Forbes: Illinois Will Be The Poster Case For State Bankruptcy

The dispute between Senate Majority Leader Mitch McConnell and House Speaker Nancy Pelosi as to whether the next stimulus bill will contain money for state and local governments should resonate in Illinois because, absent a very big dollop of federal dollars or a miraculous economic rebound, the state will soon need Senator McConnell to make good on his alternative plan to create a path to bankruptcy for the states.

At this point, Illinois has no hope of its underfunded state pension programs ever returning to solvency—even a quick economic recovery and a robust bull market won’t make a dent in its structural deficit, and its aging—and fleeing—population means that pension costs are going to continue to grow and outpace revenues without some sort of structural change that cannot be accomplished without federal help.

The passage of the amendment in November that would allow the state to impose progressive taxation may buy it some time—expect it to follow California's lead and increase tax rates for all of 2020 shortly after the election—but even that windfall won't be enough to fix things.

But the promise that top tax rates will only go to 7 percent and only for those who earn over $250,000 a year is simply untenable: income taxes will have to go up a lot and for everyone, sooner rather than later.

Ultimately, it may not be the state's decision alone regarding future tax increases: At some point the municipal bond investors will come to realize that there’s little hope that the state can make good on its contractual obligations to repay them, and the market for Illinois bonds will freeze up. If the state cannot access capital markets and the federal government won't give or lend them money, they will be stuck. At that point, negotiations between the state and its creditors will ensue—and the federal government will need to get involved.

We already know the broad parameters of any such deal: The lenders will take a haircut on the money owed them in exchange for the state fixing its problem, which will mean collecting more money from taxpayers, providing less services, and giving less money to pensioners one way or another.

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