When the US territory of Puerto Rico filed for bankruptcy last week, we took the opportunity to identify the most likely candidates among US states to follow the new legal precedents that are now being set by its example. The editorial board of a leading newspaper in one of those states, Illinois, argues that Puerto Rico’s bankruptcy filing represents the “frightening ghost” of that state’s debt-laden future.
Here are some excerpts from the Chicago Tribune‘s editorial. They first set the stage:
Puerto Rico is the terrifying Ghost of Illinois Future: a worst-case example of what happens when a government no longer can pay its bills.
The island, an American territory, is weighed down by $123 billion in bond and pension debt it cannot afford. Illinois, meanwhile, has about $130 billion in unfunded pension obligations alone, plus billions more in retiree health care and other liabilities. The circumstances are different, but no government can function properly—indefinitely—under ever-rising debt. Eventually something gives.
The day of reckoning for Puerto Rico came Wednesday when the island filed for a form of bankruptcy court protection—an emergency action unprecedented for a US state or territory.
The editors go on to explain why the prospect of a state-level government going bankrupt should be terrifying to the state of Illinois:
Puerto Rico is what a debt-fueled nightmare looks like. Total indebtedness includes $74 billion in bond debt and $49 billion in unfunded pension obligations. The road to ruin traces back to a 2006 recession that never ended. To make up for budget shortfalls, the government borrowed ... and borrowed. As Puerto Rican joblessness increased, tens of thousands of residents left for the mainland, further eroding the economy. “People sometimes just leave the key in the house or the car in the airport and just go,” a resident told The Wall Street Journal. Last March, the struggling power company temporarily shut off electricity to a hospital that couldn’t pay its bills. Talk about a Dickensian scene.
Let’s see: vast government borrowing, and outmigration removing taxpayers from the workforce. Sound familiar?
The Chicago Tribune‘s editors next consider what would happen if Illinois’ fiscal situation were to continue deteriorating and the state followed Puerto Rico’s path.
If bankruptcy protection became an option, bondholders would charge punishing interest rates, or quit buying Illinois bonds, because of the increased risk that the state couldn’t make its interest payments. Just the specter of Puerto Rico is chilling. “I think it will make life more difficult in places like Illinois and New Jersey and Connecticut, where investors are already reluctant to loan the government money,” Matt Fabian of Municipal Market Analytics told USA Today. “It’s going to increase investor trepidation.”
What the editors are describing is what happens when a government’s debt has entered into a debt death spiral, when the economy is crushed as both investors and residents are compelled to become refugees as the government becomes increasingly tyrannical in its attempts to take more and more to prop itself up while providing less and less of the things people count on the government to do.
We can see that happen on a state-level scale with the example of Puerto Rico, where the New York Times‘ Frances Robles describes the kinds of sacrifices that those who remain in Puerto Rico will be compelled to make after the bankruptcy filing:
Although the move on Wednesday was hardly a surprise, it left a sense of gloom and anxiety here, as civil servants question whether their pensions will ever be paid and private companies suffer the consequences of the brutal domino effect that results when taxes rise, salaries drop and the middle class takes off on a mass exodus for Florida....
The government plans sweeping austerity measures in the coming months that will hit teachers especially hard. On Friday, Puerto Rico’s education secretary announced a proposal to close 184 schools. Teachers may see their hours trimmed by two days a month.
So while the government seeks protection from lawsuits from the hedge funds and other financial firms that invested in Puerto Rico’s risky debt, residents of this United States territory are taking the squeeze. Fines for parking and other traffic violations have doubled. Dozens of government agencies are on the chopping block, while perks like the annual Christmas bonus and pay for unused sick time make for wistful memories.
Illinois isn’t there yet. The Chicago Tribune‘s editorial board offers that state’s government some advice for learning from Puerto Rico’s wake up call.
The right response for Illinois is to look at the ruin of Puerto Rico and take its fate as a dire warning: This state has an unsustainable debt load. Eventually it will overwhelm government and taxpayers. No plan to reform the economy to spur growth and create more taxpayers. A $12 billion backlog of unpaid bills. Only gridlock and infighting as the debt load grows. But it is not too late for Illinois to change its ways.
And there’s the problem. Illinois wouldn’t be a leading candidate to be the next state-level government in the US to pursue federal bankruptcy protections if its legislators were truly willing to fix the state’s fiscal problems, for which they bear full responsibility for having created.
Until that changes with the state’s politicians putting aside their own petty interests in asserting their long-entrenched power, Illinois will continue following Puerto Rico’s path. Until it can no longer avoid its fate.
By Craig Eyermann