Will Illinois Go Bankrupt Because of Scott Brown?

A sharp reader offers the following hypothesis (which I have edited):

Illinois is fundamentally bankrupt. It has less than $1 million in cash, pays vendors net 90, and owes its state university $450 million that it cannot pay. Oh, and it also has $60 billion in unfunded pension liabilities.

Now that the Republicans have 41 votes in the Senate, Illinois can’t count on any federal aid. The President’s home state will thus become insolvent.

(For some background on Illinois’s budget woes, see this link.)

My reader expresses similar concerns about California (where Governor Schwarzenegger’s budget assumes $6.9 billion in federal aid) and New York.

All of which raises a question for policymakers and municipal bond investors. Does the election of Scott Brown mean that the Senate will be unwilling to give federal aid to the states? The $862 billion stimulus bill last year (formerly known as the $787 billion stimulus bill) included substantial state aid, and it squeaked through the Senate with exactly 60 votes. Now the Democrats (and the Independents who caucus with them) account for only 59 votes.

Does that bode ill for struggling states and the investors who own their debt? Only time will tell. But I wouldn’t count the states out just yet.

The stimulus bill could have had 62 votes, but Senator Kennedy didn’t vote and Senator Franken hadn’t yet been seated. If the Senate majority can coordinate the same coalition–including Republican Senators Snowe and Collins of Maine–they will have one vote to spare for any new jobs bill (formerly known as a stimulus bill). In addition, with his paean to tax cuts in the State of the Union, the President was signaling that he wants to find enough common ground with congressional Republicans to get a jobs bill passed.

In the short run, then, I wouldn’t be surprised if substantial state aid finds its way into the jobs bill. That may buy Illinois and other struggling states some time.

In the long run, however, the reader is probably right that fiscally-strapped states will find the Senate less welcoming.

Legalistic answer to the title question: No. States can’t seek protection in bankruptcy court, so Illinois can’t technically go bankrupt.

4 thoughts on “Will Illinois Go Bankrupt Because of Scott Brown?”

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