On Oct. 9, S&P Global Ratings
affirmed the state of Illinois’ credit rating at BBB-, or just one notch above
junk level, as Illinois plans to offer $1.5 billion of a planned $6 billion bond
issue to partially pay down its nearly $16 billion in unpaid bills. The rating
agency warned that Illinoisans could end up worse off under the borrowing plan
if it “is not paired with additional fiscal adjustments.”
While the scheme is expected to result in some initial budgetary savings, the
net result could be a negative for Illinoisans.
S&P also kept Illinois’ credit outlook at “stable,” meaning it does not expect
to downgrade the state in the near future. However, the firm emphasized that
could change if the state does nothing to fix its chronically unbalanced
budgets, poor financial management and increasingly “distressed” pension funds.
Borrowing without reforms will result in failure
S&P says that on the one hand, borrowing $6 billion will save the state – and
therefore, taxpayers – money on interest payments. The interest cost of the bond
borrowing will be lower than the penalty interest the state pays on some of its
unpaid bills. The rating agency estimates that could save taxpayers up to $368
million in lower interest costs each year.
On the other hand, S&P noted in its broader report on the state that if
lawmakers borrow without enacting reforms, the state will only perpetuate its
financial crisis: “If the bonding plan is not paired with additional fiscal
adjustments, the state could be left with a higher tax-supported debt burden and
– once again – an escalating backlog of unpaid bills.”
Cutting down on unpaid bills will partially clear the government’s “credit
card,” allowing lawmakers to overspend once again. And more unpaid bills mean
more debt at penalty interest rates.
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S&P says that’s a
problem, as Illinois is already spending more than it’s taking in
this year, even with a $5 billion income tax increase. The
“balanced” 2018 budget lawmakers passed is already running a “$1.5
billion structural deficit,” according to the agency. The Illinois
Policy Institute has identified up to $1.3 billion of that shortfall
in a recent analysis.
The rating agency concluded that Illinois’ structurally unbalanced
budget, its growing pension liabilities and poor financial
management could cause the state’s bonding plan to backfire on
taxpayers if nothing is done to fix the state’s fiscal crises:
“[U]nless the state’s fiscal structure is aligned, the bonding plan
could leave the state with a substantially increased debt load and
only a temporary decline in its bill backlog.”
In other words, without reforms, Illinois’ unpaid bills will
eventually end up right back where they started, only now taxpayers
will face an even larger debt burden.
More debt means more problems
Borrowing more money to pay off old bills, without doing anything to
fix what led to those unpaid bills in the first place, is a recipe
for more downgrades. S&P has sent its warning to the state, as has
Moody’s Investors Service. Moody’s has gone further than S&P by
affirming a negative outlook for Illinois –meaning a downgrade into
junk is a real possibility.
Illinoisans shouldn’t be fooled into thinking the General Assembly
is solving any real problems by borrowing more and taxing more.
Instead, Illinoisans need to demand real reforms that bring down
state spending to levels Illinoisans can afford.
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