How bad has the budget situation gotten in the Land of Lincoln? Bad enough that both Moody’s and S&P are reportedly close to downgrading their credit status to “junk bond.” That a lot more problematic than the simple embarrassment factor. Whether they reach a settlement in the current budget negotiations or not, the state is going to have to borrow a lot more money and they do so by issuing bonds. If their bonds are rated as junk it will be much harder to find buyers and they will have to pay even more interest on them. That blows yet another hole in the budget. So how did it get to this point? It’s all about the pension plans once again. (Associated Press)
Illinois is on track to become the first U.S. state to have its credit rating downgraded to “junk” status, which would deepen its multibillion-dollar deficit and cost taxpayers more for years to come.
S&P Global Ratings has warned the agency will likely lower Illinois’ creditworthiness to below investment grade if feuding lawmakers fail to agree on a state budget for a third straight year, increasing the amount the state will have to pay to borrow money for things such as building roads or refinancing existing debt.
The outlook for a deal wasn’t good Saturday, as lawmakers meeting in Springfield for a special legislative session remained deadlocked with the July 1 start of the new fiscal year approaching.
The state has a staggering pension debt which is largely unfunded. As of the end of last year it was estimated to have reached $130B. Not to put too fine a point on this, but that’s roughly 1/6th of the entire estimated state GDP for the year. They are also currently sitting on a stack of $15B in unpaid bills. That’s “billion” with a B. Not paying your bills is a sure fire way to ruin your credit rating as an individual and it eventually catches up with state governments as well.
Unfortunately, unlike cities, the entire state of Illinois can’t actually declare bankruptcy. But they also haven’t been able to figure out a way to reduce their pension obligations. The unions aren’t going to give up a dime voluntarily even if it means sinking the entire state. In 2015, the previous, Democratic governor signed a law which would allow the state to scale back some payments, increase the retirement age gradually and increase contributions from the public employees to close the gap. The unions sued the state and won, shooting down the plan entirely. They had previously managed to get the Democrats in Illinois to amend the constitution so that any pension benefits, once bestowed, can never be diminished.
Forbes looked at this problem last year and arrived at basically the same conclusion. Many of the cities and towns can and probably should look at bankruptcy as a way to bring the unions to the table, but the state can’t do that. The only way they don’t sink entirely is to somehow convince the unions to voluntarily take some cuts. Good luck with that, guys. You may want to consider just shutting off the lights before that happens.