Is Illinois insolvent?

Illinois enters a state of insolvency: 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."

 

…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.

 

…"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.

 

…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.

 

…The resulting $5.1-billion backlog of unpaid bills doesn't include $1.4 billion in Medicaid and group health bills that haven't been processed, plus $2.25 billion in short-term borrowing that must be repaid soon.

 

The state's credit rating has been steadily worsening since 1997, with three downgrades in the past 13 months.

 

…While California has an even bigger budget hole to fill, Illinois ranks dead last among the states in terms of negative net worth compared with total expenditures. The state's liabilities, including future pension payments, exceed its unrestricted assets by $39 billion…

 

Paul Merrion, Greg Hinz and Steven R. Strahler

Chicagobusiness.com, January 18, 2010