Illinois’ seemingly endless appetite: another $1.3 billion borrowing

by Ted Dabrowski As if Illinois didn’t have enough debt to deal with, the state borrowed another $1.3 billion. The state says it needs the money for infrastructure projects. Illinois tapped the bond markets despite the current fallout from the state’s failure to reform pensions and the recent bond market instability, which drove states like...

by Ted Dabrowski

As if Illinois didn’t have enough debt to deal with, the state borrowed another $1.3 billion. The state says it needs the money for infrastructure projects.

Illinois tapped the bond markets despite the current fallout from the state’s failure to reform pensions and the recent bond market instability, which drove states like Georgia, New Jersey and Minnesota to delay their bond sales.

In response, investors penalized Illinois heavily, demanding record-high interest rates in exchange for parting with their money.

Bonds due in 25 years yielded a 5.65 percent interest rate. That’s 160 basis points above the rates paid by AAA-rated states, matching the record high Illinois set in January 2011.

And 10-year bonds were sold at a yield of 165 basis points above AAA-rated states.

Borrowing smacks of desperation
The fact that Illinois is borrowing money when its reputation is in tatters indicates the state is in dire straits.

• Illinois’ credit rating has been downgraded 13 times in the last four years. Two of those downgrades came in June as punishment for not reforming its nearly insolvent state-run pension funds. The state is in a fiscal death spiral and only four notches away from junk bond status.

• Illinois already has the nation’s worst credit rating and its penalty borrowing rate is, by far, the highest in the country. Illinois now pays more than three times the penalty rate California does.

• Every household in Illinois is already on the hook for more than $60,000 in taxes due to the state’s debt and unfunded obligations. In addition to the nearly $30 billion in general obligation bonds, the state has more than $200 billion in unfunded pension liabilities, $54 billion in health insurance liabilities, and more than $6 billion in unpaid bills.

And yet the state still forged ahead with the bond sale.

This desperate act should have tipped off investors about the true risks of lending to Illinois.

Instead, there’s a real chance it’ll be investors who are left holding the bag.