Government Insolvency Gets Harder To Ignore
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Several U.S. states and the federal government are hopelessly insolvent. It’s something many bullion investors have known for years.
The real question is when this reality will pierce the mainstream illusion that deficits, and the crushing pile of debt which accompany them, don’t matter. That moment drew closer last week when ratings agencies downgraded Illinois state bonds to one notch above “junk” status.
S&P and Moody’s dropped the state’s creditworthiness rating to BB+/Baa3 – the lowest ever for a U.S. state. Illinois currently has $14.5 billion in unpaid bills and a government deadlocked over forming a new budget.
That stack of bills represents a whopping 40% of the state’s operating budget. At the heart of Illinois’ problems are massive union pension obligations for retired government bureaucrats.
Sluggish economic growth, below par returns driven by zero interest rates, and the extravagant promises made to retirees created a funding gap that likely cannot be bridged. But the state looks like it will have to die trying.
Government union bosses and their supporters got pension obligations converted into a constitutional mandate in 1970. They made it so that certain benefits can only be adjusted in one direction – higher. Article XIII, Section 5 reads:
Membership in any pension or retirement system of the State, any unit of local government or school district, or any agency or instrumentality thereof, shall be an enforceable contractual relationship, the benefits of which shall not be diminished or impaired.
Adding that language was a neat trick, given the implicit mandate that the private taxpayers are permanently on the hook for these obligations – even as they enjoy no such guarantees in the face of their own impaired incomes and retirement benefits.
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