With faith quickly disappearing in the ability of Illinois and Connecticut to pay their general obligation debts, the states are employing a new method that draws directly from tax revenues to secure financing. The Wall Street Journal editorial board provides the example of Puerto Rico as a warning that this gambit may not work out as well as intended. The editors write:
Detroit’s Chapter 9 bankruptcy in 2013 set a precedent by subverting GO bondholders to pay public workers and retirees. Prior to Detroit, creditors considered GO bonds sacrosanct and figured courts would compel local governments to raise taxes or cut pensions to repay them. That assumption proved incorrect. So creditors are now demanding higher yields for GO bonds issued by fiscally irresponsible governments.
Hence, Connecticut lawmakers recently authorized bonds backed by state income taxes as a substitute for GOs. The budget noted that “the new type of borrowing authorized in the bill may be viewed more favorably in bond markets because it is linked directly to a large and relatively stable revenue source.” Hmmm.
Income-tax revenues in Connecticut have repeatedly fallen short of estimates due to tepid economic growth. Last year they were off by $530 million. Perhaps Democrats consider this a rounding error on a $3.5 billion deficit. Chicago has reassured investors that the new “corporation would be considered bankruptcy-remote” (our emphasis). However, “in the unlikely event of a municipal bankruptcy, bondholders would still be paid.” Not so fast.
Puerto Rico likewise established a special public corporation in 2006 to issue sales-tax “Cofina” bonds, which were billed as more secure than debt paid from the commonwealth’s operating fund. And for a time that appeared true as politicians raised the sales tax (which was later converted into a VAT) to repay creditors.
But last year Puerto Rico’s governor issued a debt moratorium, which led Congress to impose a fiscal control board and create a quasi-Chapter 9 bankruptcy process. Cofina and GO bondholders are now vying for the same, small pool of money, and both will be lucky to get half of what Detroit bondholders recovered.
Americans are fleeing states with high taxes for places with better prospects like Florida. How long before the tax base of Illinois and Connecticut have emigrated entirely?
Originally posted at Yoursurvivalguy.com.
Latest posts by E.J. Smith (see all)
- My March Rage Gauge: Take Inventory of Your Investment Life - February 22, 2019
- Americans Want to Leave Their High Tax States - February 21, 2019
- National Right to Work Could Help States That Can’t Help Themselves - February 20, 2019