The $53 million boogeyman: Illinois’ financial woes due to decades of mismanagement, not 7 months of gridlock
Illinois paid $53 million more to borrow money through its Jan. 14 bond sale than it would have paid had politicians not let the state’s debt and government-worker pension obligations spiral out of control, while driving out taxpaying residents and businesses through tax hikes and costly regulations.
Springfield’s budget gridlock is not without costs, but recent media reports of an estimated $53 million price tag wrongly blame increased borrowing costs caused by various factors over a 10-year span on a seven-month budget stalemate. That ignores a recession, more than a dozen credit downgrades, rising government-worker pension liabilities, more than a decade of unsustainable borrowing, and unprecedented out-migration from Illinois.
The $53 million price tag comes from Martin Luby of DePaul University and a visiting scholar at the University of Illinois Institute of Government and Public Affairs, who compared interest rates for the state’s most recent bond issuance with those the state received in 2006. The price tag is real but the interpretation that has followed in the media is flawed.
Undoubtedly, taxpayers would get a better deal if Illinois had maintained its 2006 credit rating, but the current budget gridlock has little to do with that. When a government borrows money it sells bonds through a public auction. Just as banks charge higher interest rates to individuals with worse credit ratings, bondholders offer higher interest rates to states with poor credit ratings. The higher the interest rate, the less money the state receives for the bonds it sells. The $53 million the researcher pointed to is the difference between the $515 million the Illinois government actually raised from its most recent bond issuance, and the $568 million Illinois would have received for the same bonds absent multiple downgrades of state bonds by the major credit-rating agencies.
As Luby notes, the 2006 bond issue was “before the state started receiving a steady stream of credit downgrades in 2008.” In fact, the state has been downgraded 15 times since 2008, but only two of those downgrades occurred after the state’s budget lapsed in July 2015. The other 13 downgrades all occurred during former Gov. Pat Quinn’s tenure. The recession undoubtedly contributed to this decline, but so has a repeated failure to pass a balanced budget and economic policies that have left Illinois 50th among the states in overall fiscal condition and 49th in preparedness for the next recession.
The two downgrades that did occur during the current budget standoff also came on the heels of an Illinois Supreme Court decision striking down Illinois’ 2013 pension reform. That decision left Illinois with fewer options to control a $111 billion unfunded pension liability that dwarfs total bond debt, which Luby recognizes as a major factor in the increased cost of borrowing.
Illinois taxpayers have undoubtedly been hurt by the repeated credit downgrades that have raised the cost of borrowing. If not addressed, the state’s borrowing cost may double, and adding the cost of infrastructure spending could raise the price to $424 million per year. This cost, though, is not from the failure to pass one budget, but from the repeated failure to pass budgets that control costs and rein in the expanding deficit.
Passing a budget will only improve Illinois’ debt rating in the long run if lawmakers address the structural problems that continue to drive up costs and borrowing in the state. Ultimately, it means passing a budget that’s balanced. It also means sensible measures to control government-worker pension costs, and reducing the high cost of workers’ compensation, which burdens state and local government employers and drives taxpaying businesses out of the state. And it means reversing the continued out-migration of Illinoisans and expanding the tax base through growth rather than tax hikes.