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Illinois and California lead other states in race to bankruptcy

On December 1, the Governor’s Office of Management and Budget (a misnomer), announced that the state had successfully sold $1.5B of tax-exempt Tobacco Revenue Bonds. This strategy of economic brilliance in the depths of financial insolvency involves borrowing money, backed by payments from the 1998 tobacco settlement agreement, that hasn’t yet been collected.

Illinois and 45 other states were awarded this money for medical costs associated with diseases caused by tobacco use. This is the state’s first issuance of tobacco bonds – and probably will not be its last. The bond sale will provide the state with enough revenue to pay off last year’s bills which ended June 30.

But Illinois already has a $5.3B deficit just since the start of fiscal 2011, which began on July 1. Where is the next loan going to come from? Will the governor and the General Assembly raise taxes 33% to 66% for this year’s bills? Comptroller Dan Hynes predicts a $15B gap between expected revenues and expenses.

The state will use the tobacco loan to pay Chicago schools nearly $164M for FY 2010 but already owes Chicago Public Schools over $200M since July. Late payments have caused program cuts in Chicago and will also result in cuts for the Rockford schools. The state payment for FY 2010 and other factors will reduce Rockford School District’s 2010/2011 budget deficit from $41M to $26M with the tobacco funds.

California has tried to get around its debt by paying off vendors with script, that has been used in some school districts in Illinois, and even delaying state income tax refunds. Illinois seems to be even in worse shape on a per capita basis. The prospect is that the bond market will stop financing states with insurmountable debt. When that happens, California and Illinois may soon be forced to go to the federal government for a bailout.

Some economists think that the only solution for some states will be a bankruptcy law that has been used in the past by Orange County, CA. and Mission Vallejo, CA. and some 10 to 12 cities in Michigan are already headed that way. Even if the governors of the states will not declare bankruptcy, the bond market may force the states to do so, because they will not lend them any more money, until they get their spending under control.

Congress may have to have to allow for state bankruptcies to prevent a crisis that could be just over the horizon. Earlier this month, California was only able to sell 60% of its bonds in the market.

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6 Comments

  1. Ted,

    It would be cheaper for the state and the school districts to give out vouchers to the parents. That would solve the insolvancy problem.

    Illinois and California are leading the pack in the race to bankruptcy. What is the common denominator? Both states are managed by big gov’t, economically challenged LIBERALS.

    Pat – if you are listening. It’s just a day off of work today, I’m not unemployed.

  2. Somewhat off topic – with the proposed extension of unemployment for another year, just when does unemployment compensation become welfare? Does anyone think in 2012 when this extension of benefits runs out, there won\’t be another? After all, it is a presidential election year. This will just add to the federal bankruptcy.

  3. Steve Noll

    Ironic that the State’s relying on the tobacco settlement money to bail itself out of financial trouble while at the same time supporting the expansion of smoking in Casinos and rejecting recent anti-smoking bills. It might have been wiser for the State to collect the settlement prior to showing its hand.

  4. To add to Steve’s point about tobacco, today the Surgeon General came out and said that just one puff from a cig could be fatal to your heart. If that is the case, why doesn’t the federal gov’t just make them illegal? Is it the real addiction here is the big gov’t addicted to cig taxes?

  5. Congressional democrats just rejected Obama’s extension of the Bush tax cuts.

    So – Just who is the “Party of No”?

  6. Speaking of Deficits – BO, Harry, and Nancy just keep setting records.

    http://online.wsj.com/article/SB10001424052748704457604576011683555582342.html?mod=WSJ_hp_MIDDLTopStories

    Good job LIBERALS.

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