Even Lotteries Are Pulling Out of Illinois

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:

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?

  1. 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.
  2. 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…
  3. A bailout from the federal government
  4. Other states in poor fiscal position may soon follow in Illinois’ footsteps

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