The Illinois debt clock is ticking. Unless the Governor and the General Assembly set a budget in place by June 30, 2017, and a correctly balanced budget, Wall Street ratings agencies are expected to quickly downgrade the state’s credit to junk status.
To give you a clearer idea of just how big Illinois’ pension shortfall is, if Illinois cut all additional spending (like education) by 10 percent or increased taxes by enough to earn 10 percent more revenue and committed all savings or new revenue to its pension shortfall, it might take 20 years to fully fund the state pension system.
S&P Global Ratings has cautioned the agency will probably lower Illinois’ creditworthiness to below investment grade if feuding lawmakers don’t agree on a state budget for a third consecutive year, increasing the amount the state must pay to borrow money for items like building roads or refinancing existing debt.
Illinois Debt Clock
The prognosis for a deal is not good as lawmakers meet in Springfield for a special legislative session remained deadlocked with the July 1 beginning of the new financial year approaching. That should alarm everyone.
The Illinois debt clock shows more than $154.5 billion in debt here.
The fundamental process by which states get in such severe financial distress are well established. Public sector unions give state politicians large campaign donations in exchange for big, irresponsible future pension benefits. The state legislature then underfunds those pensions, keeping the citizens from realizing any short term pain from unfunded pensions. Unions do not object to the underfunding since they understand the law protects their pensions however bad the situation gets. Eventually, you’re Illinois, with a pension shortfall equivalent of about eighteen months of overall state spending.
The agencies are concerned about Illinois’ massive pension debt, in addition to a $15 billion backlog of unpaid bills and the fall in revenue that happened when lawmakers permitted a temporary income tax increase to expire.
Bond investors base their decision on whether to buy Illinois bonds on what degree of risk they are willing to take, according to the bond ratings that rating agencies such as Moody’s assign.
With near junk-rated status in Illinois, Chicago Public Schools are now paying the nation’s legal maximum of 9 percent interest on some of the borrowing it’s relied on to keep the doors open. The school system’s choices for additional fiscal juggling keep shrinking.
A junk score means that Illinois is in a greater risk of not repaying its debt. Now, many mutual funds and individual investors – who make up over half of the buyers in the bond market – will not buy Illinois bonds. Those willing to take a chance, like distressed debt investors, will only do so if they’re getting a higher rate of interest.
After the state pays higher rates of interest, that is less money it can use to pay for government services, or to decrease the growing $15 billion backlog of unpaid invoices.
There’s also a chance of what Standard & Poor’s has characterized as Illinois entering a negative credit spiral.
While no other state has ever been put at junk rating status, counties and cities like Chicago, Atlantic City and Detroit have. Detroit saw its score increased back to investment grade in 2015 as it emerged from bankruptcy, an alternative that by law, states do not have.
The additional interest charges anytime Illinois sells bonds will be in the “tens of thousands” of dollars or more. The more money the state has to pay on interest, the less that is available for things like schools, state parks, social services and fixing roads.
The issue of public pension plans being underfunded isn’t confined to Illinois. Other states are in nearly as bad condition and thousands of cities and counties also have underfunded pension plans.