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Illinois’ impending financial disaster or just another political false alarm?

IR 9 December 2010 No Comment
[This article was syndicated via RSS from . The views represented do not necessarily represent those of the Chicago Daily Observer.]

This story from the New York Times will not brighten your day.  It's about a national concern that's growing about the financial future of the states in the worst financial crisis and what that situation could mean to the nation as a whole.  Overspending and feckless pension gambling is at the center of the article's concern:

Few workers with neglected 401(k) retirement accounts would risk taking out second mortgages to invest in stocks, gambling that the investment gains would be enough to build bigger nest eggs and repay the loans.

But that is just what Illinois, which has been failing to make the required annual payments to its pension funds for years, is doing. It borrowed $10 billion in 2003 and used the money to invest in its pension funds. The recession sent their investment returns below their target, but the state must repay the bonds, with interest. The solution? Illinois sold an additional $3.5 billion worth of pension bonds this year and is planning to borrow $3.7 billion more for its pension funds.

It is the long-term problems of a handful of states, including California, Illinois, New Jersey and New York, that financial analysts worry about most, fearing that their problems might precipitate a crisis that could hurt other states by driving up their borrowing costs.

And the NYT goes on to reveal the truth so many Illinois voters seemed to deny when they voted Gov. Pat Quinn and House Speaker Mike Madigan's party domination back this past November: Illinois is unable to pay her bills.  The Democrats insist it is a revenue problem.  Our demands have surpassed our ability to pay.  That means there's a spending problem because public demands are not due to the state's population exploding.  We are losing a congressional seat in 2012 because of our lack of growth

But here's the naked facts:  While we can't pay our long term obligations, but we can't pay last month's bills, either.

Illinois is not the only state behind on its bills. Many states, including New York, have delayed payments to vendors and local governments because they had too little cash on hand to make them. California paid vendors with i.o.u.’s last year. A handful of other states, worried about their cash flow, delayed paying tax refunds last spring.

Now, just as the downturn has driven up demand for state assistance, many states are cutting back.

The demand for food stamps has been rising significantly in Idaho, but tight budgets led the state to close nearly a third of the field offices of the state’s Department of Health and Welfare, which take applications for them. As states have cut aid to cities, many have resorted to previously unthinkable cuts, laying off police officers and closing firehouses.

Those cuts in aid to cities and counties, which are expected to continue, are one reason some analysts say cities are at greater risk of bankruptcy or are being placed under outside oversight.

So does Illinois face impending financial disaster?  If so, what will happen?  Some predict the first states to fall -- California, Illinois, New York -- will demand a federal bailout.  That will put Republican conservatives in Congress in a very difficult position.  Walter Russell Mead analyzes a gloomy scenario:

It will be ugly, and it will hurt. 

Will GOP legislators bail out the public sector unions and shovel cash into the maw of improvident and badly managed blue states like so many steaming German taxpayers bailing out the lazy Greeks?  Or will Congress sit on its hands while vital state services close down, unemployment spikes, and the financial markets panic?  Will all parties turn to the Fed to buy up state bonds?  If so, on what conditions and terms?

While an unprepared, polarized Washington argues, markets will be melting down.  Risk unnerves bondholders; the sight of clueless debates among angry politicians makes markets unhappy in good times.  In times of crisis this is a scenario for total panic.

That's exactly what Glenn Beck -- that wacky conservative radio talk show host everyone likes to dismiss -- is predicting as well.  In a recent nationally-televised closed circuit broadcast seen only in local theatres entitled "Broke," Beck compares the European Zone's situation with Greece and Germany's unwillingness to share Greece's financial burden for their careless overspending to potential inter-state bailout scenarios.   

How  will neighboring, hard-working states surrounding big-spending Blue states like Illinois and California react to similar bailout requests?  Can you imagine Wisconsin, Missouri, Iowa and Indiana eagerly pitching in to get us out of our financial woes?  Hardly.

The answer?  Prepare for even rougher times, Beck says.  Prepare for a long dry spell of unemployment and no federal bailout.  It's better to be prepared than not be, he says, and to emerge as strong individualistic leaders rather than weak, co-dependent followers. 

Sobering.  Eye-opening.  Alarmist?  Is all this scary talk merely political posturing, or are we on the brink of disaster?

Only time will tell.  In the meantime, the New York Times has sounded a warning.  We'll see if our state's captain Mike Madigan and his Democratic motley crew that got us into this mess can maneuver us around what the NYT predicts is ahead.  

It's in their hands now.  Full steam ahead.

Read the Full Story: http://feedproxy.google.com/~r/typepad/bYHz/~3/g8xcEHD7SPc/illinois-impending-financial-disaster-or-political-false-alarm.html

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