It’s tough to fathom the idea of an entire state going bankrupt, but it looks like we may see it happen in Illinois, thanks to the state government’s inability to agree on a budget.
Last week, the state marked the second full year in which Gov. Bruce Rauner and a combative Democratic legislature were unable to agree on a new operating budget. The state Senate the week before rejected a House-passed budget measure premised on a $7 billion revenue shortfall after Rauner threatened to veto it.
Unlike city and county governments, states cannot legally declare bankruptcy as a means of shedding debt by forcing creditors, bondholders, and government retirees to absorb some of the loss. The last time a state declared bankruptcy was in 1933, in the throes of the Great Depression, when Arkansas defaulted on its debts.
Unpaid bills to the tune of $14.7 billion, the failure to pass a bill to fund schools, and an astonishing $130 billion in unpaid pensions have helped contribute to the state’s financial mess. The state’s budget crisis led to Republican governor Rauner’s defeat of incumbent Democrat Dan Quinn in 2014, and it’s only gotten worse – to the point that Rauner has compared his state to a “banana republic.”
And now, Illinois could be the first state to declare Chapter 9 bankruptcy, a measure that includes the involvement on Congress. But not so fast – some leaders in the state legislature don’t think too highly of such drastic measures.
“Nobody here in Illinois is considering bankruptcy—first of all, it’s not allowed,” said Steve Brown, press secretary for Illinois House Speaker Michael Madigan. “Second of all, it would damage the reputation of the state and it’s just not necessary.”
On the other hand, some experts believe that bankruptcy is a viable option, because it would protect pensions and avoid a costly and frustrating taxpayer bailout or stronger federal involvement.
David Skeel Jr., a University of Pennsylvania law professor who has long championed granting federal bankruptcy protection to states, told Bloomberg that “Bankruptcy lets you get ahead of the problem.” And if ever there were a perfect candidate for such an approach, it would be Illinois.
Can Illinois get past partisanship and pettiness and put the state’s best interests first? Will they get their act together, or will they make history in the most dubious of ways? It will be interesting to see how the legislature moves forward.