In Part I http://pingroof.com/article/half-year-review-the-world-awash-debt-part-i and Part II http://pingroof.com/article/half-year-review-the-world-awash-debt-part-ii, we explained why (in graphs and words) the issue of “Sovereign Debt” is the biggest, scariest, and most overriding issue from the first half of 2012. We have discussed European debt at length, and pointed out our unprecedented levels of U.S. Federal Debt. Now it is time to turn to the State of Illinois debt.
You know how often I have highlighted, and opined upon, Illinois’ high levels of debt. To look at the data on state debt and unfunded liability, one might think that increasing it was a “good” thing – since the actual decisions made in Springfield do such an outstanding job of just that! But the reality, as we know, is that excessive debt is a destructive thing. So let’s take a look at where we stand.
In order to keep as many of my own feelings out of this review as possible, I will rely exclusively on the report and data found in the official “Report on Illinois Sovereign Debt”, prepared by well-respected members of the state “Debt Advisory Board”, chaired by Henry J. Feinberg. http://www.kirk.senate.gov/files/ILdebtreport.pdf If I had to summarize the essence of this report in one sentence, cobbled together from the report, it would be this: “The trajectory of Illinois fiscal policy over the past decade has put the State on a path to insolvency… a classic ‘debt spiral’… as if it were paying off a mortgage loan with a credit card.”
The report does not mince words. In a letter to Senator Mark Kirk, Feinberg identifies the state’s seminal financial issue: “the consequences of a failure of Illinois leadership regarding spending and debt.” As a result of this failure, “Illinois has become a greater credit risk than almost any other state”, inevitably leading to investor demand for higher bond yields that cost the state higher interest payments than most other states. In fact, Illinois’ current debt service (interest) is $3 billion, approaching ten percent of its annual budget!
The report points out that, despite the unprecedented 67% increase in the state income tax rate (imposed to reduce state debt), the state’s debt continues to grow to new heights! Currently, Illinois’ unpaid bills are ten times higher than in 2002. Let’s summarize current aggregate “Effective Debt” for Illinois, Chicago, and Cook County (as published in the “Report”): Illinois — $31 billion; Cook County — $22 billion; Chicago — $63 billion. The total from all three levels is $116 billion.
These are staggering numbers, so staggering that we can’t comprehend them. Therefore, let’s put it in terms we’ll easily understand. If that debt came due tomorrow, each Chicago household would owe: $59,822 to cover Chicago debt; $11,607 to cover Cook County debt; $6,615 to cover Illinois debt. The total of all three for each household is $78,044!
Those figures might lead you to shrug off the state debt as relatively minimal. However, the above figures do not include $31.4 billion in state bonded debt and at least $83 billion in unfunded public pension liability! (Many experts are convinced that the actual unfunded liability is much higher.) We have watched Wisconsin struggle through two years of political crisis over such debt matters. In that light, it is germane to note that, according to Standard and Poor’s, Illinois’ per capita debt and unfunded liabilities total three times that of Wisconsin or Michigan, and more than twice that of Iowa, Indiana, or Missouri! The amount each Illinois household owes for just this accumulated future debt is: $24,000 per household!
Given the above, it should be no surprise that the population in Wisconsin, Indiana, and Missouri is growing twice as fast as in Illinois. It’s also no surprise that this failure of state leadership has transformed Illinois from its former status as the country’s seventeenth largest economy into the state with the forty-eighth worst business climate. This appalling failure of state political leadership has brought our state debts “to levels comparable to Portugal, Ireland, Greece, and Spain!”
What should we do about this? All I can tell you with certainty is that if nothing is done to reverse this debt spiral, our children and grandchildren will: “be subject to a kind of economic serfdom born of the indebtedness this generation incurred, but didn’t have the courage to pay.”