Both the State of Illinois and the City of Chicago are in dire fiscal straits. Taxes keep rising, while staggering amounts of red ink are projected as far as the eye can see.

The city and the state should act now to restructure their liabilities and put the fiscal mess behind them. This can be accomplished by utilizing Chapter 9 and other tools Congress just gave Puerto Rico. The process would entail about two years of unpleasant headlines, but the city and the state will rebound far sooner and less painfully than if they stay on their current paths.

Illinois has the worst credit rating of any U.S. state. Republican Governor Bruce Rauner was elected in 2014 with a mandate to get the state’s financial house in order, but he and the Democrat-controlled legislature are at an impasse. Illinois is overdue on about $8 billion owed to healthcare providers and other vendors. If spending growth follows its 10-year average, the State projects a cumulative deficit of $17.5 billion over the next three years alone.

Chicago is in even worse shape and is rated “junk” by Moody’s. The city recently increased its real estate taxes by a stunning 63% – yet massive deficits are still projected indefinitely.

Pension liabilities are an important component in the budgetary travails of both governments. The state’s net pension liability is $109 billion, and Chicago’s is $34 billion. Funds that should have gone to the pension plans have been diverted for years.

Because the state’s financial resources are over-stretched, it is less able to lend a hand to the city. Indeed, Governor Rauner has encouraged legislation that would empower Chicago to file for Chapter 9. From the state’s standpoint, this is perfectly rational. Why should the state send Chicago money to avoid default when Chicago can extract concessions from its creditors by threatening Chapter 9?

There are only three ways to restore Chicago and Illinois to financial soundness – increase taxes, decrease expenditures, and/or restructure liabilities. All three are unappetizing, but it’s critical that public officials act decisively to identify and implement an orderly solution before a disorderly crisis wreaks havoc.

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