As Illinois' economy heads south, so does a view of its possible future
Puerto Rico is 2,000 miles from Illinois, but their similar financial failures make them look like next-door neighbors is some respects.
The American territory in the Caribbean is about to begin a restructuring process similar to bankruptcy after years of fiscal irresponsibility, and the process might help paint a portrait of Illinois' future if it doesn't turn things around soon.
Stephen Moore, a senior economist with CNN, shared his perspective with Dan Proft and Amy Jacobson, the hosts of Chicago’s "Morning Answer radio show" recently.
Proft is a principal of Local Government Information Services, which owns this publication.
Puerto Rico is facing a $123 billion shortfall that includes $74 billion in bond debt and $49 billion in unfunded pension costs. Illinois has almost $13 million in unpaid bills and $130 billion in pension debt. In an attempt to save money, Puerto Rico got rid of a third of its government workers, but their unemployment benefits kicked in, which furthered the debt problem.
Moore argued that a lack of equality in how much government workers get paid in Puerto Rico and Illinois is part of the problem.
“The guy who’s in the private sector who has the same job as the guy working for the city government who is funded by the taxes of the private worker gets twice as much," he said. "That is bankrupting the city of Chicago and the state of Illinois."
Puerto Rico sold general obligation bonds, mostly to institutional investors in an attempt to avoid its current situation, but now the country is struggling to pay that debt as well.
Moore said there needs to be discipline in the market, and bondholders need to think about the risks of investing in floundering economic markets.
“One of the big problems is this idea that municipal bonds are risk-free," he said. "We’ve to go instill this notion in investors that when you buy a Chicago city bond or when you buy a Puerto Rico bond, that is not a risk-free investment."
According to the Chicago Tribune, 37,508 fled Illinois in 2016, and for the past three years, the state has lost more residents than any other. About 84,000 people left Puerto Rico in 2014 -- an average of 230 per day, according to CNN.
Puerto Rico has a “junk” credit rating. Illinois just experienced a credit downgrading on June 1, a day after the legislative session ended with General Assembly failing to pass a budget.
Sacrifices will have to be made to shrink the debt in Puerto Rico and Illinois, but Moore said there is one source of assistance that should not be relied on.
“They all think Uncle Sam is going to come with a big check, and I’m here to tell you it ain’t coming,” he said.