Once lauded as an outstanding retailer, Toys “R” Us liquidated 735 stores in the U.S. this year, including the one in Peoria.
You could blame competition from Walmart or the internet. You would have a point. As Toys “R” Us once battered Mom-and-Pop toy stores, stronger players bigger-boxed-out Toys “R” Us.
But you might be missing the biggest point. Even at the end, Toys “R” Us garnered $7 billion a year in revenue in this country alone. But the company was carrying $5 billion in debt, and had been for the last decade. That’s roughly the equivalent of a $1,000 iPhone X for each of Illinois’ two million-plus school children — with enough money left over to pay their phone bills for a year.
Mascot Geoffrey the Giraffe couldn’t stick his neck out any farther.
“Even in the good years, that was almost half its operating profit,” said a June 11 Bloomberg Businessweek story.
Bon-Ton Stores Inc. also ended up liquidating its 262 stores this year. That includes several Peoria area locations, like the Sheridan Village Bergner’s store which was once a magnet for the city’s shoppers.
Again, times change. But, again, the ability to adapt to changing times was crippled by debt. Bon-Ton was an amalgam of smaller chains assembled over the last couple decades. Its biggest deal was a $1.1 billion behemoth to buy 142 stores, including Carson, Pirie Scott and Younkers. A smaller debt, but still enough to put a Chromebook in every Illinois schoolkid’s hands.
Unfortunately, that deal closed in 2006, right before the Great Recession. Other retailers, like Kohl’s Corp., invested in the recovery with innovations like improved websites. Bon-Ton couldn’t do the same.
“In hindsight, we took on more debt than was reasonable had we known what we were going to be facing going forward,” Michael Gleim, Bon-Ton’s former chief operating officer, told the Wall Street Journal in June.
That’s business. But one wheeler-dealer’s mistakes can cost thousands of people their jobs. These two failures put hundreds out of work in Central Illinois alone. And we are not ready to lose those jobs. We’ve got our own debt to pay.
Consumers hunkered down after 2008, but we’ve been back to borrowing for awhile. Personal loans surged 18 percent to a record $120 billion in the first quarter of 2018. Overall U.S. consumer debt rose to $13.3 trillion in the second quarter. Total debt is now higher than it was before the financial crisis.
With the loss of head-of-household jobs and traditional pensions, older Americans are filing for bankruptcy at record rates. (Baby Boomers were never big savers, but they do like to spend. According to the New York Federal Reserve, Americans aged 60 to 69 had about $2 trillion in debt in 2017. That includes $168 billion in outstanding car loans.) According to a study from the Consumer Bankruptcy Project which was released last month, 65- to 74-year-olds are six times more likely to file for bankruptcy now than they were in 1991.
Despite the allegedly-booming economy, such news can make the wary worry. Shuttered businesses and bankrupt households make lousy taxpayers. Peoria City Manager Patrick Urich referred to Bergner’s and Toys “R” Us closings as some of the “transformative events” creating a $6 million hole in Peoria’s 2019 budget. It may put more people out of work.
From sea to shining sea, America’s tide of red ink rises. But the next time the economy tanks, don’t count on the feds to bail us out like they did 10 years ago. Washington may not be able to offer life preservers. Last year’s tax cuts are buoying the economy now, but ballooning federal budget deficits do not bode well for the future.
“(Fiscal stimulus) is going to hit the economy in a big way this year and next year, and then in 2020, Wile E. Coyote is going to go off the cliff,” former Federal Reserve Chairman Ben Bernanke said at a June conference.
In the first eight months of this fiscal year, the federal government spent $532.4 billion more than it took in — up 23 percent from the same period the year before. And, at $433 billion, the old deficit was nothing to brag about.
Land of sinkin’
Illinois is either the best or worst place to suggest it’s time for some fiscal responsibility. We’re in first place among the 50 states when it comes to owing money. This is a state where it is considered a major step forward to have a budget — two years in a row! — even if the final budget is not published where anyone can see it.
“Not having a budget is worst,” says Laurence Msall, president of the Chicago-based Civic Federation, a non-partisan research group which has tried to raise fiscal alarm for decades. “But not publishing a budget at the end … adds to the confusion and makes it more and more difficult for people to understand just how out of whack the budget is.”
It’s so far you can’t even see the whack. The state of Illinois owes more in unpaid bills — $6.956 billion, as of June 30 — than the combined debt of Toys “R” Us and Bon-Ton. That’s after a tax increase. That does not count the dinosaur in the room, the state’s $130 billion pension debt. And Msall argues THAT doesn’t count pension debt the state has foisted off on other governmental bodies, which would add another $40 billion.
“I would argue the state is on the hook for this,” he says of the local pension debt. “The state created these pension funds.”
Msall concedes a budget, a tax increase and borrowing to pay down higher-priced debt are “the best of a lot of bad scenarios” in the last couple years. But the fiscal fire is down, not out, and Springfield has shown great creativity in borrowing money while ignoring the consequences of debt.
“We have been in a crisis mode without looking at the long-term implications for not investing in our infrastructure, in our universities, in our general state assistance,” Msall says. “As a result, we have severely stressed all of those areas … and the cost of maintaining basic services has increased dramatically.”
Illinois Comptroller Susana Mendoza might agree with most of his analysis. She is one of the few Illinois politicians beating the debt drum. The state’s unpaid bills are her bailiwick. Since she’s only been in office 20 months, she can easily remember when the pile was a lot higher. Mendoza championed borrowing $6 billion to pay down what was then a $16.7 billion backlog of unpaid bills, including late-interest payments.
“It is the stupidest debt we could have,” she says. “It goes to nothing of value to the taxpayers.”
In homeowner terms, she refinanced a portion of those bills from 12 percent down to 3.5 percent. In taxpayer terms, doing so made the state eligible for matching funds from the federal government which further reduced the debt. Over 12 years, those moves should save Illinois between $4 billion and $6 billion.
“It was a huge savings. We took a lot of pride in that,” Mendoza says. “We made sure it was in writing we could only use that for existing debt.”
She also has championed getting more — and more current — information about Illinois’ finances in front of the legislature and the public. When legislators were making budget decisions with year-old data, the average citizen had next to no chance to figure out where the state really stands.
“In order to fix it, we have to know how bad it is,” says Mendoza. “Once you know how bad it is, you can then set a plan in place to attack it and fix it.”
Now, if you want information from state agencies about their unpaid bills, you can see for yourself at https://illinoiscomptroller.gov/comptroller/assets/file/DTA/current/DTAReport.pdf.
If you don’t like what you see, Mendoza will be pleased.
“The more eyeballs are watching that and get offended by that, the harder it’s going to be to continue to hide the truth from voters and continue to exhibit bad fiscal habits,” Mendoza said.
Whether it’s personal or business or public debt, we might as well call it all MasterCard. Eventually, debt always rules.