy ignore John G. He's not worth the effort to type a response.
Leroy Added Jun 24, 2017 - 7:07pm
George, I don't see the Federal government writing a check either.  Bankruptcy is probably the easiest route.  It allows the politicians to wash their hand of it.  There will be some unhappy campers.
Every time there seems to be a spark of intelligence, he disappoints.
Leroy Added Jun 24, 2017 - 7:41pm
I just read an interesting article where it stated that the Illinois state constitution forbids the reduction of pension benefits.  The complicates the solution.
Another issue comes with bankruptcy, should it be allowed to file.  Who would handle it?  Judges are part of the pension system.  It would be a conflict of interest for any judge in Illinois to be involved.
I did come across one interesting solution to the pension issue, assuming it won't be allowed to file for bankruptcy.  It could legally force the pension funds to invest in state-issued bonds, then, at some point in the future, default.  Problem solved.  I wouldn't want to be a politician when that happened.
George N Romey Added Jun 24, 2017 - 8:48pm
Leroy business tends to shop bankruptcy courts, most notably Delaware or Southern New York because they are the most business friendly.  Whether a state can shop a bankruptcy court, again another huge unknown. I agree the Federal government won't dare get involved.  They won't want to touch this with a ten foot pole, same goes for Puerto Rico
Maureen Foster Added Jun 25, 2017 - 6:22am
Illinois can write whatever it likes in its Constitution, so long as there isn’t enough money to pay its bills, the pensioners will not be paid.  I’m not sure what the answer is, but the point of my comment to you is that what’s happening in Illinois doesn’t have anything to do with any bailout or would be bailout.  However, if the Federal government was being run by Democrats, you can be sure they would try to bailout one of the most liberal-leaning states in the country. 
Leroy Added Jun 25, 2017 - 8:23am
"However, if the Federal government was being run by Democrats, you can be sure they would try to bailout one of the most liberal-leaning states in the country."
Maureen, we can agree on that.  In fact, I will go as far as to say they Illinois was counting on having a Democrat as president.
Too bad the governor isn't a Democrat.  The process would be much quicker.
Leroy Added Jun 25, 2017 - 9:51am
Below is a link to a presentation by the Khan Academy on the Illinois pension problem.  It's dated; maybe it's even simplistic, but it gives a good overview of the problem.  As education spending goes down, pension obligations are going up.  In fact, pension obligations are now exceeding education spending.
BTW, the Khan Academy is an excellent venue for brushing up on your knowledge or as an aid for teaching your kids.  Check it out.