Illinois has been in the news a lot lately for all the wrong reasons. They are on the verge of attaining the unenviable record of first American state to boast a junk government credit rating. Even after having just passed massive tax increases of 32 percent higher for personal income tax rates¬†and 33 percent higher for corporate tax rates, they are still going to be¬ $10 billion in deficit.
This band aid approach to fixing a severed appendage was noted by the Governor Bruce Rauner of Illinois, who bluntly warned that:
“This is a two by four smacked across the foreheads of the people of Illinois… This tax hike will solve none of our problems and in fact, long run, it’ll just make our problems worse.”
Even despite these controversial efforts to turn things around, credit ratings agency Moody’s is still likely to cut the state’s credit rating to junk. Standard & Poor’s is also threatening to carry out the same damning action. The end result will be that the borrowing costs for Illinois will escalate dramatically, only making the state’s severe financial problems so much worse.
As bad as this sounds, it is only really the tip of the proverbial iceberg for Illinois. Their greatest liability is off- balance sheet so to speak. This is their wrecked public state pension system. It represents the retirement fund which the state runs. When Illinois’ police officers, firemen, and teachers pay money into this system, it goes to finance the retirement of the current retiree state employees.
While the state’s current $15 billion annual budget deficit¬†(which will drop to $10 billion deficit with the tax increases)¬†sounds bad, consider that the state pensions system presently owes an eye-watering $250 billion more in funds than it has. The pension system is a large part of the problem with the state budget. It bleeds out so badly that it has nearly bankrupted Illinois.
If only Illinois were the only state that possesses this serious public state pension funding problem. Unfortunately for the country, New Jersey, Kentucky, Connecticut, and Arizona are also sinking from enormous holes in their state pensions funds as well. This problem that state governments have simply kicked down the road for decades has finally reached the point that it will soon wreck the finances of as many as five American states.
In other words, the long-discussed (but generally policy avoided) public pension crisis within the United States is now suddenly imminent. The really bad news is that this will impact everyone in the country regardless of which state you live in and if you have pension plans or not. The reason is that these major states like Illinois and Arizona can¬†not be allowed to go bankrupt.
The chart above shows the deteriorating state pension situation as of 2015. With American state pubic pension systems underfunded by $1.8 trillion now¬†and possibly¬†by as much as $8 trillion longer term according to some experts, you can be sure there will be¬ trillions¬†in¬†new money printed by the Federal Government and Treasury in the next few years.
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Before all these states fail financially, the United States government will intervene. They have their own $20 trillion national¬†debt problem which will prevent them from using real money to solve the problem. Instead, they will simply print as many trillions in new dollars to plug the holes of the sinking states.
This will ultimately crush the dollar’s value and introduce widespread inflation as the costs of all imports (from the likes of China, Germany, Japan, and Middle East oil) and even imported inputs skyrocket.¬†Gold will be a main beneficiary as its prices rise dramatically. History has proven its role as an effective portfolio hedge in times like these.¬ Click here¬†now to¬†receive a free, no-obligation gold IRA rollover kit from Regal Assets, the industry-leader. It will equip¬†you with¬†all of the necessary information to protect¬†your retirement accounts by employing¬†a partial diversification of your IRA assets into physical gold.