CHESSNOID

I have heard of California and New York’s budget deficits, but another popular state has hit the headlines.  President Obama’s home state comes into the spotlight in a Chicago Newspaper.  Sooner or later one of these big states will require a bailout from the federal government.  If you think banks were considered “too big to fail”,  then how do you think the White House will view the biggest employers of our country adding to the national unemployment rate?  That’s right the states employ many people through state and local government jobs.  Without money, they will have to cut jobs to reduce spending.

I don’t think the California IOU tricks will work for too long.  We have elected politicians to recognize problems and solve them.  Budget deficits mean not enough revenues to pay for services.  The solution is simple and will require increasing revenues (raise taxes which Republicans hate) and reduce expenses (cutting programs which Democrats hate).    They all need to gain political courage and do what is necessary to save the people of the state from more dire consequences from their indecision.

Chicago Business:

As Illinois’ fiscal crisis deepens, the word “bankruptcy” is creeping more and more into the public discourse.

“We would like all the stakeholders of Illinois to recognize how close the state is to bankruptcy or insolvency,” says Laurence Msall, president of the Civic Federation, a fiscal watchdog in Chicago.

“Bankruptcy is the reality that looms out there,” Republican gubernatorial candidate Andrew McKenna Jr. says.

While it appears unlikely or even impossible for a state to hide out from creditors in Bankruptcy Court, Illinois appears to meet classic definitions of insolvency: Its liabilities far exceed its assets, and it’s not generating enough cash to pay its bills. Private companies in similar circumstances often shut down or file for bankruptcy protection.

“I would describe bankruptcy as the inability to pay one’s bills,” says Jim Nowlan, senior fellow at the University of Illinois’ Institute of Government and Public Affairs. “We’re close to de facto bankruptcy, if not de jure bankruptcy.”

Legal experts say the protections of the federal bankruptcy code are available to cities and counties but not states.

While Illinois doesn’t have the option of shutting its doors or shedding debts in a bankruptcy reorganization, it seems powerless to avert the practical equivalent. Despite a budget shortfall estimated to be as high as $5.7 billion, state officials haven’t shown the political will to either raise taxes or cut spending sufficiently to close the gap.

As a result, fiscal paralysis is spreading through state government. Unpaid bills to suppliers are piling up. State employees, even legislators, are forced to pay their medical bills upfront because some doctors are tired of waiting to be paid by the state. The University of Illinois, owed $400 million, recently instituted furloughs, and there are fears it may not make payroll in March if the shortfall continues.

‘We’re close to de facto bankruptcy, if not de jure bankruptcy.’

— Jim Nowlan, University of Illinois

Without quick corrective action or a sharp economic upturn, Illinois is headed toward a governmental collapse. At some point, unpaid vendors will stop bidding on state contracts, investors will refuse to buy Illinois bonds and state employees will get paid in scrip, as California did last year.

“The crisis will come when you see state institutions shutting down because they can’t pay their employees,” says David Merriman, head of the economics department at the University of Illinois at Chicago.

A record $5.1 billion in state bills was past due at yearend, almost doubling to 92 days from 48 days a year earlier the average amount of time it takes the state to pay vendors such as doctors, hospitals, non-profit service providers and other contractors.

“I don’t see any light at the end of the tunnel,” says Dan Strick, CEO of SouthStar Services, a Chicago Heights non-profit that helps people with developmental disabilities. “It seems to be getting worse and worse, and the delays longer and longer.” SouthStar hasn’t been paid since July, forcing him to borrow to keep afloat.

State tax receipts from July through December last year were running more than $1 billion behind 2008, including a $460-million plunge in sales taxes and a $349-million drop in personal income taxes. Even with a 22% increase in money from the federal government, thanks largely to the stimulus program, total state revenues were down 2.1%, or $284 million, from the previous year.

While new spending is down nearly 2% in the six months ended in December, the state started the fiscal year $3.9 billion in the hole from the previous year’s unpaid bills, which means actual spending was up 2.2%, according to the Illinois comptroller’s most recent report.