In the last week, headlines have captured a number of economic disruptions in the government and infrastructure fabric that will bring dire cicumstances in the near future:
Puerto Rico – the bombshell of incompetence and mismanagement. Puerto Rico owes a ton of to its bondholders and tried to negoatiate a deal. But its own stupidity triggered a great deal of anger from them when the government decided to pay Christmas bonuses instead of dealing with bondholder debt. And these fools were surprised when bondholders offered little movement with such a fiscal slap in the face.
From Bad to Worse for Puerto Rico – Syndicate.org Feburary 28, 2017
Aware of this reality, Puerto Rico enacted its own bankruptcy law, but the US Supreme Court struck it down, because the island is de facto an American colony, and the federal bankruptcy code permits only the US Congress to enact bankruptcy legislation over its territory. Eventually, Congress took action and enacted PROMESA, a law ostensibly designed to facilitate debt restructuring and economic recovery. Reflecting the standard colonialist view that a colony cannot be trusted to make independent decisions, a bipartisan Financial Oversight and Management Board was created to make fiscal decisions for Puerto Rico.
Connecticut – the mismanagement of finances and a poor business climate caused hedge-fund managers (along with their companies) to flee to tax free states like Florida
Connecticut’s Tax Comeuppance: Wall Street Journal June 2, 2017
According to the fiscal analyst, income-tax collections declined this year for the first time since the recession due to lower earnings at the top. Many wealthy residents decamped for lower-tax states after Mr. Malloy and his Republican predecessor Jodi Rell raised the top individual rate on more than $500,000 of income to 6.99% from 5%. In the past five years 27,400 Connecticut residents, including Ms. Rell, have moved to no-income-tax Florida, and seven of the state’s eight counties have lost population since 2010. Population flight has depressed economic growth—Connecticut’s real GDP has shrunk by 0.1% since 2010—as well as home values and sales-tax revenues.
The Governor—a slow learner—seems finally to have accepted that raising taxes on the wealthy is a dead fiscal end. Democrats are now proposing higher taxes on tobacco, expanding casinos and eliminating some tax breaks, though they don’t want to touch an exemption for teacher pensions. The state teachers union warns that axing the exemption would impel retired teachers to relocate. A quarter of pension checks are currently sent out of state.
Mr. Malloy is also seeking $1.6 billion in concessions from unions, which would be easier to achieve if collective bargaining weren’t mandated by law. He’s suggested increasing municipal pension contributions and cutting state-revenue sharing, both of which could drive up property taxes and imperil insolvent cities like Hartford. Mr. Malloy’s budget includes a $50 million bailout for Hartford to prevent bankruptcy, which might occur in any case if Aetna—its fourth largest taxpayer—leaves.
The state treasurer has advocated “credit bonds” securitized by income-tax revenues to reduce the state’s borrowing costs. Investors beware: Puerto Rico tried something similar with its sales tax, and bondholders might not get back a penny. Maybe Democrats should follow Jerry Seinfeld’s advice to George Costanza and do the opposite of the instinct that has brought the state so low: Cut taxes.
Illinois – Pension Fund Crisis and Moody’s downgrade to near Junk Bond status. Illinois is the poster child for underfunded pension mismanagemnet without having a budget for years. Their unpaid bills alone are about $800 Million.
Bloomberg – Moody’s Downgrade for Illinois June 1, 2017
Illinois had its bond rating downgraded to one step above junk by Moody’s Investors Service and S&P Global Ratings, the lowest ranking on record for a U.S. state, as the long-running political stalemate over the budget shows no signs of ending.
S&P warned that Illinois will likely lose its investment-grade status, an unprecedented step for a state, around July 1 if leaders haven’t agreed on a budget that chips away at the government’s chronic deficits. Moody’s followed S&P’s downgrade Thursday, citing Illinois’s underfunded pensions and the record backlog of bills that are equivalent to about 40 percent of its operating budget.