Which American Cities and States Will File Bankruptcy Next?

By now, many readers are aware of the major pension troubles facing the state of Illinois, which has for the time being managed to avert bankruptcy at a statewide level only by passing a massive new income tax hike. So punitive was this tax hike, at 32 percent, that 20 percent of legislators in the Illinois state House of Representatives have announced that they won’t seek reelection. Several lawmakers have resigned, while others have decided to seek office outside of the state assembly.

There are suspicions that some of these actions may be an effort by legislators to save their own pensions, which they in some cases may be eligible for by “retiring,” versus being voted out by outraged residents.

Needless to say, this “group retirement” has raised eyebrows, both in the state and elsewhere. Other states such as New Jersey and Connecticut are also facing extreme budgetary shortfalls due to their pensions and may have to follow the example of Illinois in the near future.

All of these states face the threat of having their state bonds re-rated to “junk” status, with media pundits calling pension funds a giant Ponzi scheme valued at as much as five to eight trillion dollars — a figure that could prove impossible to tackle, even if the federal government were to step in and bail the states out.

But in addition to states, certain American cities are facing their own pension troubles. Chicago — not uncoincidentally located in Illinois — has some of the worst, with more than 60 percent of its tax dollars going to fund public pension and debt payments.

Is it any wonder that tackling crime in this city has become a secondary problem?

Lubbock, Texas; Atlanta, Georgia; Pittsburgh, Pennsylvania; Austin, Texas; Baton Rouge, Louisiana; Honolulu, Hawaii; Dallas, Texas; Oakland, California; Phoenix, Arizona; Houston, Texas; and Los Angeles also have huge liabilities that are just under the range of Chicago’s.

In each of these metropolises, more than half of the municipal budget is needed to fund merely the maintenance costs of each city’s past expenditures. According to investment bank JPMorganChase, any city with a figure of more than 30 percent needed for such expenses is going to have to face making “very difficult choices” in the future regarding infrastructure investment, bond repayment, contributions to unfunded pension plans, non-pension spending and taxation.

In Honolulu, for instance, JPMorganChase calculated that the city’s budget could only be fixed with either a 30 percent or greater hike in taxes or a staggering 76,000 percent increase in worker pension contributions. It’s highly likely that neither of those conditions would be acceptable to voters or to workers.

Chase considers the cities of Chicago, Dallas, Phoenix and Pittsburgh to be “crisis” situations where pensions are currently funded to a ratio of 55 percent or less (Chicago’s ratio is just 23 percent currently and expected to drop to 15 percent if no major changes are made in the next 10 years).

Observers in Illinois are now commenting that former Chicago Mayor Richard Daley may have been smart to exit when he did in 2011 and that new mayor (and former Obama Chief of Staff) Rahm Emanuel is less so for taking his place.

Even if the states and cities listed above manage to get their budgetary problems under control by raising taxes substantially, this may cause other problems. A research study conducted by United Van Lines showed that six of the American states that were most moved-away-from have an average taxpayer burden that’s five times as high as the burden for the nine states that are most moved-into. (Chicago was the number one city in the study that people abandoned.) If one extrapolates these trends, one can see that raising taxes causes net migration away from municipalities and from states, which means that revenue bases will fall further, creating a vicious cycle.

In Illinois, retiree Rik Mallin is one of the residents who’s exiting. “I’m getting out,” said the 67-year-old. “It’s not just the property taxes on my home; it’s all [the taxes].” Despite recent destruction wreaked by Hurricane Irma, Mallin is moving to Florida, where there’s no personal income tax and where he figures his total tax bill will be one-quarter of what he’s currently paying.

Illinois has been losing more residents than any other state in the Union for three consecutive years now, with 37,508 people leaving in 2016. Forbes magazine ranked Illinois 46th in the nation for worst tax burdens, and that was even before the most recent tax increase passed by state legislators.

In Chicago, optician Sheila Tracy said this tax increase, as well as a new tax on sweetened beverages, appeared to be the measures of a desperate state government. She, too, has decided to leave Illinois in three years when she retires. “It was the last straw; they say the soda tax is about my health, but they aren’t fooling people.”

Across the state line from Illinois, in Lake County, Indiana, there’s been heavy housing growth that some have attributed to the flight from high Illinois state taxes. In northwestern Indiana, housing construction has increased by 19 percent in 2016, while in Cook County, Illinois — home of Chicago — construction is down by 6 percent.

All this news may be having a negative effect on property values. According to real estate information firm CoreLogic, the percentage of home mortgages in Chicago that are “underwater” (where liabilities are greater than what the home is worth) is one of the highest in the nation. Some 13.5 percent of the city’s homes were “underwater” in the second quarter of 2016. The amount that these homes are “underwater” by averages close to $100,000 apiece, which means that for many of these owners, declaring bankruptcy may be the only way out.

For wealthy residents who are lucky enough to have a second home outside of Chicago or Illinois, declaring their primary residence in the other location (typically accomplished by spending time there) may be enough to negate worries about tax increases. While Illinois doesn’t tax income from IRAs, pensions and Social Security, neither does Florida, for instance. And as a bonus, Florida still has no soda tax.