I’ve been casually monitoring developments in the breakdown of Illinois state finances since the Financial Crisis, which appears to be picking up speed as of late. Illinois was recently downgraded and has the lowest credit rating of any state. It’s possible, if an acceptable budget deal isn’t reached by July 1st, that Illinois will be further downgraded to junk status.
A credit rating for a state is much like a credit score for an individual. It’s meant to score the state’s solvency and ability to pay back borrowed monies timely and in full. It also helps determine the interest rate so the lower the credit rating the higher the interest rate required by potential lenders.
The Gist of Illinois’ Fiscal Woes:
- ~$15 billion in unpaid bills
- Can’t even cover interest on pension debt, which exceeds $9 billion / year
- $9.6 billion deficit in fiscal 2016
- Illinois net position = ~-$131.6 billion (yes, that’s a negative)
- Moody’s estimates ~$250 billion of unfunded pension liabilities even though state claims “only” $130 billion.
- IL population is shrinking while all other Midwestern states’ populations are growing
- Behind on paying lottery winners
- 3 years without passing a budget
- Illinois hasn’t had a balanced budget since 2001 (and that’s using a lot of financial gimmicks)
- The Board of Trustees for the Illinois Teachers’ Retirement System is assuming a 7% return forecast on pension investments, which is far too optimistic for the next ten years. Anything is possible, but those type of returns over the next ten years are unlikely unless there is also significant inflation, which also implies real returns will be far lower than estimated.
And this all on the heels of one of the greatest bull markets in history. It’s reasonable to assume that the nation is closer to the end of this growth cycle than the beginning. So what happens during the next recession? Illinois’, and other states’, financial troubles will only be compounded.
What Next?
- It’s reasonable to expect more tax hikes in Illinois on top of property and sales tax hikes seen in the Chicagoland area over last several years. You might recall Illinois raised the state income tax temporarily between 2011 and 2015. Even though the tax hike raised $30 billion in new taxes, the backlog in bills only dropped by $1.3 billion. So it’s not likely that tax increases alone would cure the problem.
- It seems pensioners have been better protected than bondholders in these situations so any debt restructuring efforts, which will be needed, may try to preserve the majority of pension benefits while hitting bondholders. Of course, nothing is guaranteed in these dynamic situations. However, the current pension system is unsustainable so reforms will be needed and will likely be enacted at some point in the future. These adjustments could impact; annual inflation adjustments, retirement age, participant contributions, final salary determination formula, etc…
- A bailout from the federal government
- Other states in poor fiscal position may soon follow in Illinois’ footsteps
Recent Headlines:
- Official warns Illinois finances in ‘massive crisis mode’
- Illinois’ credit rating spirals downward while residents flee to surrounding states with stronger economies and lower taxes.
- Illinois debt is about to be rated ‘junk.’ What that means
- Payouts Over $25,000 “Will Experience A Delay” As Powerball Pulls Out Of Illinois Today
- Illinois could go down in history as the first U.S. state with a “junk” credit rating.
- Will Illinois Need a Federal Bailout?
- The history of Illinois’ fiscal crisis
