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Bankruptcy Would Disrupt Market: Illinois Treasurer

As Illinois battles with the country’s second-largest state budget deficit—some $13 billion—its treasurer, Dan Rutherford, told CNBC Tuesday that bankruptcy, an idea being floated to close budget gaps, would disrupt the bond market and break trust with vendors who do business with the state.

“It’s taken many years get the state in the condition that it’s in,” said Rutherford, a Republican. “That is going to take adult leadership. It’s going to take statesmen standing up and politicians sitting down.”

Under current US law, states are prohibitedfrom filing for bankruptcy protection, but a movement is afoot to change the law and allow it. However, the proposed change has its detractors, too.

Rutherford favors restructuring the public pension system. The Securities and Exchange Commissionis investigating statements issued by Illinois regarding the potential long-term savings from a pension reform law.

In addition to bankruptcy, said Rutherford, raising taxes, fixing the problem or being bailed out by the federal government are part of the public discourse on solving financial problems of states. GOP congressional leader, Eric Cantor, from Virginia, said he is against a federal bailoutfor fiscally ailing states. California has the largest budget deficit.

Rutherford is opposed to the recent action to raise taxes in Illinois, although the side benefit is that the action helped “to at least stabilize bond conditions here.”

Illinois lawmakers recently voted for a 66 percent hike in personal income tax, from 3 percent to 5 percent, to address the deficit, which amounts to more than half of the state's general fund. The tax increase will be coupled with a strict 2 percent limit on spending growth.

“If you look seriously at a condition for a sovereign government: To go bankrupt would send the bond market into turmoil, and I believe it would actually break a considerable trust that those have who deliver goods and services to the government.”