It seems we are in a little bit of a rut in that we seem to be getting overwhelmed with news about our choice for states and major cities that are likely to go bankrupt relatively soon. As always, our top state governments that we think are nearing bankruptcy include New York, New Jersey, Illinois, and California. Our top major cities we think are rapidly approaching bankruptcy include New York City, Chicago, Los Angeles, and San Francisco.
Before reviewing the latest news and seeing which state or city is making the best progress towards government bankruptcy, let’s review how these cities and states got themselves into this financial death spiral position to begin with:
A government entity keeps expanding its budget, eventually putting pressure on the tax revenue stream it receives.
At some point, rather than cut government spending or make its programs more efficient financially, the politicians in charge raise taxes to meet the ever growing government expenditures.
The raising of taxes causes some residents and businesses to leave the city or state for less tax burdensome areas, reducing the tax base and reducing the revenue stream.
Rather than cut expenses and become more efficient to match the reduced tax revenue stream, politicians in the above cities or states raise the tax burden even more.
This causes more residents and businesses to flee the city or state, further reducing the tax base and tax revenue stream.
At some point politicians panic and raise taxes more and start cutting vital government services (e.g. police, fire, education) in order to try and balance government spending against the shrinking tax base and revenue stream.
The reduction in quality of government services in particular and quality of life in general drives more residents and businesses out of the area.
Eventually, the expenses, costs and financial liabilities outstrip the reduced tax stream and bankruptcy occurs.
Okay that’s the process, now lets check the progress some of the above listed government entities are making to achieve this bankruptcy goal:
1)Business and residents have been fleeing Chicago for a while now due to high taxes, high crime rates, faulty management skills of the politicians running the city government, etc. Major companies that have made major moves out of Chicago include Boeing, Citadel Financial, Tyson Foods, Caterpillar, and others. The CEO of Citadel, Ken Griffin, told the Wall Street Journal that his co-workers feared getting mugged and attacked on the streets of Chicago which was a driving force for the relocation to Florida.
Consider the following numbers:
According to the Illinois Policy Institute, during the tenure of the current state governor, J.B. Pritzker, there have been 49 state tax hikes since 2019.
These tax hikes have raised the average resident tax burden by 44%.
The state has lost at least ten major corporate headquarters in the past six years.
Since 2019, the state GDP has grown at only about one third the rate of the national GDP growth.
But it is not just residents and businesses leaving the city:
The Chicago Bears have called Chicago their home for over 100 years, beginning back in 1920.
An original NFL franchise, the words “Bears” and "Chicago" have been inseparable for so long.
But now there is a good chance that even the town’s historic NFL franchise has had enough of the city and are seriously considering leaving the city, and the state, and heading to a new home in northern Indiana.
Despite negotiations directly with the state’s governor, J.B. Pritzker, it looks like the Bears are leaving.
Indiana politicians are moving quickly to put a package together that will steal the Bears away while Illinois and Chicago politicians have dithered for years without coming up with a good plan to keep the Bears in the city.
When you lose a 100 year institution like the Bears leaving the city and state, when residents and businesses cannot wait to leave the city of Chicago and the state of Illinois, you have a strong case for either Chicago or Illinois governments entering bankruptcy pretty soon.
2)The Chicago Contrarian website recently published an in-depth article and analysis on the financial disaster that is the Chicago city government. But the big news is that they not only outlined the dire financial situation of the city but also forecasted when the city would actually go bankrupt:
The opening paragraph of the article summed up the situation quite nicely by claiming “It’s only a matter of time” before the city’s revenues cannot pay off the city’s expenses and financial obligations.
The article maintains that the previous mayor’s administration of Lori Lightfoot heavily contributed to the financial mess but that local politicians set Chicago off on a financial death spiral long before she came along.
The theory is that local politicians sold off the financial future of Chicago by lavishing lucrative salary, pension, and benefit programs on city union workers in exchange for their votes.
In order to finance the city’s massive pension fund liabilities for retired and future retired city employees as well as operate the city on a day to day basis,, the city has to fund those pension obligations and current expenses off of a shrinking tax base.
Unfortunately, over time the city’s politicians have underfunded those future pension liabilities with the police, fire, and municipal workers pension funds currently funded at less than 30% of what they will need to pay out over time.
These low funding levels to cover future pension liabilities are at about the same level Detroit had before it went bankrupt.
In the Contrarian article, the point is made that the city is not allowed to cut benefit levels because that is prohibited by the Illinois Constitution.
In fact, things are already so bad that the city is actually borrowing money to pay for current financial obligations while at the same time increasing those future costs of servicing the money it is borrowing today.
So a shrinking tax base which leads to shrinking tax revenue streams with growing pension and other employee obligations that cannot be legally reduced and you have a vicious financial death spiral.
In fact, the article, using the city’s own actuarial analyses, predicts that the city will go bankrupt in 7 to 12 years
But the state politicians in Illinois have passed legislation that does not allow Chicago or any other state city to declare bankruptcy.
Thus, it is unknown territory of what happens when Chicago can no longer fund its current operating city expenses and its pension and other union benefits which makes it bankrupt but cannot legally be bankrupt, quite the conundrum.
Thus, what happens when the city is out of money and cannot legally go bankrupt:
One option would be to drastically cut government services (fire, police education, etc.) but that option would drive more residents and businesses out of the city further reducing an already dwindling tax base.
The city could raise property tax rates and other taxes but that would also drive people out of the city and further reduce the tax revenue stream.
The city or a judge could force the state government to change the law and allow the city to declare bankruptcy and then go through a judicial process to fix the financial situation which would obviously involve slashing benefits and salaries of union workers and city retirees which would have catastrophic political impacts on the Democrats ruling the state and city.
It could hope to get a bailout from the Federal government which is highly unlikely since those people living outside of Illinois are not going to allow their tax dollars to go to bail out a failed political problem in Chicago.
Get the popcorn because it is going to be a wild ride since in as early as seven years the city will go bankrupt in reality but not legally, it will not have enough revenue to pay its expenses and financial obligations but will have to anyway, what a mess.
The bigger question now becomes whether Mamdani in New York City, Karen Bass in Los Angeles or any number of other cities (Portland and Seattle) can beat that seven year window to bankruptcy court.
The entire Contrarian article can be viewed at the following link:
3)One last example of what is going on in cities and states across the country that are facing a financial death spiral:
Palantir is a major AI technology company.
It recently announced that it is moving its corporate base to the state of Florida which is one of the least burdensome tax states and one of the most welcoming states of businesses.
The company had escaped from the high tax/high regulation state of California in 2020, taking its high salary and high tax paying employees with them, giving that state another blow of an exiting company.
They moved to Denver but have now fled that state for Florida where taxes and business regulation are lower.
The company is valued at $300 billion so this move to Florida is a pretty big deal.
Florida and other states continue to gather up residents and businesses that are leaving the high tax/high business regulation states like our prime candidates to go bankrupt: New York, New Jersey, California, and Illinois. At some point the financial bastions of these states, e.g. Silicon Valley in California, Wall Street in New York, Chicago Bears in Chicago, etc., get hollowed out and the functions they once owned get reincarnated in other states.
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If you agree that we need to deseat every member of Congress for their lack of success and accomplishment, then please consider going to the following petition link to help the cause:
https://www.change.org/p/deseat-congress-reset-freedom
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