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Illinois Charges to Lead in Race to Failed State Status

Friday June 2nd, 2017   •   Posted by Craig Eyermann at 6:50am PDT   •  

12071081 - poor man showing empty pockets in front of american state of illinois flag There is a sad race underway between two fiscally-troubled states in the Union, where the state governments of both Connecticut and Illinois appear intent on becoming the first full U.S. state to file for the equivalent of bankruptcy.

Just over a week ago, Connecticut took a strong step backward toward reaching that status first when all three major U.S. credit rating agencies downgraded the state’s credit, which immediately made it more expensive for that state government to borrow new money by issuing new debt.

This week however, the state government of Illinois, thanks to its unadulterated dysfunction, has stormed back into the lead by achieving something that no other state has: the lowest credit rating ever assessed against a state government! Bloomberg has the story:

Illinois had its bond rating downgraded to one step above junk by Moody’s Investors Service and S&P Global Ratings, the lowest ranking on record for a U.S. state, as the long-running political stalemate over the budget shows no signs of ending.

S&P warned that Illinois will likely lose its investment-grade status, an unprecedented step for a state, around July 1 if leaders haven’t agreed on a budget that chips away at the government’s chronic deficits. Moody’s followed S&P’s downgrade Thursday, citing Illinois’s underfunded pensions and the record backlog of bills that are equivalent to about 40 percent of its operating budget.

“Legislative gridlock has sidetracked efforts not only to address pension needs but also to achieve fiscal balance,” Ted Hampton, Moody’s analyst, said in a statement. “During the past year of fruitless negotiations and partisan wrangling, fundamental credit challenges have intensified enough to warrant a downgrade, regardless of whether a fiscal compromise is reached.”…

The downgrades, which also dropped some debt backed by legislative appropriations into junk, came a day after Illinois’s legislature blew the deadline for approving a compromise budget by a simple majority. Now, it takes a higher threshold — three fifths majority vote in each legislative chamber — to pass anything. On Wednesday, Rauner, who is up for re-election in 2018, and Democratic House Speaker Michael Madigan, who controls much of the legislative agenda, faulted each other for the unprecedented gridlock.

The Bloomberg article goes on to describe the consequences that the continuing failure of the state legislature’s leadership to pass a budget leading to solvency would have if it continues its current dysfunction:

Despite the lack of a budget, Illinois has continued to cover payments due on its bonds, and, like other states, has no ability to resort to bankruptcy to escape from its debts. A downgrade to junk, though, would add further financial pressure by increasing its borrowing costs and preventing many mutual funds from buying Illinois’s securities.

The second part of that passage is right on target, but the first part, while correct today, may be subject to change in the near future. Right now, the U.S. territory of Puerto Rico is blazing the legal precedents that would enable a state government like that of Connecticut or Illinois to enter into similar bankruptcy-like proceedings to have its debts restructured. In Puerto Rico’s case, it’s shaping up to be a messy process.

Given the quality of politicians in power today in both Connecticut and Illinois however, it’s only a question of time before those states will gain direct experience in that kind of messy legal process.

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June 2017