By John Ruberry
If you believe that states–and commonwealths–cannot declare bankruptcy, you are technically correct. But last week a commonwealth, Puerto Rico, filed for bankruptcy in all but name, utilizing the Puerto Rico Oversight, Management, and Economic Stability Act, which President Barack Obama signed into law in 2016.
That bill of course was written for Puerto Rico in mind, but with Republicans in control of all levels of the federal government, similar bills can be proposed for the fifty states, or just some of them, including California, New Jersey, Connecticut, and Illinois. Those three are among the states that have fallen victim to what New York City Mayor Michael Bloomberg dubbed the “labor-electoral complex” in his farewell address four years ago.
What’s that? It’s when public-sector unions, consisting of workers on the taxpayer payroll, cajole politicians–almost always Democratic ones–to increase their salaries or defer their pay hikes by way of generous yet unaffordable pension plans.
And of course these pols are cajoled by these unions through campaign contributions.
Many local government workers don’t pay into social security and many of them have no other pension plans. In states like Illinois, if you work for the state government, funds deducted for your retirement only go to one place–an Illinois retirement plan. So far so good–unless the politicians neglect to properly fund those pension programs.
And that has been the sad case in those blue states I mentioned earlier, as well as Kentucky.
Now that Puerto Rico has declared, well, something, investors will very likely take a closer look at sinking cash into what may be sinking ships. Puerto Rico has negative population growth. So does Illinois. That means fewer taxpayers are participating in funding these failures. And it’s the productive citizens who are leaving Illinois and Puerto Rico.
Yesterday Puerto Rico announced it was closing 184 schools and there is speculation that commonwealth retirees may suffer a 20 percent cut in their pensions. Expect much more bad news from there.
It doesn’t have to end up this way in states like Illinois–if corrective action is taken immediately. Let me define “immediately” for those politicians who may be reading this post.
Immediately means 2017, not ten years from now.
Ten years ago the financial situation in Puerto Rico wasn’t as dire.
John Ruberry regularly blogs at Marathon Pundit.