From top to bottom Illinois is a sham, putting tax dollars into the pockets of elected officials with no regard for fiscal sanity. In 2013 I highlighted that 47 of Illinois’ Village Managers earn more than any state governor. Every level of government in Illinois is filled with horrors like this. Looks like the chickens are coming home to roost. Brittany De Lea reports:

Illinois will not meet a court-set deadline Tuesday to increase spending on backlogs of Medicaid payments, pushing the problem off until the end of the month as the state’s unprecedented budget impasse is on the verge of entering its third straight fiscal year.

Medicaid talks will continue past Tuesday, with a new deadline set for June 28 —  just two days before the final deadline for the state legislature to agree on a spending bill during a special session, an attorney said late Monday. The new fiscal year begins July 1.

Illinois owes Medicaid providers $2 billion for care provided to more than 3 million people —  a small sum compared to the state’s total unpaid bill of $15 billion, or 40 percent of Illinois’ operating budget. After failing to pass a spending bill for two straight fiscal years, the state has been functioning on appropriations since 2015.

Failure to strike a budget agreement by the end of the state legislature’s annual session on May 31 resulted in a critical credit downgrade for the country’s fifth largest state to Baa3, the lowest of any state and only one level above non-investment grade — also known as junk. Illinois has received 8 downgrades in as many years and most states are rated at least 8 levels higher, according to Moody’s.

Read more here.

Illinois could be the first state government to go bankrupt, but some big cities have recently gone belly up. In 2011 I wrote about the nearby city of Central Falls.

The Crisis of State Bankruptcy

With Central Falls, Rhode Island, filing for bankruptcy, who in their right mind would invest in its municipal bonds? Luckily for current bondholders, Rhode Island passed a law in July that puts them ahead of other creditors, such as recipients of pension payments. But even with this law in place, who in their right mind would buy a Central Falls bond with a Moody’s rating of Caa1—“C” standing for “crap”?

“We didn’t want bondholders to think this state was not a good place to put their money,” says Rosemary Booth Gallogly, Rhode Island’s director of revenue, in speaking about the law. That’s not how markets work, Ms. Gallogly. That’s not going to cut it. The patient is still on life support. It’s like signing Rhode Island up for one of those debt consolidation programs that consolidate all your credit cards into one “easy” payment. It does nothing to pay down the debt the state is drowning in. It’s looking for approval to take on more debt. Give me a break.

What will happen when a state, not just a city, declares bankruptcy? Will President Obama and his team of bankruptcy specialists bail it out as they did GM and Chrysler? You can be sure that saving the union heads and their cushy salaries will be right up near the top of the work-out plan. So much for Gallogly’s law protecting bondholders. Washington prefers to cram losses down their throats.

There is a way for President Obama to sidestep the state mess heading his way, and that’s to allow states to file for Chapter 9 bankruptcy. David Skeel, law professor at the University of Pennsylvania, feels it’s the best option for avoiding a massive federal bailout. Right now, there are fewer than a handful of municipal bankruptcies. But what happens when more take place in states like California, Illinois, or New Jersey?

According to testimony in a 1934 congressional hearing, 2,019 cities and other governmental entities defaulted on their debt during the Great Depression. State bankruptcy is the only way to reorganize and get out from underneath this debt from pensions and create real reform by forcing union leadership’s hand. The last thing our campaigning President Obama wants to do is get embroiled in a nasty state bailout heading into 2012, especially in a non-battleground state.