photo courtesy of http://www.whatamimissinghere.com
For the last few years, many in the economic world have been cynical of states like Illinois, California and others for how bad their government books are when it comes to finances. Continue reading →
Illinois is starting to get hit with rising interest payments on debt borrowed. Illinois Policy points out how compound interest is a vicious beast once it takes hold:
According to the fiscal year 2015 budget summary from the Commission on Government Forecasting and Accountability the cost of debt service in fiscal year 2015 is nearly $4 billion on outstanding bond debt of nearly $32 billion. The debt service amounts to more than 11 percent of the state’s anticipated revenues for the fiscal year – 11 percent that can’t be used for essential programs.
Illinois will not be the only heavy spending state to start getting hammered on debt payments. But here is how a debt situation gets out of control:
Primarily as a result of these nontraditional uses of bond debt, the state began fiscal year 2015 saddled with $32 billion in bond debt requiring $4 billion, or 11 percent of its general funds budget, to pay the annual debt service. This represents nearly a 400 percent growth in debt service, more than 300 percent growth in outstanding bond debt, and more than 200 percent growth in debt service as a percentage of general revenues since 2002.
There are now over 2 million Illinoisans dependent on food stamps, and more than 1 million in Cook County alone. That means that one in five residents of Cook County depend on food stamps just to get by.
Standard & Poor’s Ratings Services again has threatened the state of Illinois to get their financial mess in order or else it will downgrade their bond ratings. Once you are downgraded, your borrowing rates go up making it more expensive to borrow. That means more of their yearly budget will be diverted to paying off interest and debt.
The credit rating agency affirmed the state’s worst-in-the-nation A- bond rating, but its outlook, which had been raised to “developing” earlier this year after enactment of pension reforms, went back to negative.
That means that the state’s credit rating could be downgraded within the next two years unless its finances improve, S&P said. A lower credit rating translates into higher borrowing costs.
Illinois biggest issue is their health pension system which is not sound financially. The Illinois Supreme Court recently had this to say:
“The Illinois Supreme Court was clear in its opinion that the health insurance subsidies paid by the state for retiree health care are a benefit derived from membership in a state pension plan and therefore subject to the Illinois Constitution,” S&P said.
S&P has stated that if the state comes to together for serious reform, then it would most likely revisit upgrading their status. Illinois has a big backlog of bills that already need paid and their most recent budget enacted will produce more deficits. They have used many gimmicks to reassure vendors/creditors in collecting tax revenue while doing bad borrowing schemes in the form of borrowing against future sales tax revenue.
I do not see Illinois changing its bad habits anytime soon.
Hoosier Econ 