Buying Illinois Debt – Bold Or Bad?

The Illinois debt saga continues. The state operated without a budget since 2015. In June, just before their fiscal year end, both S&P and Moody’s downgraded Illinois’ credit rating to one level above “junk bond” status.

Moody’s said:

“Legislative gridlock has sidetracked efforts not only to address pension needs but also to achieve fiscal balance, allowing a backlog of bills to approach $15 billion, or about 40% of the state’s operating budget. 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 in an extended session.

…By our calculation, the state’s unfunded pension liability for its five major plans in aggregate grew 25% in the year ended June 30, 2016, to $251 billion.

…After eight downgrades in as many years, Illinois’ rating is an outlier among states, most of which are rated at least eight notches higher.”

Fox News reports the Governor agreed.

“We’re like a banana republic,” Rauner said earlier this month, after the General Assembly failed, yet again, to pass a budget package by the regular session deadline. “We can’t manage our money.”

Illinois Comptroller Susana Mendoza chimes in:

“My Office has very serious concerns that, …the State of Illinois will no longer be able to guarantee timely and predictable payments in a number of areas that we have to date managed (albeit with extreme difficulty)…

We are effectively hemorrhaging money as the state’s spending obligations have exceeded receipts by an average of over $600 million per month over the past year.”

A political soap opera

Bloomberg follows the events and reported “…Yields on the state’s 10-year bonds soared (Emphasis mine) to 4.8%. …That’s the highest yield of all 22 states Bloomberg tracks.”

On Sunday July 2nd, the Illinois House approved a budget, sending it to the governor who promptly vetoed the bill. It includes a 32% income tax increase. He said, “This tax hike will solve none of our problems. In fact, in the long run, it will make our problems worse, not better.”

On Tuesday, July 4th the Illinois Senate overrode the governor’s veto of the budget package. Bloomberg reported:

“Illinois bonds surged as the legislature moved closer to ending a record-long impasse over the budget, reducing the risk that the state’s bond rating will be cut to junk.

The rally came after the state senate overrode Governor Bruce Rauner’s veto to approve tax increases and the first full-year budget in two years, sending the measures to the House of Representatives.”

The Illinois House also overrode the veto. Whoopee! Illinois now has a budget. Wonder if it included overtime pay for working on the July 4th weekend?