Illinois Headed for the Junk Heap


Thursday June 15th, 2017   •   Posted by Craig Eyermann at 6:41am PDT   •  

46177396 - junk heap Over the last several weeks, we’ve been watching a very strange race to the bottom between two very fiscally-troubled states, Illinois and Connecticut, where the state government of each seems intent on becoming the first U.S. state to crash its credit rating all the way down to junk status.

It looks like Illinois’ state government is going to get there first, and quite possibly, within the next few weeks. Eric Pianin of the Fiscal Times considers the possibility of Illinois becoming the first state to go bankrupt since Arkansas defaulted on its debt in 1933, during the depths of the Great Depression.

Last week, the state marked the second full year in which Gov. Bruce Rauner and a combative Democratic legislature were unable to agree on a new operating budget. The state Senate the week before rejected a House-passed budget measure premised on a $7 billion revenue shortfall after Rauner threatened to veto it....

Illinois has the dubious distinction now of being the only state to have operated without a complete and balanced budget for the past 700 days. Instead, it has been forced to conduct business under court-ordered spending and stop-gap measures while running up a massive deficit. For years dating back to Democratic rule in the State House, Illinois has led the nation in state budget shortfalls, pension fund crises, and unpaid bills to public universities, schools, social service agencies and government vendors.

As of last week, little had changed. The state was responsible for a record backlog of unpaid bills totaling $14.7 billion, causing fear among programs and local agencies dependent on state aid. State legislators also failed to approve a stand-alone kindergarten through 12th-grade education budget that was vital to the operations of the financially struggling Chicago school system, Reuters reported. A $15.7 billion bill to ensure schools open in the fall passed the Senate but was soundly defeated in the House.

How bad has Illinois’ state legislature’s dysfunctionality become? At this point, the state is currently negotiating deals with its creditors to lower the penalties that the state will have to pay once the state’s credit rating has been cut to junk status, which in the absence of the legislature reaching a viable budget deal that could be approved by the state’s governor, will happen as early as July 1, 2017. That pending action became all but ensured after a federal judge ordered the state to pay health care providers who are owed money by the state’s Medicaid welfare program.

At the same time, the state’s creditors are requiring that the state pay higher and higher interest rates on the money they borrow from them, where in recent weeks, those rates have exploded upward. Business Insider reports on the effects of the state’s recent credit downgrades to be just one step above “junk”:

The downgrades have left Illinois’ debt just one notch above junk status, which would create limitations on the kinds of investors who can hold the bonds.

This has caused a sharp spike in bond spreads on Illinois general obligation bonds, making it more costly for the already cash-strapped state to borrow.

The state hasn’t even achieved junk status yet, but is already paying for it.




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