With a fast-approaching debt payment due to the International Monetary Fund and no deal in sight, the world waits to see whether cash-strapped Greece will remain a part of the Euro currency. Meanwhile, Puerto Rico's governor wants Congress to allow the commonwealth to enter bankruptcy and restructure its massive debt load. Some say the island's economic peril makes it "America's Greece." And here at home, massive pension debts and political battles are complicating budget deals for the state of Illinois and city of Chicago. If Illinois lawmakers don't reach a budget agreement, state government shuts down tomorrow. We talk with two economists, Edward Stuart and Michael Miller, about both local and global economic issues.
State Budget Negotiations
The fiscal year ends June 30, and a budget deal has yet to be reached for fiscal year 2016 which begins July 1. Without a budget in place, the state braces for a government shutdown. In February, Gov. Bruce Rauner introduced his proposed fiscal year 2016 budget which included cuts under his turnaround agenda. Since then, Rauner scaled back the number of reforms he wanted made in tandem with the budget: those include workers compensation reform, term limits and redistricting, property tax freezes, municipal bankruptcy, and lawsuit reform.
In late May, Democratic lawmakers approved a budget, which was about $4 billion short and backed by House Speaker Michael Madigan. During the weeks long standoff, Madigan has criticized Rauner for putting “non-budget issues” (the governor’s turnaround agenda) in the budget process. Late last week, Rauner vetoed all but the education portion of the budget sent to him by the General Assembly, saying it was $4 billion short. The governor’s rejection of the budget came one day after the Illinois House failed to garner enough votes to pass legislation that would extend the June 30 deadline for Chicago Public School’s $634 million pension payment to August 10.
City Pension Obligations
While it had been anticipated Tuesday that the Illinois House would pick up a bill to extend the CPS pension payment deadline, it wasn't. Despite the lack of help from state lawmakers, CPS was able to make the full $634 million payment Tuesday afternoon.
The city of Chicago is facing its own budget issues, and the City Council recently approved a $1.1 billion borrowing plan to help the city refinance old debt. In May, Moody’s Investors Service downgraded the city’s credit rating to junk status, citing the Illinois Supreme Court ruling of the 2013 pension reform law as unconstitutional.
While the 2013 pension reform law has been overturned, there’s a plan to fund Chicago’s police and fire pension in Springfield. The measure passed both houses of the Illinois General Assembly at the end of the spring legislative session. The bill, which hasn’t been signed by Gov. Bruce Rauner, adjusts the payment schedule and requires the funds to be 90 percent funded in 40 years (the current schedule requires it to reach that level in the next 25 years).
Greece Defaults on IMF Payment
Greece did not make its 1.6 billion euros (approximately $1.8 billion) payment to the International Monetary Fund, according to The Washington Post, making it the first developed country to default on its debt to the fund.
The default comes hours after European Finance officials declined to grant a last-minute bailout extension to Greece. Earlier Tuesday, Greek Prime Minister Alexis Tsipras requested a two-year bailout program, according to Business Insider which reports the Greek government was looking to restructure its debt and receive another loan to avoid default.
With the default, Greece is no longer in a bailout program for the first time since 2010, according to Business Insider. Greek banks and the Athens stock exchange will remain closed through the week ahead of the July 5 referendum, which will ask voters to approve the latest bailout proposal from Greece’s creditors.
According to BBC, Tspiras prefers Greeks cast “no” votes in the referendum. If voters reject the creditors’ proposals, that could mean Greece would leave the Eurozone which is something Tspiras has said he doesn’t want to happen.
The next big deadline after Sunday’s referendum vote is July 20, which is when Greece must redeem 3.46 billion euros of bonds held by the European Central Bank. If the country fails to do so, the ECB could cut off the country’s access to emergency loans, according to BBC.
Greece’s financial turmoil began amid the global financial crisis when the nation’s credit ratings were downgraded in December 2009, according to The Huffington Post. The country accepted a multi-billion bailout from the IMF, ECB, the European Commission in 2010, and then again 2012 in order to avoid bankruptcy. In exchange for the bailouts, Greece was required to make reforms, including austerity cuts to public spending.
Puerto Rico’s Governor: Debts Are “Not Payable”
Puerto Rican Gov. Alejandro García Padilla acknowledged his country cannot pay its approximately $72 billion in debts, according to The New York Times.
“The debt is not payable,” he said. “There is no other option. I would love to have an easier option. This is not politics, this is math.”
As a commonwealth, Puerto Rico does not have the option of bankruptcy, and a broad restructuring by the country would be “an unprecedented test of the United States municipal bond market,” according to The Times. The article also states, “A default on its debts would most likely leave the island, its creditors and its residents in a legal and financial limbo, like the debt crisis in Greece, could take years to sort out.”
According to The Washington Post, Puerto Rico’s governor is pushing for the country’s ability to file for bankruptcy under Chapter 9, as well as come up with a fiscal and economic reform plan by August 30. The Post also reported the White House is urging Congress to consider changing the law to allow Puerto Rico to file for Chapter 9 bankruptcy, and a federal bailout is not on the table.
If the country doesn’t get the right to declare bankruptcy it will either restructure the debt or go into default. The restructuring process has begun with some creditors, including a deal that would avoid a default on a $416 million payment to the electric power authority on Wednesday, according to The Times.
